1) What is a "Maquiladora"?A maquiladora is a Mexican corporation operating under a special customs regime which allowsthe corporation to temporarily import into Mexico duty-free, raw materials, equipment,machinery, replacement parts, and other items needed for the assembly or manufacture offinished goods for subsequent export.(1)The maquiladora program enables companies to import in-bond and duty-free all the machinery,tools, equipment, and raw materials necessary to assemble and manufacture products forexport. Companies may reexport the finished or semi-finishedproduct from Mexico or may sell it in the Mexican market, subject to certain restrictions. Foreigninvestors may own 100 percent of the equity in a maquiladora operation, although manymaquiladoras are owned by Mexican companies. The term "maquiladora" originates from theSpanish word "maquila" which historically refers to the payment millers receive from farmers forgrinding corn into meal, or adding value.(2)2) What is the History and Background of the Maquiladora Program?The maquiladora program began in May 1965. There are 21 countries with maquiladorainterests operating in Mexico. The U.S. holds the lions share with more than 85% ofinvestments, followed by Japan, Switzerland, Singapore, Holland, Spain and Ireland. 73% ofmaquiladoras are located at the northern border with 35% in Baja California Noret, 7% inSonora, 12% in Chihuahua, 8% in Coahuila, and 11% in Tamaulipas. (3) Initially, maquiladorascould only be established in the border areas of Mexico and in the Baja California free tradezone. The original purpose of the maquiladoras was to provide work for excess labor in theborder areas and to encourage Mexican exports. The maquiladora program was also intendedto lead to the transfer of technology to Mexico. Over time, the maquiladora program evolved sothat maquiladoras could be set up anywhere in Mexico and were allowed to sell a portion oftheir production in the Mexican domestic market upon payment of import duties and other taxeson the imported raw materials used in the processing of the good. U.S. tariff scheduleprovisions, known as the "9802" (formerly known as 806/807), greatly assisted the developmentof the maquiladora industry.(4) Goods entering the United States under these provisions areU.S. goods that have been advanced in value abroad. U.S. duties on qualifying goods are onlyassessed on the value-added abroad. This program predates the establishment of themaquiladora program. Finally, encouraged by few restrictions on foreign investment in themaquiladora industry, foreign companies helped the development of the maquiladora industry inMexico.(5)International competition has forced many U.S. companies to develop the concept of productionsharing to remain competitive with European and Far-East companies. When Mexicoestablished the maquiladora program in 1965, U.S. corporations began to realize theadvantages of establishing operations in Mexico, a country which offered lower production costs(including lower labor and transportation costs), closer proximity to the United States, and theavailability of immediate technical assistance from parent companies, thereby producing higher
product quality.(6) However, despite these advantages, the program did not really becomepopular with U.S. corporations until the mid-late 1980s.In the first half of 1996, nearly 40 percent of Mexicos exports were generated by themaquiladora sector. Around 60 percent of the sector is concentrated along the U.S. border. Asof March 1996, there were 2,288 maquiladoras, and 781 (34 percent) were located in theinterior states of Mexico. The border cities of Tijuana, Ciudad Juarez, Matamoros, Mexicali.Reynosa, Nogales, and Tecate are home to over half the plants and 60 percent of employmentin maquiladoras. Each of Mexicos 31 states has at least one maquiladora. As mentionedabove, foreigners can own up to 100 percent of maquiladora plants. In 1995, 43 percent of themaquiladoras were owned by Mexican companies, 38 percent by U.S. firms, 14 percent by jointMexican-U.S. companies, 2 percent by Japanese, and 3 percent by other. The largestconcentration of maquiladoras is in electronics, textiles, and auto parts and accessories.(7)3) What are the Key Features of the Maquiladora Program?The maquiladora industry is governed by the Decree for the Development and Operation of theMaquiladora Export Industry (the "Maquiladora Decree"), published on December 22, 1989 inthe Mexican government DiarioOficial. The Maquiladora Decree was amended effective January1, 1994 to comply with certain provisions of NAFTA. In addition to this decree, maquiladoras aregoverned by special provisions in the Customs Law and Regulations and General CustomsRules issued by the Department of Finance and Public Credit (Hacienda), as well as other lawsin Mexico.