Mexican Factories: What does it mean to be a Purchase Order Friendly/Export Ready?

?

??????????? At the Mexico Strategic Sourcing Alliance (MSSA), our contracts generally stipulate that we only do business with Mexican and Latin American (LATAM) suppliers who are “Export Ready” or “Currently Exporting”.? While American clients rejoice in reading such a clause, the succinct definition of “Export Ready” can become rather nebulous when viewed from the contrasting lenses on each side of the border.? An American firm that is currently importing from other countries generally enjoys a set protocol for quoting, sample expedition, lead times, shipping, and delivery that could come across as “foreign” to certain small and medium-scale LATAM suppliers.? Nevertheless, those suppliers in Mexico and further south who refuse to adapt to a more Westernized methodology may lose out on lucrative long-term contracts with US firms as America’s messy divorce with China will accelerate in subsequent years.? In this article, are general expectations and requirements that Mexican firms will need to consider when wishing to develop long-term partnerships with American and Canadian importers.

?

?

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 and LATAM 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 is what 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 Westernized their bidding process.? Those who have correctly analyzed the global raw materials market, and correctly costed 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 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.

?

While Westerners understand that Mexico and the rest of LATAM are relationship-based cultures, contemporary technology along with global supply chain urgency dictate that in-person meetings cannot be required for each competitive bid.? Mexican factories who prefer to bid 2-3 times above the pricing that they will accept prior to receiving the prospect in his or her facility should reconsider doing business with the United States while focusing on Mexican and other Latin American markets.? American executives and business owners do not have time to fly to Mexico during the initial benchmarking phases of a project and will exclude your factory in the initial round if it is not initially within the ballpark.?

?

?

IMMEX CERTIFICATION

?

?

As a group of US-based consultants who are bi-national and/or bi-cultural, we at MSSA understand that there are challenges to global competitiveness in Mexican manufacturing.? These challenges range from high taxes, Mexican labor law, illegal Chinese subsidies of industries, and lower Mexican raw material supply amongst others.? While global competitiveness can be a challenge in Mexico depending on product category, commodity, raw materials, and logistics, it does not have to be impossible.?

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:

?

1.???? VAT tax exemption for components and services involved in the manufacturing process for export of final goods.

2.???? Import duty exemption for parts and components required for final assembly in Mexico for export of final goods.

?

?

For many Mexican suppliers, IMMEX certification and subsequent tax exemption are the defining line between competitiveness and lost opportunity in the States or Canada.? Mexico recently raised tariffs on Chinese products and parts.? Tariffs ranging from 5-25% on Chinese imports will put a significant dent in the competitiveness of a final assembled product that requires at least some Asian components such as synthetic textiles or functional hardware.? While tariff exemption is key, VAT exemption is likely more crucial for Mexican exporting factories.? There are few products made in Mexico in which a firm is not required to purchase a component, product, process, or service from another Mexican company or individual.? Mexico’s 16% VAT or IVA is a substantial obstacle when trying to export.? The more complex the BOM of a manufactured product, the higher percentage of IVA is contained in the price of an exported product.? Even when a supplier can be competitive while paying duties and IVA, this is essentially money thrown in the trash that could be used for greater competitiveness, re-investment and an expanded partnership with a US importer.

?

It is our recommendation to Mexican firms to apply for IMMEX certification immediately.? Those who wait until the correct client comes along will lose opportunities.? As previously stated, US firms are in a current bind with China and are not interested in waiting for a Mexican firm to “become” competitive.? You can either play ball now or you cannot.? IMMEX certification can take over a year.? ????

?

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 regarding the timeframe required to receive an initial quote from a Mexican supplier.? We attempt to avoid using the stereotypical term “Ma?ana 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 the business and are competing against other firms throughout Asia and LATAM.? It is your responsibility to be proactive in effort 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, it is expected that high-level managers and partners 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 estimated completion and shipping dates based on agreed-upon lead times in the contract.? Should a Mexican supplier need additional time to complete an order or ship that is outside of 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 are facing 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 promptly.? While these are cultural shocks for many Mexican and other LATAM firms, you must understand that you are still competing with Asian suppliers that hold even more industrious mindsets.? Competitive, fast 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.?? But 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 is 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.?