11 Nov 2024 From Factory to Market: Achieving Competitive Pricing for Mexican Exports
Written By Jeffrey Cartwright and John Hyatt – 12 min read
Since the inception of NAFTA in 1994, the primary source of conflict between Mexican factories and American importers has often been pricing. American importers consistently complain that Mexican factory pricing is not competitive on a global scale. These concerns have persisted through significant events such as China’s inclusion in the WTO (2001), the 301 Trump tariffs (2018), and the post-COVID logistics crisis (2021). US buyers frequently ask, “Why does Mexico continue to lack price competitiveness in industries where it seemingly has raw material, labor, and logistics advantages?”
Understanding Pricing Dynamics
Economic theory states that pricing should be an intersection between aggregate supply and demand for a given product or service, particularly commodities. While most manufactured products are not simple commodities, they do hold global market value and are priced and benchmarked accordingly.
Mexican suppliers must be aware of global benchmarks when costing, quoting, and pricing their products. The realities of the US-China trade war, ongoing logistics crises, and geopolitical tensions do not excuse Mexican or other Latin American suppliers from maintaining competitiveness. Although US and Canadian importers consider overall supply chain risk and total cost of ownership when making strategic decisions, 80% of such decisions ultimately boil down to the landed cost of the product.
The China Comparison
At Shoreview Advisors, our strategy when negotiating with Mexican suppliers often involves not disclosing current FOB China pricing or target pricing to facilitate competitive bids through sound benchmarking. However, for retail manufactured products and commodities, Mexican suppliers must be aware of the approximate pricing their US clients are paying in China. This price, plus freight and duties (landed in the US), represents what US buyers are willing to pay to a Mexican supplier.
While many American firms wish to move operations out of China for various reasons, they are unwilling to pay more for the same product. If a firm is willing to pay a premium for manufacturing in Mexico, such markups will only be marginal. Mexican firms must set realistic margin expectations when competing with Chinese manufacturers, who often operate on 15-20% gross margins, compared to the 30-40% margins many Mexican firms expect. A 30-40% margin may work in an uncompetitive national market, but it is unlikely to attract US clients. When US purchasing managers seek sourcing options in Mexico and encounter significantly higher product costs, they have little recourse other than to either accept lower margins, stay in China, or consider options in countries like Vietnam or India.
Costing Out a Quote
When preparing an initial quote, Mexican suppliers typically calculate raw material, labor, and operating costs, and then add a gross margin to these costs. While this strategy is appropriate, it must account for competition from China. After NAFTA’s implementation, many Mexican suppliers lost business and long-term partnerships with American importers by quoting based solely on internal costs without considering the US firm’s current product costs.
Back in the early 1990s, many such products were being manufactured in the US. Nevertheless, a plethora of Mexican firms came back with landed pricing higher than US manufactured costs. This was obviously unacceptable to American firms wishing to benefit from cheaper labor and overall operating costs in Mexico. Mexico lost over 700,000 jobs to China as a result of China joining the World Trade Organization. The advantage of proximity to the US market, more convenient travel to visit factories, and shorter lead time did not offset the lower prices that China offered then.
Today, suppliers must ensure their pricing falls within global benchmarks (mainly from China, Vietnam, or India). A competitive initial quote is crucial, as significantly higher pricing can deter American firms and lead them to seek alternatives.
The Negotiation Game & Shaving Points
At Shoreview Advisors, we do not expect suppliers to quote their absolute best price on an initial bid, nor do American or Canadian importers. However, these importers are not interested in the typical “Mexican Negotiation Game” of 4-5 rounds of bidding and benchmarking with multiple suppliers to achieve a competitive price. Initial quotes from a Mexican factory should be no more than 25% above the final acceptable price to maintain a healthy margin (15-20%). The game of initial bids at $100 per unit for a deal that will close at $29 a unit is unacceptable. We cannot overemphasize that American firms have been spoiled by the Chinese and are accustomed to 1 perhaps 2 rounds of negotiation before agreeing to final pricing. If a first quote comes back 3x above a target price, you will immediately be eliminated, and importers will look for other options in Mexico or elsewhere.
When a deal is close but needs final adjustments, suppliers should focus on internal avenues to offer concessions. One approach is to reevaluate raw material procurement strategies. Is a supplier purchasing raw material from a large distributor, mill, or a small dealer or broker down the street from the factory? Competitive raw material procurement is an enduring challenge in Mexico, yet not one that is insurmountable. If a factory is indeed purchasing from a smaller dealer or broker and could buy directly from the mill or national distributor, a few points can often be shaved off final pricing for the US client. Even if raw material volumes are too low to justify purchasing from a large distributor, it is imperative for a factory to shop and benchmark raw materials with multiple suppliers in Mexico to ensure the absolute best pricing. We constantly meet factories who are overpaying for raw materials as they have been purchasing from the same small dealer for years or decades and have been overpaying.
Aside from raw material procurement strategies, the activities inside one’s factory can be crucial to ensuring competitive pricing and receiving the first purchase order. Overall, lean manufacturing practices and efficiency inside one’s plant can significantly lower costs, thus resulting in more competitive pricing. Increased efficiency of labor and processes inside the plant of a Mexican SME can be the key to reducing such costs and, subsequently, pricing. If a plant manager or owner is unsure about where to increase efficiency and cut costs, an external audit may be warranted in order to remove final points from a piece price and close a deal. A factory owner shouldn’t see such audit or consulting as an expense but as a long-term investment that could pay dividends for years.
Conclusions
At Shoreview Advisors, we recognize that competitive pricing from Mexico is challenging, especially compared to China. However, it is essential for Mexican suppliers to consider global pricing benchmarks when bidding on new projects. Achieving pricing within these benchmarks (considering landed US costs) is crucial for winning business from US partners. Realistic margin expectations of 15-20% are needed to ensure long-term partnerships with American importers. The traditional multiple-round negotiation strategy is ineffective; a concise negotiating window of 20-25% will suffice. Finally, internal audits of raw material procurement and manufacturing practices can reveal cost-saving opportunities, leading to globally competitive pricing and long-term partnerships. Understanding that US buyers often have more product requirements than initially presented underscores the importance of strategic initiatives for long-term growth. The potential US market is vast, and a price-competitive Mexican factory has significant opportunities beyond the initial scope.