(8) The key features arethe following:1) Maquiladora Registration Number: In order to operate as a maquiladora, a MaquiladoraRegistration Number must be obtained from the Ministry of the Economy (SECON). Onlyindividuals who are Mexican citizens or companies incorporated under Mexican law may obtaina Maquiladora Registration Number.(9)2) Maquiladora Export Program: In order to obtain a Maquiladora Registration Number, acompany must file a Maquiladora Export Program with the local SECON office where themaquiladora operation will be established or in Mexico City. The Maquiladora Export Program isa document containing information about the proposed maquiladora company. It describes themanufacturing process and the products to be produced and/or service to be performed, the listof raw materials and machinery/equipment to be temporarily imported into Mexico, stipulates theamount of labor to be used, and details an export program. Once approved by SECON, theMaquiladora Registration Number is issued and Mexican Customs is notified so that thecompany may begin its operations.(10)3) Types of Merchandise: The following types of merchandise may be imported temporarily on aduty-free basis under the maquiladora program: raw materials and auxiliary materials(containers, packaging materials, labels and brochures necessary for themanufacturing/assembly of the product); tools, equipment, production, and industrial safety
accessories and products necessary for hygiene, sanitation, and for the prevention and controlof environmental contamination of the production plant, work manuals and industrial blueprints,telecommunication and computer equipment; machinery, apparatus, instruments, andreplacement parts for the production process, laboratory, measuring and testing equipment forthe products and equipment necessary for quality control and for training of personnel andadministration; trailers and containers.(11)4) Simplified Customs Procedures: Maquiladora imports qualify for expedited customsprocedures. Maquiladora imports are exempted from many of the non-tariff requirementsapplicable to products imported on a permanent basis, such as Mexican official standards or"NOMs." Also, maquiladoras are not subject to the value-added tax on raw materials,machinery, equipment, and other items imported under the program. Finally, maquiladoras areallowed to use a consolidated import declaration or "pedimento" and, upon prior authorizationfrom SECON, are not required to classify the imported items under a specific Mexican TariffSchedule number, but may import those items under a special tariff classification applicable tomaquiladora imports.(12)5) Geographic Location: Until 1972, maquiladoras were restricted to the border states and theBaja California free trade zone. Under the Old Maquiladora Decree (superseded by the currentMaquiladora Decree in 1989), maquiladoras could not be established in areas of high industrialconcentration. Currently, however, maquiladoras may be established anywhere in Mexicoprovided environmental laws and regulations are met.(13)6) Duration of Approvals: Under the Old Maquiladora Decree, approvals for Maquiladora ExportPrograms were valid for two years. Under the current Maquiladora Decree, approvals forMaquiladora Export Programs are open-ended. Subsequent importations under the program,however, do require approvals.(14)7) Length of Temporary Importations: The Maquiladora Decree and General Customs Rulespermits fuels, lubricants, auxiliary materials, and spare parts used in production process to beimported for up to one year and raw materials, parts, and components to be incorporated intothe finished product for export, as well as containers, packaging materials and trailer boxes forup to two years. Machinery and equipment is permitted to remain in Mexico for as long as theMaquiladora Export Program is in effect.(15)8) Period for Effecting the Initial Temporary Importation: The time period effecting initialtemporary importations listed in the Maquiladora Export Program (which the maquiladora willmake to begin its operations) is one year from the time the maquiladora authorization is granted,with the possibility for what is usually a one-time extension of three months upon priorauthorization from SECON. In special circumstances, a second three-month extension may begranted.(16)9) Subsequent Importations: Subsequent importations necessary for the continued operations ofthe maquiladora require authorization from SECON for an extension of its Maquiladora Export
