18 Apr 2024 Mexican Factories: What does it mean to be Purchase Order Friendly and Export Ready?
Written By John Hyatt, Mexico Business Associates and MSSA Partner | 8 min read
At Mexico Strategic Sourcing Alliance (MSSA), our partnerships are built on the foundation that Mexican and Latin American suppliers must either be “Export Ready” or “Currently Exporting” to collaborate effectively. Understanding the subtle yet significant differences between these two classifications is vital for Mexican companies aiming to establish successful business relationships with American clients. Moreover, adhering to Western business protocols is not just a preference but a necessity. A failure to align with these standards can result in missed opportunities, especially in the context of escalating US-China trade tensions which have shifted the focus towards alternative markets.
This article aims to delve deeper into the core expectations and essential prerequisites that Mexican companies must meet to foster long-lasting partnerships with American and Canadian importers. By doing so, we aspire to bridge the knowledge gap and pave the way for more structured, beneficial collaborations that can withstand the challenges of international trade dynamics.
INITIAL BIDDING PROTOCOL AND CULTURE
We cannot overemphasize the point that American buyers are “spoiled” by bidding and negotiation protocol in Asia and elsewhere. We understand that Mexican manufacturers are not American and do not purport to be so in their business and negotiating cultures. While we advise our clients on such cultural differences, the traditional Mexican protocol of multiple bidding rounds in which initial bids are 200-500% above what the supplier intends to accept is unacceptable and will repel the majority of foreign prospects. American directors, vice presidents, and business owners simply do not have time to visit multiple Mexican factories to subsequently embark upon the merry-go-round of benchmarking that often takes several months. The fact that a Mexican supplier would begin initial bids at over $100 per piece price while grossing a healthy 40% margin at $18 per unit is absurd. This type of behavior in negotiations caused tens of thousands of American importers to explore Mexico at the beginning of NAFTA only to return from Mexico with a sour taste in their mouths while subsequently running to China after it joined the World Trade Organization (WTO) in 2001.
Our most successful Mexican suppliers who have developed lasting, lucrative partnerships with US importers have worked to Westernize their bidding process. Those who have correctly analyzed the global raw materials market and cost things out, without being greedy, have enjoyed the most lucrative long-term benefits while exporting north. Suppliers who leave a 10-20% window for negation through initial bids usually fall close to importer target pricing while sending an immediate message to the Gringos that they are ready to play ball and compete globally with Asia. Such a window in initial bids leaves the door open to healthy negotiations with American suppliers not only on price but also on credit terms, lead times, and other deliverables. American importers, just like Mexican suppliers, are looking for long-term partnerships, not transactional flings. Their move to Mexico is a strategic one in which they look to compete on price while mitigating overall supply chain risk. Initially competitive bids from Mexicans convey to Americans that they are looking outward and in it for the long haul, not for short-term financial gains.
In today’s fast-paced global marketplace, it is essential to adapt business practices for efficiency and competitiveness. Although relationships are important in Mexico and other Latin American cultures, the reality of technology and supply chain demands means that in-person meetings for every bid may not be feasible. Mexican factories that significantly inflate their bids before even meeting with potential clients should reconsider their approach when doing business with the United States. American executives prioritize time and cost-effectiveness, making it crucial for factories to align their pricing more closely with market expectations from the start. To maximize opportunities in the US market, Mexican factories should focus on adjusting their pricing strategies while exploring growth within their own market and other Latin American regions. Failure to align with initial expectations may result in exclusion from consideration during early project stages.
IMMEX CERTIFICATION
At MSSA, our team of binational and bicultural consultants specializes in addressing the challenges faced by Mexican manufacturing companies striving for global competitiveness. From high taxes to complex labor laws and unfair subsidies, we understand the obstacles that can hinder success. Despite these hurdles, achieving global competitiveness is achievable with the support of programs like IMMEX offered by the Mexican government.
The IMMEX (El Programa Industria Manufactura, Maquiladora y de Servicios de Exportación) program from the Mexican federal government exists to assist Mexican exporting factories in overcoming otherwise insurmountable fiscal obstacles in route to global competitiveness. The IMMEX program serves two primary purposes for Mexican exporters:
- VAT tax exemption for components and services involved in the manufacturing process for export of final goods.
- Import duty exemption for parts and components required for final assembly in Mexico for export of final goods.
Securing IMMEX certification and obtaining tax exemptions are absolutely essential for Mexican suppliers who are striving to maintain their competitiveness in the highly competitive markets of the US and Canada. This is particularly critical in light of Mexico’s decision to raise tariffs on Chinese products, with rates ranging from 5% to a whopping 25%. This significant increase in tariffs means that the competitive edge of final products which require components sourced from Asia is seriously jeopardized, making it more challenging for these products to compete on price and quality.
