17 Dec 2025 Why Companies Decide Not to Source in Mexico Even After Significant Savings Have Been Determined
Written by Jeffrey Cartwright, Managing Partner
Exploring Sourcing Alternatives in Mexico Is Time Consuming and Factors Such as Tariff Uncertainty Cause the Economics to Be Different at the End of the Sourcing Process than the Beginning of It
Over the last 7+ years, Shoreview and its partner firms have been assisting companies to find alternative solutions to importing from China by identifying and qualifying valid alternatives in Mexico. Most of the time, these alternatives are at a lower landed cost to the US distribution center than the incumbent factory in China. In most cases, the company will move forward by changing its supply chain. However, we have found that sometimes, even with compelling economics, the importing company decides otherwise. This article explores those reasons. Please note that the ultimate decision-making is external to Shoreview, and we are not always aware of the internal factors, such as executive or functional issues, that may have determined the outcome.
Using the Outcome to Leverage the Incumbent Factory to Lower Pricing
The taking of a much lower landed cost and using it to leverage an incumbent factory to lower its price frequentlyoccurs. This is understandable, but it also begs the question as to why the importer historically has not been a better negotiator. Generally, it occurs during a near-sole-source relationship, or when negotiations have been conducted by marketing or a product development professional who does not really understand or care about the underlying cost structure of a product. In both situations, the company overpays, either having become over-reliant on the factory’s assistance with design tasks or having given away its negotiating leverage by becoming enamored with the factory’s aesthetic design capabilities. This importer has lost its objectivity and believes that there is only one factory out of the tens of thousands in China and Mexico that can meet their needs.
It also occurs if the importing executive has been compromised by bribes, favors, or simple laziness. Independent studies suggest that as many as 30%+ of those China “experts” in purchasing have been compromised.
If there is great success with getting the incumbent factory to lower its price, the company should conduct a vigorous review of all other products.
Using the Outcome in a Competitive Bidding Process with Other Factories in Other Low-Cost Countries
This should be expected. A great re-sourcing project will consider a variety of alternatives. The ultimate criteria should include quality, landed cost, and lead-time of a much lower landed cost. Making a supply chain move is time-consuming. It should not be done lightly or frequently.
Companies that have relocated to Vietnam, Thailand, or elsewhere have generally found the manufacturing cost to be higher (10 to 15%) as many components or materials are still sourced from China, and there are logistics costs associated with the movement of those items. However, they avoided the tariffs on Chinese imports to the United States. Since the time they re-sourced, new tariffs have started on these other low-cost countries, and the economy has shifted again in favor of USMCA/NAFTA. However, they may have adjusted their business model relative to customer pricing, or there is a degree of comfort to staying in the new factory despite the increasing risk.
On a different note, we have completed two projects in a multi-country competitive bidding process. Quotations were solicited in China, Vietnam, Thailand, and Mexico. In both projects, Mexico was the most attractive from a lower landed cost standpoint and has the advantage of a 35-day order to delivery cycle versus a 60-day cycle. Less finished goods inventory was required, thus improving working capital.
Using the Outcome to Get the Incumbent Factory to Relocate Manufacturing to Another Low-Cost Country
This is a valid response to the incumbent factory costs increasing dramatically as a result of labor costs or tariffs. The advantage of this scenario is a lower price with lower start-up risk, as the original factory will provide engineering and management support to ensure that quality expectations are met at the new factory location. It also has the advantage of moving tooling, and thus the avoidance of this cost for relocation. Note that the cost of the product at the new factory may be higher than in China, as many of the components are probably still made in China, and thus incur a logistics cost to move them to the new factory. We typically found the product cost to be 10 to 15% higher, which has been offset by a much lower tariff cost, until the recent round of tariffs of roughly 20% on Southeast Asian countries, and now 50% on India, again increasing the relative competitive advantage of Mexico.
There is a substantial risk if the incumbent supplier has simply moved assembly operations to another country. There are higher tariffs (40%) for transshipments than for products manufactured in a particular country. The rules on these transshipments have not yet been formalized, but the USMCA protocols are obviously expected to apply. These require a majority of value-added content to be local and much higher local content for automobiles than other products. Failure to achieve these content requirements results in a current tariff of 25%. Certificate of origin must be available and maintained on file for 5 years so that verification can be made when US Customs requests documentation.
Tariff Uncertainty (Continued Hope that Tariffs Will Eventually Be Lowered Dramatically)
Despite the on-again/off-again tariff announcements, it seems clear that China is viewed as an existential threat. After 7 years of a trade war, higher tariff levels are here to stay. 301 and 232 tariffs have been found by the courts to be lawful. Reciprocal or IEEPA tariffs on China of 10% for fentanyl and 10% additional are before the US Supreme Court. Even if those are found to exceed the President’s authority, the Trade Act of 1974 grants the President the authority to impose 15% (150-day duration) tariffs because of trade imbalances. Beyond that, the President is sure to expand the use of 232 and 301 tariffs on China. So, whether the 45% (as of November 2025) level holds, it is a near certainty of levels much higher than in the prior Administration. Estimates are hazardous and likely to be wrong, but it seems 40 to 45% should be expected. Note also that the previous Democratic Administration also declared China as an existential threat and raised tariffs on China. Holding out hope that in 3 years tariffs might be dramatically lowered seems very wishful thinking.