Program. Approvals for subsequent importations are valid for one year for raw materials andtwo years for machinery and equipment. In other words, importations of these items must beeffected within these time frames or a new authorization will be required. Only those items listedspecifically in theMaquiladora Export Program or in the request for authorization for subsequent importations maybe imported duty-free under the maquiladora program.(17)10) Authorization in Dollars and Pesos: Authorizations issued for temporary importations maybe expressed in U.S. dollars as well as in pesos, provided the rate of exchange and the date arespecified.(18)11) Sales into the Domestic Market: As a result of the NAFTA, maquiladoras are allowed to sellan increasingly higher proportion of the amount of the prior years exports into the Mexicanmarket. As of January 1, 2001, maquilas will be allowed to sell all of their production into thedomestic market. When a maquiladora sells into the domestic market, however, it must pay theapplicable Mexican import duties on imported raw materials used in the production dependingon their specific tariff classification and customs value, as well as any other charges or taxesthat are applicable. Finished products sold in the Mexican domestic market must also satisfynon-tariff requirements, such as the NOMs, and must be of the same quality as the finishedproducts produced for export.(19)12) Transfers Between Maquiladoras: The transfer of merchandise, raw materials, equipment,and finished products between maquiladoras is permissible under the Maquiladora Decree.Provided certain requirements are met, such transfers may be treated as exports by thetransferring maquiladora and a temporary importation by the transferee. The transferee thenbecomes liable for any applicable import duties and other charges if the transferredmerchandise is subsequently imported into Mexico on a permanent basis.(20)13) Exportation of Waste and Scrap: Waste and scrap which is not considered hazardous underMexican law may be exported to the country of origin, destroyed, or donated to charitable oreducational institutions, provided the applicable Mexican legal requirements are met. With priorapproval from SECON, waste and scrap may also be sold into the Mexican domestic market.Waste and scrap considered to be hazardous must be exported to the country of origin.(21)14) Recognition of Specialized Companies: The current Maquiladora Decree recognizes theexistence of specialized maquiladora companies, such as agroindustrial maquiladoras andcompanies involved in the exploitation of mineral resources, fishing and forestry, servicemaquiladoras, and companies operating as "shelters.(22)4) How Does One Establish a Maquiladora?There are three different methods for establishing a maquila operation in Mexico: contractmanufacturing, shelter operation, or subsidiary (stand-alone) maquila corporation.
Contract ManufacturingOne way for a foreign company to have goods manufactured in a maquiladora is to enter into acontract with an existing Mexican manufacturer or contract assembler to manufacture/assemblethe product for the U.S. client.(23)Under this arrangement, the maquiladora often has full responsibility for the following: shipmentfrom the border to the Mexican maquiladora facility, customs clearance and paperwork,materials and production management, quality control of the product, and overall administrationof the Mexican operation.(24)The foreign company would provide the specifications and requirements for the product. Usuallythe Mexican contractor is paid on a per piece basis. The advantage of using this method is thatit involves usually the least risk to the foreign company. The Mexican subcontractor iscompletely responsible for all aspects of production and compliance with Customs regulations.The disadvantages include difficulty in finding a qualified contractor willing to bid on the project,little control over operations, greater risk of failure to perform by the contractor, and greater costdue to the compensation owed the Mexican contractor.(25)Shelter OperationsA second method is to contract with a shelter operator located in Mexico. In this situation, theMexican company provides the facilities in Mexico for the manufacturing process and providesservices including inspection, customs, shipping, general administrative services, warehousing,and personnel management. The foreign company, however, assigns representatives tomanage and run the production process and provide quality control in Mexico. The foreigncompany provides the technical knowledge and the Mexican shelter operator supplies itsknowledge of the Mexican corporate structure, the maquila permit, labor hiring andadministration, and Mexican customs procedures.