16 May 2022 Negotiations Are Complex Yet Productive in Mexico
When North American companies have failed to successfully negotiate a re-shore of their manufacturing to Mexico, more often than not, it’s due to a lack of understanding in the negotiation styles of Mexican companies.
Time and time again, almost without exception, North American companies fail when they attempt on their own to nearshore their manufacturing to Mexico. The main reason this occurs is due to the negotiation style in Mexico and the way Mexican companies view and determine pricing.
First and foremost, the Mexican companies believe in providing value, they are looking for a long-term partnership from the get-go. When they quote something, their minds are already thinking on how to serve you better and how they can earn your trust toward a long-term relationship
Patience in following the process is by far the biggest challenge and obstacle with the companies in North America who want fast results and to get quotes back within weeks. Unfortunately, this will not happen! The U.S. principals negotiating must understand that Mexican companies are not prepared to quote in short periods of time, they will follow a different timeline and that will require time and patience.
On the other hand, the Mexican negotiation style is a barrier because many Mexican companies will “test the waters” with pricing no matter how experienced they are, no matter if they are dealing with an experienced organization, and no matter that they know that initial pricing may not work. Their initial prices will always be high, sometimes even irrational.
Negotiation Factors to Focus On
There are two key factors that will be important for Mexican companies in deciding the best offer they can put on the table. First will be how much they trust you. The other is that they will want to engage in a long-term partnership with you.
Two recent examples of pricing come to mind. One where a consumer product started off being quoted $130 usd/pc and the final pricing eventually became $40 usd/pc. The other one is when, during round three of negotiations with a plastic manufacturer, their owner saw the intention for the customer to visit them and his comment was “now that I understand that they are serious and want to come for a visit, we can provide our best pricing.” These two examples are a reality. Not to say that this is a good practice, but Mexican companies work this way. The following chart provides an example of what different rounds of negotiations could potentially look like from the beginning to the end. Not only can the price come down significantly but it’s also impossible to determine at the beginning of the negotiation process which company will be the most competitive by the end of the process. There’s no way to shortcut this back-and-forth dance since relationships factor so much into the Mexican negotiation process.
Mexicans will only provide good pricing when they trust you. That is when they know that your company knows the market, the suppliers, who the decision makers are, and know the negotiating process in a way that should help your company to get the best prices, because they trust them. There simply is no business that will be done in Mexico unless there is trust and patience to follow the process.
Visiting Mexican Factories – Timing is Critical in the Process
One thing that will help you to get the right pricing is a visit to Mexico to meet face to face with the owners of the businesses to develop confidence. This visit is not recommended early in the process, instead the visits should be the last step in the negotiations. An early visit will show a sense of urgency to them, and pricing will never be aligned, but the visit at the end of the process, where a final negotiation will take place, will get you a final concession after you have earned their trust.
Sending RFQs and expecting to receive competitive pricing does not work. It is not going to get traction and is not going to achieve the desired result of the best possible price. You must expect no less than four rounds of negotiation, probably the last one will be merely in a dinner environment where rapport and relationship was already built. The last offer will be granted if you have earned their trust.
Partnering with a firm that has a proven track record in helping U.S. companies re-shore is invaluable when navigating through the Mexican negotiation process. Please do not forget the recipe for success: Gain their trust, be patient, and trust the process.