Perfume definition: Perfume is a mixture of fragrant essential oils, a fixative and alcohol used to give objects a long-lasting and pleasant smell. It is a substance that emits and diffuses a fragrant odor, especially a volatile liquid distilled from flowers or prepared synthetically.
Several ways are available to an organization to establish business presence in Mexico. Production operations are typically established via the following routes:
Contracting or Sub contracting has emerged as a lucrative option for foreign companies looking to initiate production operations in Mexico with a view either to serve the domestic demand or export to nearby markets (benefitting from the various Free trade agreements). The process of contracting has some inherent advantages & disadvantages.
Limited initial capital requirements
Requirement of land, plant equipment, labor and other factors of production can be easily left to the contractor
Benefits from cheap and abundant labor in mexico without entering into permanent employment contracts
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Suitable for organizations looking to engage less than 25 workers
Works very well for organizations looking to start assembly functions in Mexico
Protection of trade sensitive information such as proprietary compositions and products is difficult
Another method of establishing footprint in the Mexican market could be through a Joint Venture with an existing Mexican perfume manufacturer. Joint Ventures benefit the foreign partners in the following ways
Existing governmental clearances for plant operations
Mexican partner's experience with regards to operations, distribution etc can be leveraged
The operations / manufacturing process can be further perfected and adjusted as per the requirements of the foreign partner
However, this method has certain inherent weaknesses with regards to the case in point :
Very few mid to large scale organizations in the business of fragrance manufacturing which could be partnered. Some of the better manufacturing plants are run by large international competitors such as Avon, P&G etc
It is difficult to find an organization with organization culture, policies, processes and objectives similar to our company
Setting up a wholly owned subsidiary is one of the most classical and often the most time consuming ways of setting up operations in Mexico. The method has the following advantages and disadvantages
Operations can be set up with a long term intent and objective
Stability of operations and control on production volumes, expansion, downsizing etc
100 percent control on operations in terms of work force, intended markets, volumes etc
Requires high initial investments in terms of time and capital
Expertise in areas such as foreign investment procedures, labor laws, environmental regulations etc
Shelter Manufacturing or New form of Maquiladora
Traditional Maquiladora system involves transfer of labour intensive production processes to border districts of Mexico from the United states. The process is mostly assembly like in nature that is plants in the order towns specialize in assembly operations for electronic goods, furniture, automobiles etc.
Maquiladora system lead to the rise of maquiladora districts or areas which saw large chunk of skilled and semi skilled workers settling in those towns to work on such projects. The sytem is akin to contract manufacturing.
Traditionally the system has benefitted from the NAFTA. Under NAFTA, Mexico allows a duty drawback or duty waiver on import of raw materials from different nations provided that the raw materials are assembled in Maquiladora ( value add ) with an objective to export major component of the produce to United states of America.
This system however does not seem to be suitable for chemical processing operations like Perfume manufacturing, which are not assembly type in nature. Our business requires precision controlled processes and thus require complex infrastructure and skilled workforce.
In light of the advantages and disadvantages mentioned above for various ways of setting up operations in Mexico, it is proposed that a fully owned subsidiary be set up to cater to the long term objectives of the firm. Action imperatives in terms of foreign investment procedures, labor laws, environmental clearances and various steps towards incorporating a business in Mexico are detailed in the next section.
Raw materials required in manufacturing of perfumes:
Always on Time
Marked to Standard
The raw materials required for perfume manufacture are classified based on perfume categories.