(26) In this type of maquiladora operation, theshelter operator is usually paid on a clock-hour basis (usually the number of hours worked bythe Mexican employees at agreed upon rates). This compensation is not usually dependentupon the success in meeting quality control objectives or in meeting production schedules.Shelter agreements are generally for a fixed number of years, during which time the U.S.company will learn how to do business in Mexico from the shelter operator and will usuallyconvert to a stand-alone operation at the end of the contract. The advantages of a shelteragreement include quicker start-up time for the foreign company and lower start-up expenses.The disadvantages include the increased cost over a stand- alone operation and less control ofthe Mexican maquila operation, which is usually owned by the shelter operator.(27)Subsidiary or Stand Alone OperationsThe third way to establish maquila operations in Mexico is to incorporate a wholly-ownedsubsidiary corporation in Mexico. This situation requires the foreign company to obtain amaquila permit and any other necessary permits, import the raw materials and equipment, hire
the personnel, and begin operations. This is the most direct method of setting up a maquilaoperation in Mexico.(28)Foreign companies interested in this type of maquiladora operation should obtain the services ofa Mexican lawyer to set up a Mexican corporation and to assist in the necessary contractsbetween the parent company and subsidiary. In order for foreign companies to incorporate inMexico, authorization and approval of the corporate name must be obtained from theDepartment of Foreign Affairs. In addition, the Charter and By-Laws of the company must beprepared, notarized before a Mexican notary public, and registered in the Public Registry ofProperty and Commerce. The stock certificates must also be publicly recorded. In addition, thecompany must obtain a Federal Taxpayers Registration Number from Hacienda, register withthe National Registry of Foreign Investments, the Institute for the National Housing Fund forWorkers and the Mexican Social Security Institute, and other Mexican agencies.(29)Once the subsidiary has been incorporated, it must then obtain approval to operate under themaquiladora program by applying for a Maquiladora Registration Number and approval for itsMaquiladora Export Program from SECON.(30)When the foreign company submits the formal application to SECON, the agency will return tothe company a letter of conditions, which will be taken directly from the information provided inthe formal application. The company reviews and signs the letter of conditions and returns it toSECON. SECON will then issue a letter of authorization for the company to begin operationsand an authorization to import the necessary equipment and machinery. The company shouldthen take the letter of authorization to Mexican Customs to import the necessary equipment andraw materials.(31)Major advantages for foreign companies include the greatest amount of control that thisarrangement provides and its cost- effectiveness. Disadvantages include the longer timerequired to establish operations and the greater likelihood of making mistakes (often due to thelack of knowledge of doing business in Mexico).(32)5) What are the True Labor Costs Involved in Operating a Maquiladora?Reduced labor cost has always been an incentive for foreign companies to establishmaquiladora operations in Mexico; however, companies must give special consideration to otherimportant labor matters when deciding whether or not to set up a maquiladora operation. Whilewages for maquiladora laborers are often less than $1 an hour, employment in maquiladorasinclude many fringe benefits for employees. These jobs are formal sector jobs that makeworkers eligible for health, retirement, and housing benefits from the Social SecurityInstitute.(33)These benefits, such as the minimum wage, maximum hours and overtime pay, paid holidays,vacation pay, Christmas bonus, employer housing contributions, profit sharing, paid maternityleave, social security, retirement savings, and training, mandated under Mexican law must be
