What it means
The system began as a border industrialisation initiative to attract manufacturing investment and create jobs. Under it, a company could bring in inputs without paying the usual import duties, provided the finished goods were exported.
Over time the rules have been updated and are now administered under a Mexican export manufacturing scheme, and the details change, so current terms should be checked. The attraction for foreign manufacturers is mainly cost.
Labour is cheaper than in the United States or Canada, the plants are close to customers, and transport times are short compared with Asian production. Typical products include car parts, electronics, medical devices, appliances and clothing.
From a finance perspective, a maquiladora is usually a subsidiary or contract operation. Some run on a cost-plus basis, where the parent pays the plant's costs plus an agreed margin, while others operate as independent contract manufacturers.
Transfer pricing, the setting of prices between related companies, is an important issue because tax authorities check that the margin reflects the work done. The risks are real.
Wages can rise, currency swings affect costs, trade rules and tariffs can change, and supply chains can be disrupted at the border. Security, labour turnover and the cost of training staff also affect the economics.
Analysts comparing a maquiladora with other options should look at total landed cost, not just wages. That means including freight, duties, quality costs, inventory held in transit, management time and the cost of compliance with customs and tax rules.
Companies also weigh strategic factors. Having a plant close to customers allows quicker design changes and smaller, more frequent shipments, which can cut the cash tied up in inventory.
In practice
Real-world examples.
Example
An auto parts company builds wiring looms in a border plant. Components arrive from the United States, and the finished looms are shipped back to car assembly plants within a day. Trucks cross the border every morning on a fixed schedule.
Example
A medical device firm sets up a contract manufacturing plant for disposable products. It chooses the location for its skilled workforce and proximity to customers. Clean rooms and trained technicians are part of the investment.
Example
A clothing brand sends fabric to a plant for cutting and sewing and re-imports the finished garments. The company prices the work on a cost-plus basis and documents the margin for tax purposes. The tax adviser reviews the arrangement every year.
Formula
Calculation
Net annual saving = (Home labour cost per hour - Maquiladora labour cost per hour) x Hours worked - Extra costs of operating abroad
A manufacturer needs 200,000 labour hours a year. Fully loaded labour costs $22 an hour at home and $8 an hour in a Mexican plant, so the labour saving is ($22 - $8) x 200,000 = $14 x 200,000 = $2,800,000. Extra costs for freight, customs compliance, management oversight and security are $600,000 a year, so the net saving is $2,800,000 - $600,000 = $2,200,000.Case study
Seen in the real world.
Northfield Appliances is an illustrative, fictional company that assembled kitchen appliances in the north of the United States. Rising labour costs led it to compare keeping production at home with moving assembly to a border plant in Mexico.
The finance team estimated a labour saving of $3,000,000 a year, but identified $900,000 of additional costs for freight, inventory in transit, compliance and management. It also tested what would happen if wages rose by 10% and if the exchange rate moved against the company.
In this illustrative story, the plan still showed a net saving of $2,100,000 a year on the base case and stayed positive in the downside tests. The board approved the move in phases, starting with one product line, so that quality and delivery could be proven before more work was transferred. Quarterly reviews compared actual savings with the original estimate.
Watch out
Common mistakes.
- Comparing only hourly wages, and forgetting freight, duties, compliance, inventory in transit and management costs.
- Assuming the rules never change, when trade and customs rules are updated and can alter the economics of a plant that was profitable under the old terms.
- Ignoring transfer pricing, which tax authorities review closely for plants owned by foreign parents, and where poor documentation can lead to adjustments and penalties.
Questions
People also ask.
What does maquiladora mean in business?
It describes a Mexican plant that processes imported materials into goods for export, typically owned by or working for a foreign company.
Why locate near the border?
Short transport times and low freight costs make it easier to serve North American customers and manage inventory.
Is it the same as offshoring?
It is one form of offshoring, which means moving work to another country, and is often called nearshoring when the destination is close to the home market.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related