When Does it Make Sense to Expand to Mexico?
When looking at the competition – especially in the automotive industry –the question on whether it makes sense to expand to Mexico will ultimately arise. Our clients ask this often enough for us to note the key considerations required before determining if this opportunity is right for your business.
- Financial Capabilities: The upfront cost of starting up a subsidiary in Mexico can be considerable, and obtaining adequate levels of financing is not always easy. Before expanding, we typically look at our clients’ financial data, analyzing liquidity and the covenants established in the company’s current debt structure to determine if they are capable of making the move. For companies expanding into Mexico, the inherent cost in Value Added Tax (VAT) when importing goods to Mexico can be surprising. As such, we suggest incorporating the financial assessment and cash flow projections of this concept in your projections.
- Geography: Replicating your business, including hiring the right employees in a new location, is an obvious cost which may not be considered in full. One of our clients overcame this obstacle by sending the chief operating officer to Mexico from day one, for a period of three months, and then a week per month for the following nine months to help make the transition a success. This level of commitment ensured that the business was established with the same rigor and discipline as the US entity.
- Markets: To keep things simple, we define markets as the sale of your existing product or service to a new demographic for competitive pricing. Even though labor rates are typically much lower than the labor rates in developed countries, there are other costs which impact overall pricing of manufactured or distributed goods. Some of these costs include additional benefits, such as social security and holiday pay, while other expenses could be higher financing costs and transportation.
After assessing your organization’s financial capabilities, the aspects related to geography and the markets, businesses could find themselves in a good position to expand to one of the largest automotive clusters in the world. This move, when ready, secures your company’s role in the supply chain for OEMs.
The international team at Clayton & McKervey can help not only with the assessment and through implementation once the decision is final. Contact us to learn more.