The Pros and Cons of Offshoring to Mexico

by Lauren Soucy
Offshoring to Mexico

Global companies are offshoring their business operations to other countries to increase their profit margins.

And, if you’re a business owner looking to offshore to Latin America, Mexico is your best bet. Offshoring to Mexico has been on the rise due to its recent economic growth and favorable government policies.

In this article, we’ll discuss the five benefits and drawbacks of offshoring to Mexico. We’ll also take a look at the top cities if you’re looking to offshore to Mexico.

Let’s get started.

Table of Contents

5 Key Benefits of Offshoring to Mexico

Offshoring is the process of relocating some of your company’s processes overseas to take advantage of the lower costs of the offshoring country. 

Companies prefer to offshore either their manufacturing operation (also known as offshore manufacturing or contract manufacturing) or services to Mexico, depending on their business activities.

Confused between offshoring and outsourcing?

Read more on offshoring vs. outsourcing to know what’s right for your business process.

Let’s now look at a list of benefits of offshoring to Mexico.

1. Low Labor Cost

The average salary in Mexico was 33,200 MXN (Mexican Peso) per month in 2021, as per Salaryexplorer.com. It equates to around USD 1,642 (according to the exchange rate in April 2022). Although the average salary is higher than traditional offshoring heavyweights like India and China, it’s comparatively lower than countries in eastern Europe and North America.

For example, a Mexican software developer can cost USD 18,000/year (30,000 MXN/month) in Mexico, while the same software developer will cost USD 96,861/year in the United States.

Such low costs can help your company save money which, in turn, improves your company’s bottom line.

Find out the average salary in Mexico if you’re looking to offshore to this Latin American country.

2. Skilled and Talented Workforce

Mexico produces around 130,000 skilled graduates in the field of information technology and software development every year. This makes it easier for companies in offshoring software development to Mexico.

According to research conducted by Tholons in 2019, Mexico ranked 8th in the list of Top 50 Digital Nations. The reason behind this is that Mexico invests a lot into its STEM (Science, Technology, Engineering, and Mathematics) education.

Mexico has approximately 120 universities, and more than 110,000 software engineers graduate every year. This educated pool of graduates can help you build the right software products for your business requirement. 

3. Favorable Trade Agreements with Partner Countries

Mexico has signed 12 free trade agreements with 50 countries all across the world. 

The FTAs would help the offshoring companies save a lot of money by reducing the tariffs on imported goods and services.

Here’s a list of some free-trade agreements that Mexico has signed:

  • North American Free Trade Agreement (NAFTA): This agreement was signed in 1994. The treaty created a free-trade zone for the United States, Mexico, and Canada (also known as USMCA). It also helped to increase foreign investment in the country.
  • EU–Mexico Free Trade Agreement (SICE): The EU-Mexico trade agreement will reduce high tariff rates on European drinks and food. 
  • Japan–Mexico Free Trade Agreement: Both Japan and Mexico signed a bilateral free-trade agreement in September 2004. The treaty focuses on the free trade of pork, citrus fruits, and avocados between the countries to strengthen economic ties among them.

4. Outstanding Infrastructure

Mexico’s top-of-the-class industrial estates and advanced infrastructure drive its reputation as a manufacturing hub.

Further, Mexico is improving its transportation routes throughout the country by investing heavily to create new highways, container ports, and airports. Such improvement is propelling the country as one of the most attractive BPO (Business Process Outsourcing) destinations in the world. 

5. Proximity to Western Markets

Companies with their target audience in North America (the USA and Canada) usually go to Mexico for manufacturing purposes. This practice reduces the risk of delays caused by long supply chains and transportation routes, especially during the financial crunch after the pandemic.

And, since Mexico is well-known for its manufacturing sector, European automakers are setting up offshoring units in Mexico.

All North American companies can also carry out manufacturing by establishing a low-cost factory called maquiladora. These Mexican factories let Canadian and U.S companies carry out duty-free trade with Mexico.

Despite these advantages, some recent legal changes may impact your business’ growth. 

On April 23, 2021, the Mexican government made an amendment to the Mexican Federal Labor Law. This amendment will change how your company will offshore to Mexico. Let’s see how your company would be affected after the change in the Federal Labor Law.

Mexican Labor Law: 2021 Amendment

The Mexican Labor Law, enacted during the Revolution of 1910-20, included a daily living wage and an eight-hour workday for Mexican employees.

However, on April 23, 2021, Mexico’s President Andrés Manuel López Obrador amended the Federal Labor Law (FLL) to prohibit all companies from outsourcing or subcontracting jobs for core activities. However, they can continue to outsource non-core activities. 

Why?

Mexican law requires companies operating within the country to share 10% of their profits with their employees. But companies often escape this regulation by subcontracting or hiring via a third party. Since these subcontracted employees don’t show up as the company’s full-time employees, businesses got away with not sharing profits with them. 

This ‘dual company’ setup was seen as the default for many years. However, in recent years, critics have held this system responsible for worker abuse and unethical business practices. This encouraged the Mexican government to amend the country’s outsourcing laws to protect its citizens better. 

The only exception to this rule is subcontracting for “specialized services” or activities that can be considered non-core to the business’s primary objective. Non-core activities usually include services such as human resources, data processing, supply-chain management, logistics, etc.

This amendment is meant to encourage businesses to hire more full-time employees directly and offer them benefits like profit sharing. 

