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Analysis

Shelter Program Provides Soft Landing for Newcomers

Mon, 09/01/2014 - 10:35

- The shelter business model can be of great help to international automotive companies looking to source manufacturing services in Mexico. Prior to their arrival, a shelter program can greatly affect their decision-making on how to successfully deploy and operate a manufacturing project. There have traditionally been two typical runways available for an automotive corporation when looking to land such a project: directly through a wholly owned foreign subsidiary or WOFS; or indirectly through an already established domestic contract manufacturer or subcontractor. Considering the advantages and disadvantages of these options, the shelter business model presents a new optimized alternative, which stands in between the WOFS and the contract manufacturer. On one hand, it optimizes the inherent risks of the first, while making up for the latter’s lack of control.

The Shelter Model of Service, as offered by Intermex, effectively addresses all of a company’s requirements throughout the different phases of a project’s life cycle. This ranges from the site selection assessment to the deployment and start-up and throughout its successful operation. This model accomplishes risk minimization and grants control over production and quality, through four key strategic elements. The first of these is that Intermex’s shelter company, as a wholly owned subsidiary, is duly incorporated and registered under the IMMEX program. The shelter company is assigned to a client corporation to act on its behalf for its operations in Mexico, minimizing its risk while providing a true soft landing for the project. This means that the client corporation faces no exposure in Mexico as the shelter company takes charge of the hiring of personnel, the duty-free import of raw materials and equipment, taking custody of these once imported, the manufacturing and export of products, the purchasing of MRO and other services from Mexican suppliers, and ensuring compliance with all Mexican legal and environmental permits and regulations.

The second is the provision of a portfolio of services, designed to avoid the costly mistakes and unnecessary delays often associated with the inevitable learning curve of a company operating away from its native environment and in a country with a different culture, legal framework and compliance requirements. As such, the services portfolio allows the company to focus completely on the transfer of technology and manufacturing operations, while Intermex can take charge of all non-core manufacturing support services. These include HR, such as recruiting and retaining qualified personnel or relocating expatriate personnel, international commerce and logistics, such as freight and import-export optimization, and administrative and accounting, including the optimization of duties and taxes if a Mexican subsidiary or WOFS is created. One of the final two advantages is an experienced management team that provides daily consulting on site selection, deployment and start-up, and day-to-day operations of the projects. The last benefit is a pass-through mechanism that allows for the invoicing of all expenses incurred by the shelter company, under the specific direction and supervision of the client corporation, for the manufacturing and import/ export of its merchandise and finished goods. These passthrough expenses will always be previously authorized by the client corporation.

These four services are blended together into a comprehensive cost model that is provided to the management team of any client corporation. With 40 years of experience facilitating the successful establishment and operation of international corporations in Mexico through its shelter, logistics and real estate services, Intermex’s cost model is a budgeting tool comprised of six building blocks designed to project a client corporation’s total cost in absolute US dollars and per direct labor paid hour, on a perfect attendance basis, to obtain a projected warp rate. The cost model does not include in its scope the cost of raw materials, equipment, equipment depreciation, and expatriate costs, nor international freight, as these are specific to each corporation and are supplied from their country of origin. The building blocks for the cost model are divided across labor cost detail (salaries and benefits), personnel-related costs (cafeteria, transportation, medicines, uniforms), facilities operations expenses (supplies, utilities, property tax, maintenance), logistical costs (in-bound and out-bound, customs brokers fees, transfers), building rent (cost per square foot), and Intermex’s shelter fee by direct labor tranches. The cost model also allows the client corporation to gain a detailed review or drill down of each building block as follows.

Firstly, labor is the cornerstone of the analysis, as it covers the availability of qualified personnel that match the project’s requirements, the KPI’s of turnover, absenteeism and cost. Beyond labor, some marketdriven benefits vary depending on the city selected for the project. These include the cafeteria service, public transportation routes, uniforms, and company events, among others. Further cost elements are required for compliance with the law, such as the offering of medical service and medicines for projects deploying more than 100 employees in Mexico. For facilities’ operations expenses, a cost approximation is provided that details office expenses, a facility’s NNN (triple net of property taxes, insurance and non-structural maintenance), CAM (common areas maintenance), the consumption of utilities, security and cleaning. These expenses are paid for on a pass-through basis. The logistics expenses track functions across a range of areas: the port of ingress/ egress for the raw materials and finished goods; the method of transport, including truck, air and ocean freight; the number of round/single trips; transfers at the border, where applicable; and US and Mexican customs broker fees. These expenses are managed by the shelter company to obtain a cost-effective solution for the client corporation’s merchandise import/export requirements. The industrial real estate offerings available to the client corporation range from available inventory buildings to build-to-suit options. These can be acquired on a buy or lease basis, within an industrial park or on standalone premises. Usually, the lease of an inventory building, whether a brand new spec that requires fitup tenant improvements or an empty building that had previously been used before by another tenant and thus more equipped, is the preferred way to go. Should the client corporation’s processes require peculiar bay size geometries or amenities neither available nor costeffective to implement in existing buildings, the buildto-suit option would then be the way to proceed.

Finally, the shelter fee is the compensation Intermex would receive for the rendering of its services. It includes the cost of the onsite employees as provided by the shelter agreement; the management and supervision of a group of experts with many years of experience in the business areas of human resources, international commerce and logistics, environmental, accounting and taxes, and compliance with the overall Mexican legal framework.