Freshness, Youth, Nature
Examples: Rheum Rhaponticum, Ribes Nigrum, Citrus Aurantium, Hyacynthus Orientalis, Ferula Galbaniflua, Viola Odorata
Powdered-woody, sweet, honeyed
Tobacco, Ilex Paraguayensis, Liatrix Odoratissima, Helichrysum Augustifolium, Hay, Dipterix Odorata, Apis Mellifera, Arnica Montana
Sort of woody category
Obtained from fawn originally
White Musks, Moschus Moschiferus
Forests, undergrowth, earthy
Abies Pectinata, Abies Alba, Evernia Prunasti, Gurjum Balsam
Violet notes, orris
Roots, rhizomes and bulbs
Iris Germanica, Iris Padilla, Iris Florentina, Daucus Carotta
Citrus Paradisi, Citrofortunella Microcarpa, Citrus Clementina, Citrus Junos, Citrus Paradisi, Citrus Aurantium Dulcis, Citrus Aurantium Amara, Citrus Reticulata, Citrus Aurantifolia, Lemon grass
Almost all plant parts are included in this: Roots, bulb, fruit, leaves, bark, flowers, blossoms, twigs, resins, rhizomes, bulbs, seeds, wood
Deer musk from Asian musk deer, honeycomb from honey bee, Hyraceum obtained from African rock hyrax, civet musk obtained from animals in family related to mongoose, castoreum obtained from sacs of north American beaver, ambergris from sperm whale
Other sources (natural)
Lichens (oak moss and tree moss), seaweed
Calone, coumarin, linalool salicylates
Perfume production raw material availability in Mexico:
Mexico is among the world's major producers of essential oils. Major essential oils identified or traced back to Mexico are:
Mexico contributes to 6 percentage of world's citrus fruits production. Among the prime citrus fruit categories- Oranges, lemon and limes, Grapefruit are produced in Mexico. Mexico ranks fourth in the world citrus fruit production on tonnage basis.
Lemons and limes
Source: Food And Agricultural Organization of United Nations: Economic And Social Department: The Statistical Division
A vast majority of limes are processed in Mexico. Mexico after India is the world's largest producer of lemons and limes. Lemons and limes grown in Mexico are-
Large fruit limes
Small fruit limes
Limes and lemons production:
Source: Monograph of Persian Lime. Government of Veracruz, Mexico
Major production areas of limes are around central Mexico and Gulf of Mexico.
Mexico is responsible for worlds 70 percent of Mexican lime oil production.
Mexico is responsible for worlds 50 percent of Persian lime oil production.
Mexico is responsible for worlds 3 percent of lemon oil production.
1 percent of the essential oils produced in Mexico are used in perfumes and cosmetic industry.
Lemon oil and lime oil processing takes place in following ways-
1) Lime peel is separated from the limes. The citrus extract obtained through expression is formulated into an emulsion which is subjected to distillation to obtain essential oil.
2) Lime peel is separated from the limes. The citrus extract obtained through expression is formulated into and emulsion which is subjected to centrifugal separation to obtain essential oil.
Based on above information we can decide a strategy of manufacturing citrus perfumes due to easy raw material availability and processing. A tentative composition for our perfume formula can be assumed to be as follows-
Quantity per bottle (100ml)
Perfume oils including primary scents, modifiers, blenders, fixatives
Aluminum spray caps with attached pipes
Spray cap cover
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Perfume production processes
Mexico has also developed technical expertise and leads in processing of essential oils. Hence technical skill set as well as production machinery will be easily available in Mexico.
There basic chemical methods of obtaining odorants from natural sources:
Extraction: A very common, old and economic technique for extraction of aromatic compounds. This technique is popular when the quantity of volatile oil to be extracted is less and the aromatic compounds degrade when subjected to high temperature. Solvents like- hexane, supercritical carbondioxide are used to extract the oil. This is followed by another extraction using ethanol and the acohol is further separated through distillation. Alternatively- the raw materials are submerged in a solvent which helps extract the aromatic oils. The solid raw materials are then physically separated from the extract or the concentrate by filtration. The technique takes a long period of time (hours or months) and can be cumbersome with large amount of losses.
Distillation: In this technique the raw materials (flowers, roots, leaves, peel, seeds, wood, bark, buds, rhizomes) are put into the distillation appartus over water and heated. The volatile compounds which are basically the essential oils get vaporised. The vapor containing essential oils is passed through coils which help cool down the vapor and it converts back to liquid. The vapor is collected in a condensate. Techniques used are- steam distillation, dry distillation or fractionation.