For other countries like Vietnam, Cambodia, and Thailand, it seems that tariff agreements have been reached so that the President’s foreign policy powers will prevail over the potential overreach of IEEPA authority. The Iran nuclear deal by the Obama Administration is an example of the wide authority that the courts have given the President in the area of foreign policy. However, hope is not a strategy and wishing does not make things so.
New Tooling Costs Not Fully Considered
Companies that utilize contract manufacturers in China pay for tooling. They should expect to do the same with any other contract manufacturer. Tooling is more expensive if made in Mexico than in China. Therefore, it is almost always sourced from Southern China. Building the capital costs of tooling into the re-sourcing of the product is necessary.
On occasion, the tooling in China is relatively new. Companies sometimes plan on moving that tooling from China to Mexico. That may go well, and the capital cost is avoided. However, we have seen that more commonly, the Chinese factory is reluctant to release the tooling. If the company has a number of products being manufactured at a factory, then the factory can read the tea leaves in that this product is the first of moving all of the production elsewhere. The factory will not release the tooling, and at other times, we have seen the tooling deliberately sabotaged to prevent its successful use elsewhere.
If the importing company has a wide assortment of products, then the capital cost to move everything should be analyzed. We strongly suggest performing a Pareto analysis of what items are profitable, and what items are unprofitable and should be discontinued (20% of the assortment is zero profits; it is generally a major subtraction from overall profitability and has been for a number of years). Rationalizing the product mix almost always results in much higher profits, even if the decision is made to stay with the current factories in China.
Distribution Strategy Not Considered
It is common that a distribution center (maybe the only distribution center) be located near the ocean port. That reduces inland logistics cost, but may not be the lowest cost option going forward. If the product is manufactured in Mexico, the ports of entry might be Laredo, McAllen, El Paso, or San Diego. In optimizing the US distribution footprint, it may be necessary to close a facility (breaking a lease, selling a distribution center, severance, etc.) and open a new one. Since the population center of the US (and probably the center of the end-user customer) is near St Louis, Laredo is a very attractive location from an outbound transportation cost standpoint versus the Inland Empire of California, Savannah, or New Jersey. Outbound transportation as a P&L item is much higher than inbound transportation. Lease costs, labor, taxes, etc. are also much lower in Texas than in the coastal ports. Difficulty and one-time expenses are incurred during these transition periods, particularly if the supply chain is now from multiple countries. The best practice is to perform a network analysis early in the overall strategic sourcing analysis to determine the optimum distribution strategy.
Fear of Having to Pass the Majority of the Savings on to Customers
The company’s current customers are also interested in avoiding price increases due to tariffs or any other factors. Based on our experience having served Walmart and other retailers, the importer should expect both pressures to avoid price increases and an intense desire to have lower prices. These are normal business objectives of retailers and customers. Having a well-thought-out strategy to increase your company’s profits while continuing to serve your clients well is difficult.
Anxiety over Potential Product Quality Issues
Those of us who have imported from China have developed a buyer-beware attitude. We have experienced engineering changes or raw material substitutions despite having a clear understanding with the factory to make no changes whatsoever without prior approval. We hire third party inspection companies or deploy our own quality assurance resources to detect quality issues and prevent shipment of off-quality products. Some Chinese factories will try to avoid detection by “salting” shipments with some off-quality product and/or paying an inspector a fee to pass a suspected defective product. While all factories will have non-conforming product issues, Mexican factories are considerably different(better) than most of those in China. The 3 largest industries in Mexico are:
- US automobiles
- US aerospace
- US medical devices (like heart pacemakers)
None of these tolerates any defects. The quality systems in Mexico are rigorous, and if a defect is detected, production and shipment stop until it is resolved.
Product Development Requirements May Change Dramatically in Order to Source in Mexico
Before a company engages in the time and money intensive consideration of moving their sourcing, they should fully understand their business model. Many companies design products and build a supply chain to manufacture and ship those products. Other companies that source from China are more buyers of existing products with minor changes in aesthetics. They typically attend trade shows and visit factory showrooms. They select a product and ask for changes in shape, color, or other features. They may even specify some functionality requirements, but they do not design in the true sense. No CAD drawings, no industrial designers, no tooling engineers, etc. For them to look at a country like Mexico, which is by and largely a contract manufacturer, and not a product design country, completely changes their business strategy. We have recently had several of those companies for which we have developed great alternatives with lower costs, but the company is unable to exploit the alternative because it is more of a trading company than one that is based upon its innovative capabilities. Why they engaged in a re-sourcing effort to begin with is a mystery. Perhaps pressure from the owners of the company?
Shoreview Management Advisors’ Value Proposition
US companies have significantly benefited from Nearshoring consulting projects even when they have decided not to exploit the significant savings that have been identified. By taking a deep dive into the possibilities afforded by contract manufacturing in Mexico, they are discovering that their tried-and-true efforts of sourcing in China have left many dollars on the table – year after year, quarter after quarter. All people like to do the most comfortable things. True competitive bidding within China is time-consuming and sometimes deliberately difficult. Because of that, it is likely that it has not been rigorously performed since the US company started importing from selected factories years ago.
The advent of high levels of tariffs on China, Southeast Asia, and elsewhere mandates a strategic review of not only costs, but of what alternative supply chains bring to the table in terms of reducing risk or increasing profits.
Shoreview Management Advisors takes pride in knowing that our efforts have resulted in huge, quantifiable savings for our clients as they leverage the potential new product costs with their incumbent or with other factories in other countries, whether Mexico or China.
Please email or call us for a brainstorming session before tariffs increase yet again.