10 Dec 2021 DISAPPOINTED WITH THE RESULTS OF YOUR SOURCING EFFORTS IN MEXICO?
Misunderstanding of the cultural differences in the ways of thinking and its effects on negotiations is the likely reason that your company has failed to find a globally competitive source of product.
By Jeffrey Cartwright, Managing Partner | 8 min read
Many companies approach sourcing in Mexico as if it were the same as sourcing in either China or the United States. While the steps of the negotiating process are essentially the same, the impatience of the US company and the desire for a quick conclusion oftentimes yield very disappointing results. Unfortunately, there are no shortcuts that will yield globally competitive pricing.
A truly competitive bidding process takes time
The process of negotiating should be simple and straightforward. It has been taught to buyers and sellers in the United States and elsewhere for decades. In order to create negotiating leverage, you need:
- Qualified, perceived, competitive alternatives.
These alternatives can be similar factories within Mexico. They can also be factories in other countries like China or Vietnam (if they do not have the 301 Tariffs) or even El Salvador.
A significant part of the process that is unique to Mexican factories is to help them realize that they can be globally competitive. When China entered the World Trade Organization (WTO), many Mexican industries quickly became uncompetitive and various manufacturing capabilities ceased to exist. If they did continue production, it was because they specialized in the Mexican market with higher quality and greater complexity than the products that were re-sourced in China. This previous collapse of many industries has left the perception that Mexican factories cannot be competitive.
- Time to develop a relationship that communicates serious intent to buy from a target factory.
This serious intent is established over multiple meetings and is best encouraged through face-to-face meetings at the appropriate time. This is not during the early, qualification period, nor the development of technical understanding concerning the product specifications and requirements. Too soon communicates a sense of urgency and therefore an ability by the quoting factory to obtain a much higher price.
- Commitment to a long-term sourcing strategy with Mexico.
Another obstacle unique to Mexico are owners who feel that the supply chain disruptions are temporary and that US companies will immediately move production back to China. Convincing them that re-sourcing is difficult, and the need to mitigate the risk of future supply chain disruption is imperative in the Executive suites and board rooms of many US companies. Indeed, sourcing changes are made for the longer term, and snapping production back to China is not anticipated by any of our client companies.
- Patience in the face of disappointment with the initial prices being much higher than desired.
Concessions in Mexico tend to happen late in the process and after several rounds of competitive bidding. Also, the factory owner will add in risk premiums that will eventually be reduced as he becomes more comfortable with the relationship, as well as a more thorough understanding of the product. If there is doubt in either of these areas, the pricing will be higher.
In addition to the above steps of the negotiating process, there is the US company’s assumption that the raw materials and components being secured by the Tier 1 (final assembly plant and integrator) are globally competitive. They are probably not. The factory usually has its supply source that is based on a long-term relationship. Factories in Mexico have been competing with US companies on a basis of an 8 to 1 or more labor cost advantage, which left raw material pricing as a lesser consideration. When Mexico is competing with China, this is not the case. The current manufacturing labor cost in Mexico is roughly 40% that of China, and there are zero duties and tariffs (for content made in Mexico) but those alone may not be enough of a cost advantage to offset China’s subsidies of many raw materials and in certain industries.
Another obstacle occurs when the US company specifies that the product must be identical in every way to Chinese production. For example, consider when a US company specifies wall thickness for tubing. China operates under the metric system and Mexico under the imperial system. What are stock wall thicknesses in China will be custom thicknesses in Mexico and therefore significantly higher in costs from the processing mills. When adjusting for the commonly available thicknesses or grades of steel available in Mexico, the cost of the tubing will decrease significantly.
An abbreviated bidding process will have disappointing results
To conduct a truly competitive bidding process takes time and motivated owners who want the new business. Failure to develop a qualified factory list of 6 to 8 factories will, by definition, limit the results. The bidding process will generally require 4 to 5 rounds. When the list is down to the final 2, it is highly desirable that the US company visit the factory and spend time with ownership. This usually involves a lengthy dinner meal. Most of the meal may not even discuss business. When the Mexican owner is comfortable that a trusted relationship is becoming possible, he or she will bring up business. This may be relatively late and towards the end of the meal. For US company leadership to try to discuss business before the Mexican owner is ready may have an adverse effect on the relationship. Keep in mind that if the owner does not like and trust the US company, he may choose to not do business even though he knows that he will be very profitable with the new business. An easy way to say no is to submit a high quote that will be immediately declined. If, however, the factory visit and the subsequent dinner go well, the US company should expect another concession in pricing. On occasion, we have seen this to be as much as 10% or more. Negotiation in Mexico is much more like a long conversation than in the US or China.
Thinking that Mexico is like China will also result in disappointing results
Many US companies are accustomed to attending large trade shows where product is offered for sale and factory owners will modify or adapt to the buyers wishes. Mexico generally has very few trade shows and in product lines which were moved completely to China years ago, there are none. Other buyers like to visit factory showrooms in China. Similarly, there are virtually no factory show rooms in Mexico. This is an execution culture who executes your designs and does not seek to develop similar products to yours and sell them to others, which could potentially infringe on your intellectual property. This is good news for protecting your designs, but bad news for those companies whose sourcing efforts are more shopping-oriented than development-oriented.
Occasionally, we are contacted by companies that just want to buy a Mexican companies excess inventory or want to buy from open stock. Neither are characteristic of Mexico, which is generally a manufacture to order culture. Mexican factories rarely speculate and build tooling hoping to sell from that open tooling.
For these companies that expect Mexico to be the same as China or hope to benefit from what a Mexican factory has already developed on its own, stay in China. It is a waste of your time to think that Mexico’s business culture will change to accommodate your buying efforts.
For those companies that think Mexico has several strong advantages over China, we can help.
summary
A properly conducted sourcing project will start with irrationally high pricing in the first couple of rounds of bidding. Concessions are made when unknowns are removed or clarified. Major concessions are made when a relationship has been built with the factory owner and he or she is serious about wanting to gain the new business. Think of this as very much like a dating process. A long-term relationship (partnership) is not arrived at in one or two conversations or meetings, but over time. It is not unusual for prices to decline by 20 to 50% over the course of the process, with sufficient qualified factories, multiple rounds of bidding, and a developing level of trust. Too often in the past, US companies have contacted Mexican factories, received a quote, abandoned the process, and declared that Mexico cannot be competitive. Given that history, it takes time for the relationship to develop and for serious buying interest to be established.
Shoreview Management Advisors and the Mexico Strategic Sourcing Alliance have an extensive history of success with the process of re-sourcing products from China to Mexico. Contact us today to learn more about our expertise, and how we can help you make the decision that is best for your bottom line.