Expression: The citrus peels are expressed mechanically or cold pressed. In this technique the raw materials are squeezed to separate the essential oils. The technique leads to losses and hence is usually used for extraction of oils from the citrus peels and large amount of oil extraction is possible from them making the technique feasible. Also the fact that the relative cost of the citrus fruits is not high makes this technique economical on a larger scale.
Basic Perfume manufacturing equipment:
Oil Extractor/ Expression equipment
De- Sludging Centrifuge
Distillation apparatus: condenser, separator, distillation column
Glass bottle filling machines
Carton packaging machines
Raw Material, In process - Suitable essential oils storage and solvent storage tanks
Finished goods- Fragile equipment storage facilities
The long history of maqiloadora manufacturing in the country, a fairy developed domestic cosmetic industry and several institutes for technical education ensure availability of skilled workforce for the setting up of a plant by the wholly owned subsidiary.
Hourly wage rates in Mexico stand at around 3.5 dollars per hour as against 25 to 35 dollars per hour in the United States, Gemany, Japan etc. The graph below provides a quick comparison of wage rates across different countries. Quite clearly mexico offers one of the lowest wage costs.
Wages In Mexico Are Stable International Production Worker Compensation in 2008
Mexico Maquiladora, Manufacturing offshore, Production Management and Consulting
The next chart below provides an overview of the stability of wage rates and labor environment in Mexico in the last 3 decades as compared to US, Canada, Korea , Japan etc. The stability in the pattern suggests that the company can safely assume that there will not be any spike in wage related costs in the near future. A stable labor environment also sets the foundation for setting up a wholly owned subsidiary with long term objectives.
Mexico Maquiladora, Manufacturing offshore, Production Management and Consulting
Labor Market in Mexico:
Mexico is worlds 13th largest economy. Recently Mexico has seen a large rise in foreign investment.
Demographic data of Mexico:
Gross domestic product ( current US $)
$ 874 billion
Gross National Income ( current US $)
Poverty headcount ratio at national poverty line (% of population)
Life expectancy at birth, total (years)
Literacy rate, adult total (% of people ages 15 and above)
Improved sanitation facilities, urban (% of urban population with access)
Merchandise trade (% of GDP)
Source: World bank data
Labor and Social protection data:
Unemployment, total (% of total labor force)
Labor participation rate, total (% of total population ages 15+)
Employment to population ratio, 15+, total (%)
GDP per person employed (constant 1990 PPP $)
Source: World bank data, International labor organization
Industry-wise labor force segmentation:
Figures in '000
28. Employees - by industry:
28. Employees - by industry:
28. Employees - by industry:
28. Employees - by industry:
28. Employees - by industry:
28. Employees - by industry:
Source: International Labor organisation
Mexico is a largely agrarian economy. The percentage share of manufacturing sector in the total employment has been relatively low at about 11-12 percentage. While employment in manufacturing sector is around 50 percent of non agriculture employment. Almost 50 percent of the total urban employment is part of the manufacturing sector and there has been large influx of rural population being added to manufacturing sector due to their migration to urban cities.
Mexico has a workforce of 24.3 million as per the 1990 census. Approximately 500000 people join the labor pool each year and total labor pool expands by around 3 percent annually. Almost 40 percentage of the population is below the working age of 14 or less.
Mexico has a labor pool consisting of highly educated and highly skilled professionals. Mexican labor force is growing at an annual rate of 3 percent. Semi skilled and skilled laborers make up one third of the labor market. The participation of women in the labor force is also increasing at a fast pace. The current female participation in the labor force market is almost 40%.
The working population is expected to reach its peak at 80 million by 2020.
Income from work (adjusted for 2007 values)
Average income per hour worked
Source: National Employment Survey and National Survey of Jobs and Employment, INEGI
As per law minimum wage rate is the amount enough to sustain a family of average size. The nominal minimum wage rate has tripled but however in real terms it has reduced by one fifth.
Social insurance costs as a percentage of manufacturing hourly compensation costs are 26.3% in Mexico.
