Foreign manufacturers have several options to pursue when setting up a manufacturing operation in Mexico.
The Shelter option is one of the smoothest, safest, and most competitive structures for manufacturing projects. It has been specifically preferred by many Aerospace Industry companies that decided to expand their manufacturing footprint into Mexico.
This blog post is a collaboration with the Aerocluster of Queretaro, and one of our distinguished members, Prodensa. Prodensa is an advisory firm that acts as an integral facilitator to assist companies with market analysis, expansions, site selection, start-ups, shelter, and advisory for new and ongoing operations in Mexico. The company has provided solutions for the start-up or expansion of over 700 operations all over Mexico. Prodensa has supported over 20 projects from the Aerospace Industry with their multiple solutions, helping to generate more than 3 thousand employments in this industry, and has facilitated the investment of more than 100 million USD from foreign Aerospace companies.
Additionally, we prepared an interview with the Queretaro’s Aerocluster Director, Mr. Antonio Velázquez, and Prodensa’s Business Development experts, Carlos Loyola and Ricardo Martinez. We focused the conversation on the fact that many Aerocluster members do have manufacturing operations in Mexico under a Shelter Operation. Seeking to add value to these companies, we discussed the Shelter modalities, compliance implications, and recent changes to Mexico’s Shelter Regulations. This blog will also present a successful business case in Mexico in the aerospace industry, Lauak Aerospace, another distinguished member of the Queretaro’s Aerocluster and Prodensa’s client.
Shelter Operations in Mexico
The concept of Shelter in Mexico works for Cost-Center type of operations in Mexico. In this concept, the US parent company operates a manufacturing branch without having a wholly-owned Mexican entity, working under a third party’s umbrella.
Shelter in Mexico has two modalities:
The main difference between a Multitenant Shelter and a Dedicated Shelter is the way the entity sets up in Mexico. A Multitenant Shelter has multiple companies under a single Mexican entity acting as an “umbrella operation” to all of the companies. In the Multitenant Shelter format, the entity is already set up, representing the fastest option to start-up in Mexico. However, you will share the same entity among all of the companies under the “umbrella”.
This may put you at risk if one of these companies lacks compliance. Ultimately it will impact all companies linked to this entity. On the other hand, a Dedicated Shelter creates a new entity for each specific project to ensure that the compliance is in full control under a single structure.
Recent changes to the Shelter Regulations in Mexico
There have been many changes to the Income Tax Law about Shelter. In 2014, the term of Shelter Operations in Mexico was limited for a maximum period of four years. After those 4 years, the company could decide whether to continue in the Shelter operating structure paying Income Tax for 4 more years but having to create a «branch office» in Mexico for taxation purposes, or move into a Wholly-owned Maquila structure. However, in 2020, another fiscal reform brought another change, mainly related to Fiscal rules and Term:
Recommendation for Shelter Operations already established in Mexico
One of the most common topics ignored when selecting a Shelter operator is to define a clear Exit Strategy, which will give your company the certainty to continue operating after the shelter contract expires or any significant changes in the laws regarding this operational mode.
Taking into consideration the recent changes aforementioned, here are two suggestions for companies already operating in Mexico under a shelter mode:
Lauak Aerospace’s Successful Launch of its first Manufacturing Operation in Mexico
Since its establishment in 1975, French company Lauak Aerospace has been a strategic supplier for some of the key players of the aerospace industry, with Dassault, Airbus, Bombardier, and Safran as its main customers, providing solutions in 4 core businesses: sheet metal, hard metal machining, tubes & pipes, and mechanical-welded parts for aero engines.
With the new operation in Mirabel, Quebec, Canada, one of the company’s strategic moves was to increase its North American manufacturing capabilities, and the conversation about a possible expansion into Mexico, as a low-cost manufacturing site, started. The operation in Mirabel and a potential new site in Mexico were considered key to developing and growing the customer base of companies like Boeing, Spirit, Collins, and GE.
After Mr. Guillaume Bajolet, VP of North American Sales for Lauak Aerospace, concluded a very detailed cost analysis for Lauak’s Mexico operation; the project was greenlighted. A proper due diligence explored different locations and Mexican states until it was determined that the State of Queretaro was ideal for the project, mainly due to the presence of Bombardier, Safran, and other aerospace companies.
During the decision-making process, Prodensa had the opportunity of hosting Mr. Bajolet and Mr. Charritton (Lauak’s CEO) for a 2-day work agenda in Querétaro, which included several meetings with Government authorities, key players of the State’s aerospace industry, and academic personalities, as well as visits to manufacturing operations and industrial properties.
After the agenda in Queretaro, Prodensa started working on developing the right strategy for the project, which included the company to start-up in Mexico under the shelter program. The Prodensa approach represented the advantage of a faster set-up process and the minimization of liabilities for Lauak in Mexico, given that the legal entity would be a subsidiary of Prodensa, although exclusive for Lauak.
Today, Lauak Aerospace in Queretaro has 47 employees, and the facility is set up as a complete shop floor and full turn-key solution, with integrated processes focused on tubes and pipes for the highly demanding aerospace industry. In the short term, Lauak Queretaro will also incorporate sheet metal processes to continue growing its customer base in North America.
Prodensa, current member of the Querétaro Aerospace Clúster, is an advisory firm with 35 years of experience that acts as an integral facilitator and assists companies with market analysis, expansions, site selection, Start-ups, Shelter, and advisory for ongoing operations in Mexico. Prodensa has assisted with the start-up or expansion of over 700 operations all over Mexico.
Prodensa has supported over 20 projects from the Aerospace Industry with their multiple solutions, has helped to generate more than 3 thousand employments in this industry, and has facilitated the investment of more than 100 million USD from foreign Aerospace companies