Furthermore, obtaining a VAT exemption becomes a pivotal factor for Mexican exporting factories. Given that the country imposes a 16% VAT, this tax can significantly impede the exportation process by increasing the cost of goods, thus making Mexican exports less attractive on the international stage. Consequently, enhancing competitiveness, fostering reinvestment into the local economy, and expanding partnerships with US importers are heavily contingent upon the ability to minimize duties and VAT costs. In an economic environment where margins are thin, and competition is fierce, these financial adjustments can make or break the ability of Mexican suppliers to thrive and expand their footprint in North American markets.
Mexican firms are strongly advised to promptly apply for IMMEX certification. Delaying this process may result in missed opportunities as US firms, facing challenges with China, are eager to engage with competitive Mexican counterparts without delay. It is crucial to act now as obtaining IMMEX certification can be a lengthy process, taking up to a year. Make the strategic choice to secure your future success by starting the application process immediately.
QUOTE TURNAROUND TIME
Aside from pure numbers, the time in which a quote is expedited is essential in laying the groundwork for a working relationship with the Americans. Our clients constantly lament the timeframe required to receive an initial quote from a Mexican supplier. We attempt to avoid using the stereotypical term “Mañana Culture” to describe such tardiness; however, many US clients utilize the pejorative jargon when experiencing delays of weeks or even months to receive an initial bid on a project. A timeframe of one week is reasonable for delivering a quote, and many US importers are accustomed to just a few days when dealing with the Chinese. As a Mexican factory, if you are missing information or documentation in order to bid competitively, an assertive, proactive approach with your US counterpart in the procurement department will only strengthen the image of your firm. Waiting for a prospect to inquire about a quote and responding, “I still need 3D drawings, a volume forecast, etc.” are unacceptable responses. You, as a supplier, are trying to earn their business and are competing against other firms throughout Asia and LATAM. It is your responsibility to be proactive in trying to stand out from the competition. Saying that you were waiting for more information or material will only show American firms that you are not serious.
Additionally, high-level managers and partners are expected to speak English when doing business with the US and Canada. If your firm does not have such a luxury, at least one manager who speaks nearly impeccable English will be crucial in developing a long-term partnership with firms north of the border. Should your firm not have such team members in place, such an investment will eventually be necessary.
PURCHASE ORDER TURNAROUND TIME
After a Mexican supplier and American importer have agreed in principle to pricing and other terms in a contract, lead times and PO turnaround times must be swift and reasonable. US purchasing managers will expect all purchase orders to be confirmed via email within 24 hours. Such confirmation emails should include the contract’s estimated completion and shipping dates based on agreed upon lead times. Should a Mexican supplier need additional time to complete an order or ship that is outside the client’s expectations, the American client should be advised immediately. One of the quickest ways to sever a relationship with a US or other Western firm is to surprise that company with unexpected delays. Many US importers face stiff penalties and lost orders from distributors, retailers, and end users should shipments arrive late. Unexpected delays and surprises that they could have prepared for or mitigated will infuriate such firms, leading to lost future business between your company and its US clients.
CONCLUSIONS
We understand that the United States and most of the West have a demanding, cutthroat business culture. American companies have been spoiled by suppliers from Asia and the rest of the world and demand things be done a certain way, with price competitiveness, and in a timely manner. While these are cultural shocks for many Mexican and other LATAM firms, you must understand that you are still competing with Asian suppliers with even more industrious mindsets. Competitive bidding, fast PO recognition, and lead times are not unreasonable importer demands in 2024. Regarding competition, the Mexican government can assist in removing a myriad of fiscal obstacles that would otherwise shrink your export market. However, IMMEX, proper accounting, costing, and other practices cannot wait until MSSA brings the ideal client to your facility. If you are not “Export Ready” when we walk into your facility, our client could shortly be walking out the door with you staring at millions of USD in lost revenue.
China has learned to adapt to the US business culture, where the customer comes first, and the factory (company owned or a third-party contract manufacturer) must meet the customer’s basic demands to gain the business. Note that in the early years as China was opening up, the Chinese did a poor job meeting US demand. However, over time China adapted and now is the world’s factory. Mexico has many advantages over China, but speed of response is not one of them.
Ensure your operations align with customer expectations to thrive in the demanding U.S business environment of today. If you have questions or would like to have a deeper conversation on becoming ready to take on millions of dollars in business, reach out to the experts at Shoreview or MSSA.
