News, Insights and Best Practices for Manufacturing in Mexico

The History of the Maquiladora Program

   
23 Sep 2014

Category: Labor & Economics, Manufacturing in Mexico, Politics & Regulations

A maquiladora, simply put, is a production operation run by a foreign company that exports the final goods outside of the host country. Maquiladora companies thrive on foreign investment because of the offered tax incentives and access to the global labor market, specifically in Mexico. Though they exist throughout Latin America, maquiladoras are predominantly found in Mexico.  

The Maquiladora Program

While many people believe that the Maquiladora Program was implemented alongside NAFTA negotiations in 1992, it actually began in 1965 with the downfall of the Bracero Program, a policy that allowed Mexican agricultural workers to work seasonally in the United States. This loss meant high unemployment rates in the border regions of Mexico, and the Mexican government responded with what they hoped would increase foreign investments and the domestic economy.

A few U.S. electronics companies set up shop in Tijuana shortly after the program was launched, but the value of the peso at the time gave companies little incentive to offshore their manufacturing under the maquiladora example. Mexico borrowed a great deal of money in the 1970s to fuel the exploration of oil resources, and inflation began to rise steadily with the devaluation of Mexican currency. Bankruptcy in the 1980s created an urgent need for hard currency - a need that was eagerly met by the United States' desire for low-cost labor in an increasingly competitive global economy. 

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The Mexican government recognized how important maquiladoras in Mexico would be in rebuilding their financial infrastructure, so they began to make foreign investment restrictions much more lenient. Under the Maquiladora Program, all raw materials imported into the country for manufacturing purposes became duty-free with one stipulation: the final product had to be exported back to the country of origin or to a third party. 

Foreign Investment in Mexico

NAFTA negotiations began in 1992, restructuring the limitations set on maquiladoras in Mexico. While NAFTA did indeed bar companies from exporting duty-free goods created from non-NAFTA materials, it also greatly loosened the restriction on domestic sales that the Maquiladora Program had initially imposed. Since NAFTA, Mexico has participated in even more agreements and treaties that encourage foreign investment and production.

Learn more about NAFTA and other Mexican Free Trade Agreements here!

The program itself allows maquiladoras to be completely foreign-owned, and manufacturing in Mexico remains profitable today as tax-free materials are shipped into the country and then exported at lower tariffs than they would elsewhere. Nearshoring to Mexico has halved labor costs for many companies, and the region's highly skilled workforce continues to differentiate from labor forces overseas.

Mquiladora Advantage: Nearshoring to Mexico

Nearshoring to Mexico can seem like a daunting task initially, however, beginning production in a foreign company necessitates a clear understanding of the culture and government structure in place. Because the maquiladora model is well established, beginning an expansion as a maqiuladora is a great way to lower costs and boost production.

There are a multitude of different ways to nearshore to Mexico with varying options of control over the entire operation. 

For example, Manufacturing Communities are an option and primarily exist to help companies reap the cost-effective benefits of manufacturing in Mexico without needing to tackle every nuance of owning a company in a foreign country. These are more than just facilities as they take on a multitude of administration tasks, such as leasing a building that meets the client's needs, handles all the ensuing paperwork, obtains necessary permits, and sets up payroll, benefits, day care services, taxes, zoning, benefits, customs and more. While Mexican policy has made manufacturing in maquiladoras increasingly easier, Manufacturing Communities help make the process as simple and efficient as possible.

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