taken into consideration when calculating the cost of Mexican labor.(34)6) Where are Maquiladoras Locating in Mexico?Today, about 66 percent of maquiladoras are located along the U.S.-Mexico border, with mostof the border maquiladoras located in the cities of Tijuana, Ciudad Juarez, Matamoros, Mexicali,Reynosa, Nogales, and Tecate.(35) Current trends indicate that while big existing plants areexpanding on the border, new maquiladoras are gravitating towards the interior of Mexico. Theborder has become saturated with companies and, because the outlook for the maquiladoraindustry is high rates of growth, many companies are looking to the interior.(36) The cities ofMonterrey, Torreon, and Gomez Palacio are expected to generate the most maquila growth inthe near future. For example, Monterrey has experienced a 27 percent increase in maquilas inthe past two years and currently has more maquiladoras than border cities Reynosa,Matamoros, and Nuevo Laredo. Higher real estate costs on the border, less expensive labor,and less competition for workers in the interior are fueling this movement towards the interior.Interior maquiladoras also experience lower turnover rates and less absenteeism. Turnoverrates along the border often reach 20 percent a month due to maquila workers quitting andmoving between maquiladora employers.(37)Interior municipalities often offer incentives to attract maquiladoras, such as an exemption fromthe local payroll tax, property tax exemptions, and training costs.(38) Despite these advantages,however, the majority of todays maquiladoras are still concentrated along the border, as manyfirms still prefer the close proximity of border maquiladoras to the United States.7) Can Maquiladoras Sell Their Production Into the Mexican Domestic Market?NAFTA stipulates that the level of permitted sales by maquiladoras into the Mexican domesticmarket as a percentage of the value of the previous years exports be incrementally increasedfrom 1994 to 2000. As of January 1, 2001, however, all restrictions on domestic sales willdisappear. The proportion of the maquiladoras production which may be sold into the domesticmarket from 1994 to 2000 is as follows: 55% (1994), 60% (1995), 65% (1996), 70% (1997),75% (1998), 80% (1999), and 85% (2000). Again, note that these percentages are based on thevalue of the previous years exports. Typically, maquiladoras in their first year of operation maynot sell to the Mexican market; however, it is possible to obtain special permission from SECONbased on anticipated exports for the first year.(39) The current level of taxes and the paperworkrequired to obtain authorization to sell maquila products in Mexico, however, discourage mostfirms from trying to tap the Mexican market. In 1995, 98 percent of maquiladora production wasexported, although some of the maquiladora exports are later re-imported into Mexico throughnormal trade channels.(40)8) What is the Effect of NAFTA on Maquiladoras?NAFTA will affect the maquiladora program in two phases. In the first phase (January 1, 1994-December 31, 2000), the main provisions affecting the maquiladora sector are the phased
elimination of import duties on products manufactured or assembled in the maquiladoras uponimportation into the United States or Canada, provided those products satisfy the NAFTA rulesof origin, and the phased increase in permitted sales into the domestic market of Mexico. Duringthis phase, maquiladoras will continue to benefit from the waiver of Mexican import duties onraw materials. The maquiladora industry will be most affected by NAFTA in the second phase,beginning on January 1, 2001. As of that date, all of a maquiladoras production may be soldinto the domestic market of Mexico and there will be restrictions on the duty-relief available onnon-NAFTA originating raw materials used by the maquilas in the manufacture or assembly offinished products.(41)NAFTAs provisions on foreign investment and Mexicos foreign investment law of 1994eliminate virtually all restrictions on foreign investment in the manufacturing sector. Thus,foreign companies need no longer set up a maquiladora facility to assemble in Mexico.Regarding the long-term future of the maquiladora program, there are differing opinions as tothe continued existence of the program. After 2001, the industry is due to lose its special tariffstatus, but some within the industry are lobbying for a continuation of this status. It is currentlyunclear as to whether or not the Mexican government will allow a continuation. Theoretically, themaquiladora program should end in the year 2001. However, some argue that the continuedimplementation of NAFTA will require only minor changes in the maquiladora program, leavingthe basic incentives for the industry intact. The generally accepted wisdom of the industry itselfis that it will either be extended, as is, or continued under a different name or as a new programto avoid closing factories or losing manufacturing cost benefits. Thus, the future of themaquiladora program is currently unclear and interested firms should closely follow thedevelopments in the program over the next few years.9) Who Should a U.S. Company Contact for More Information about Maquiladoras?U.S. firms interested in establishing a maquiladora should contact either the local SECON officein the Mexican state in which they wish to locate or the SECON office in Mexico City at:Secretaria de Economia (SECON)