Monthly Income from work data:
Monthly income from work (in 2007 pesos)
Employees or business with 5 or less workers
Year round full time workers
Employees of business with 250 or more workers
Employed men with primary education
Employed men with higher education
Employed women with primary education
Employed women with higher education
Source: Data from the second quarter of each year from the ENE de la ENOE, INEGI
A vast majority of Mexican labor pool immigrates to Unites states of America. Almost 40 percentage of Mexican population showed an emigration trend to Unites states of America.
The country can be divided into following regions to study the economic activity-
Northeast (Baja California Norte, Baja California Sur, Sinaloa and Sonora)
North (Chihuahua, Coahuila and Durango)
Northwest (Nuevo León and Tamaulipas)
Central North (Aguascalientes, Guanajuato, Querétaro, San Luis Potosí and Zacatecas), West (Colima, Jalisco, Michoacán and Nayarit)
Central (Hidalgo, Morelos, Puebla and Tlaxcala)
Central Gulf (Veracruz and Tabasco)
South Pacific (Chiapas, Guerrero and Oaxaca)
Peninsular (Campeche, Quintana Roo and Yucatán)
Capital (Distrito Federal and Estado de México)
Social underdevelopment: Greatest in South pacific and least in capital region
High levels of manufacturing activity: Central, North, North east, North west
Rate of growth in income from work: Overall small but higher in Peninsular region
Average real hourly income by region: Stagnant except in peninsular region
Unionization: Overall the Mexican labor force is highly organized. More than 90 percent of industrial workers are part of labor unions. Professional workers are largely unorganized.
Unionized population 1992 - 2006
National Survey of Household Income and Spending (Encuesta Nacional de Ingreso y Gasto de los Hogares - ENIGH
ECONOMICALLY ACTIVE POPULATION
Unionized with the PSSI
Rate of unionization of the ECONOMICALLY ACTIVE POPULATION
Rate of unionization of the PSSI
Unionized population in the industrial society; the population over 14 that works in businesses with over 20 workers
Source: Own analysis with expanded data from the ENIGH from 1992 and 2006
Labour Laws - Rodeja
Environmental Issues & Waste Management - Rodeja
Investment Procedures - Foreign Investment Laws & Procedures
The Foreign Investment office under the ministry of economy governs foreign investment in the state of Mexico. The legal framework for foreign investment has been laid by the FIL effective since December 2003. 11 key areas have been identified as areas of foreign inclusion. Apart from these 11 areas, the FIL stipulates that any foreign entity can obtain capital stock in Mexican entities, enter new businesses and obtain fixed assets located in the territory of Mexico, start new premises and establishments, own upto 100 percent in new subsidiaries etc.
Activities Reserved to the Mexican State
Following Constitutional provisions, this law reserves the following areas, because
of their strategic nature, only for the State:
â€¢ Oil and other hydrocarbons;
â€¢ Basic petrochemical;
â€¢ Generation of nuclear energy;
â€¢ Radioactive minerals;
â€¢ Telegraph industry;
â€¢ Radiotelegraph industry;
â€¢ Postal service;
â€¢ Issuing of currency;
â€¢ Minting coins;
â€¢ Control of marine ports, airports and heliports; and
â€¢ All other services expressly considered as such by the applicable legal
provisions (public services).
Acquisition of Property and Use of Trusts
Foreign entities looking to hold title of real estate / land in Mexico must note that transfer of titles to foreign entities are governed by the following conditions as per the Mexican constitution
Not allowed upto 100 Kms from the border and within 50 Kms of coastal areas (restricted regions)
Beneficial interest in such restricted areas may however be held by the way of trusts ( trustee being a Mexican bank )
The article lays down that foreign entity must acquire property as though it were a Mexican national ( governed by similar dispute settlement mechanism ) and must not seek protection / special status from the Mexican government in the eventuality of a dispute.