If you’re looking to offshore to Mexico, this means two things:

  • To offshore core functions: Set up a fully owned subsidiary in Mexico that can hire full-time Mexican employees – entitled to the 10% PTU according to the Labor Law. 
  • To offshore non-core functions: You may subcontract or hire via a third-party vendor.

Further, to ensure you’re outsourcing according to the Mexican Labor Law, ensure that you verify:

  • That the offshoring work is not part of their company’s core business.
  • The subcontracting company you hire is registered with the STPS (Secretaría del Trabajo y Previsión Social), the Secretary of Labor and Social Welfare.

If charged with non-compliance, companies and their employees may have to face:

  • Fines of up to USD 222,000. 
  • Imprisonment.
  • No tax deductions and criminal offense/fraud charges in case of unlawful availing of tax deductions. 
  • The outsourcing company and the subcontracting company can both be held liable for all labor, social security, and tax obligations.

While the penalty for non-compliance may seem steep, the Labor Law amendment doesn’t intend to harm the interests of offshoring companies. 

International businesses can continue to enjoy the numerous benefits of outsourcing in this vibrant and affordable country. And working with more full-time employees – motivated by PTU – will also increase their chances of success.

Moreover, a business looking to offshore to Mexico is best advised to hire a local consultant who can help them navigate the nitty-gritty of the law. 

This will also help them overcome some drawbacks of offshoring business operations to the Latin American country. Let’s look at some of them. 

4 Potential Drawbacks of Offshoring to Mexico

In this section, we’ll mention some of the drawbacks of offshoring to Mexico.

1. Complex Tax Laws

In Mexico, the proper registration for a foreign company can be a significant time investment. It also requires substantial knowledge of Mexican tax laws. 

If you’re looking to offshore to Mexico, consider the following primary taxes:

  • Income tax (ISR): This tax is charged on the income received by individuals or companies in cash or credit.
  • Excise tax (IEPS): It imposes a federal tax on the import or sale of items like gasoline, beer, wine, spirits, or tobacco products.
  • Value Added Tax (IVA): IVA is applicable on the sale of goods and services, as well as on lease payments and imports of goods and services.
  • Social Security fees: The Mexican government charges 7.58% from employers and 1.65% from employees as social security fees. These contributions are used to fund health insurance, retirement pensions, day-care, etc.

Also, businesses must pay an amount equal to 10% of taxable profits to their employees. Profits must be paid within 50 days after filing the annual ISR (Income Tax) return.

2. Complicated Intellectual Property Rights (IP) Law

Under the Industrial Property Law, there were substantial changes in the ‘inventions’ category, including utility models and industrial designs. The most significant reforms regarding intellectual property rights were published on 13 March 2018 and came into force on 27 April 2018.

Under this reform, the law regarding inventorship recognition has been changed. The new law removed the right of the inventor to remain anonymous. Now, the patent owner is obligated to be mentioned in the patent application – and the person patenting the application cannot deny it.

This can be an issue for an inventor who wants to remain anonymous as companies can pressure them to sell the patent even if the person doesn’t intend to.

3. Unforeseen Costs

Some additional costs when subcontracting to a Mexican supplier may include:

  • Currency exchange rates.
  • Tax implications.
  • Freight charges.
  • Broker fees.
  • Insurance and travel expenses.

These can fluctuate and add up to your overall business expenses.

Also, consider that the legal and fiscal systems in Mexico can be unfamiliar and complex. That’s why you’ll need to employ a legal team to help and find a reputable representative that knows the system inside-out.

4. Potential Time Theft

The distance between your offshore team’s operations and your business location can make it difficult to monitor their performance. 

You can solve this problem by introducing employee productivity management software like Time Doctor.

With Time Doctor, you can track your employees’ work time, work schedules, activity levels through screencasts, and many more, even while working remotely. You can also analyze your offshore team’s productivity through Time Doctor’s customizable productivity reports.

Check out Time Doctor’s other features to learn how the tool can help you track your offshore team’s performance.

Once you’ve dealt with these issues, you might wonder: Which is the best city for offshoring to Mexico?

Top 3 Cities for Offshoring to Mexico

Here’s a list of top Mexican cities best suited for your offshoring activities.

1. Mexico City

With a population of more than 8.85 million, Mexico City is the largest city in North America, after New York City and Los Angeles.

Since Mexico City leads the country’s digital transformation, the city is very appealing to young tech talents. The 992 tech startups are evidence of the growing entrepreneurial sector in the city. So if you’re looking for software development outsourcing, Mexico City is the place to start.

2. Guadalajara

Guadalajara is also known as the Silicon Valley of Mexico as software development, web design, and R&D have found a home here.

The city has the third-largest GDP among all Mexican cities after Mexico City and Monterrey. Household names like Cisco, HP, Intel, and Oracle have established offices there.

3. Monterrey

Monterrey is home to the Monterrey Institute of Technology (Tecnológico de Monterrey) also known as “TEC.” 

Monterrey is one of the most livable cities in Mexico and is also known as the country’s business capital. The city is home to major international companies like Accenture, Samsung, Toyota, Dell, Johnson Controls, LG, and SAS Institute.

Wrap Up

Offshoring to Mexico has many advantages like lower labor costs and favorable trade agreements with partner countries.

However, like any other business decision, you need to carefully consider all the benefits and drawbacks of offshoring your business operations to Mexico.

You can use the information we’ve covered in this article to help you make a good choice for your company.

 
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