Organization and Incorporation of Business Entities/Corporations
Any foreign company looking to incorporate an entity in mexico must first seek an approval from the Ministry of foreign affairs. Additionally, the bye laws as proposed by the company must compulsorily include the foreign exclusion clause as laid by the article 27 of Mexican constitution.
Failure to comply with provisions of law attract monetary penalties ranging from as much as 5 to 1000 times the prevailing wage rate.
It is recommended that the parent company should charge the proposed subsidiary in form of technical transaction fees, royalties etc since these expenses are exempt from tax under the Mexican law.
Intellectual Property law in Mexico
The IP laws in Mexico are drawn from the WIPO provisions and there are namely 2 types of provisions :
Industrial property law covering trademarks, designs, formulations etc
Copyrights covering artistic work
Other notable provisions as laid down by the IP law are
Patents are upheld or protected for a period of 20 years from the date of patent grant. Patents granted abroad specially in the area of chemical processing and pharmaceutical are granted with relative ease in Mexico.
Mexican law provides protection to industrial and trade secret. Any leakage by any person in this regard is treated as a criminal offence
Trademarks are granted for a period of 10 years and extension can be sought after the lapse of the period
The antitrust law in Mexico took shape in the early 90s and was implemented in the year 1993. The law seeks to prohibit activities such as cartels or activities that seek to reduce the mechanism of competition and free market.
"The law provides that the Federal commission of competiton should be notified of
certain concentrations before they are created, for example, if the transaction's
value exceeds an amount equal to 12 million times the minimum daily wage
(currently this amount is approximately 55 million dollars); when the transaction
implies the accumulation of 35 percent or more of the assets or stock of an
economic agent whose assets or annual sales exceed an amount equal to 12
million times the minimum daily wage or when the agents participating in the
transaction, individually or jointly, have assets or annual sales for an amount
exceeding 48 million times the minimum daily wage (approximately 220.6 million
dollars) and if such transaction implies an additional accumulation of assets or
capital stock equivalent to 22 million dollars."
Procedure for Incorporation in Mexico
Source : http://www.doingbusiness.org/data/exploreeconomies/mexico/starting-a-business/
The most important criteria considered for selecting the location of the plant in this case is proximity to raw material that is proximity to areas where fruits are cultivated.
A look at the cluster map below gives us an idea about the regions where industries dependent on agriculture output are located.
Source : http://mim.promexico.gob.mx/wb/mim/agroalimentaria_cluster_mapping
A further evaluation of the 3 districts above was carried out to zero in on the most suitable location.
The state of Michoacan emerges as the most developed state in terms of industrial infrastructure, availability of skilled manpower, roads and proximity to a port.
It is thus recommended that the state of Michoacan be considered for setting up the plant.
Proposed product portfolio
As mentioned previously, it is proposed that Mexico based subsidiary manufactures citrus or fruit based perfumes or fragrances. It is proposed that the company must engage in the following activities
Production of fragrances for personal consumption
B2B activities : Supply of fragrances as ingredients for soaps, shampoos, air freshners, detergents etc
In other words, it is recommended that the company must generate both consumer and industrial business (B2B & B2C)
Mexican cosmetics industry clocked a net business of 7000 million dollars in the year 2009 making it the third largest producer of cosmetics in the year 2009. The industry has also actively attracted FDI since the year 2003, almost to the tune of 300 million USD.
The sector has shown a modest growth of almost 10 percent per annum which can be used as a safe estimate of the rate of growth of the proposed entity in the first few years of establishment.
More than 200 registered manufacturers of cosmetics exist in Mexico with Colgate Palmolive, P&G, Beieirsdorf being the major ones.
With a market that almost seems to be saturated with manufactures, the opportunity lies in penetrating the lower and middle segments of the Mexican population which have largely remained untouched. Also, perfumes and fragrances are also an essential ingredient for shampoos and other products, thereby creating business to business opportunities.
Sources : Consumer Consumer Goods opportunities in Mexico, published by UK trade investment board
Almost 10 percent of monthly earnings is spent on beauty products by women in Mexico. The total expenditure on toiletries is expected to touch almost 20 percent of income.