So, you´ve set your eye on Mexico to outsource your manufacturing. This means you are aware of some significant numbers, such as:
- Labor costs are 14.6% lower in México than in China
- There are over 1,200 logistics and distribution cluster companies in the Cali-Baja region
- American trade with Mexico has grown by nearly 30 percent since 2010, to $507 billion annually
- Foreign direct investment in Mexico last year hit a record $35 billion.
This hard data shows confidence among American companies on Mexico´s outsourcing capabilities.
However, when it comes to setting up a successful operation in Mexico, you´ll need knowledge that goes beyond numbers. Intangible cultural differences can make or break a business, so it is essential to be able to handle them.
It´s not all about money
We may think that when it comes down to business, money does all the talking, but that´s not always the case.
Inadvertently hurting sensitivities of your foreign counterparts can result in doors closing, deals falling apart and overall lack of cooperation.
On the other side, showing cultural savvy can expedite things and make everyone, from factory owners to workers, go the extra mile for you. Gone are the days where it could all be solved by handing out “mordidas” (bribes).
Why it matters :Today, this practice may actually destroy your credibility and cause legal problems.
Here is a list of significant cultural differences between Mexico and the US, compiled from academic studies, and my opinion on how they can affect business dealings:
You may have heard a lot about the benefits of Contract Manufacturing in Mexico, and are willing to give it a try. You just don´t know how to go about it, or to what extent Mexico can cover your manufacturing needs.
There are three essential steps to the pre-production processes, which American entrepreneurs seldom realize can be performed in Mexico:
1. Building a Prototype
Building a working prototype is an invaluable step of the manufacturing process. There is no way of knowing if the product is viable until you produce it in an industrial setting, with the same kind of methods that would be used for larger quantities. This is true even if you created an entirely functional prototype in your garage.
Many entrepreneurs have approached us with an innovative idea, which we were able to test this way. With our workers´ feedback, we were able to offer practical recommendations, which ultimately improved the product, reduced production costs and made for easier manufacturing.
- There´s no need to approach a large maquiladora for prototyping; some small workshops offer excellent prototyping services
- Provide a super-detailed “spec sheet” for the product. Err on the side of caution and include as much information as possible: materials, measurements, finishings
- If you are still fuzzy on the details, it is worth the money to hire an industrial designer before setting out to produce samples. One of the best-kept secrets in outsourcing is the superb quality of professional work available in Mexico. We can help you find the right industrial designer or engineer for your product, at a fraction of what you would pay in the U.S. f
- We recommend going above-and-beyond prototyping and creating actual samples of the product
- Create at least 5 or 6 working samples of your product
- Expect to wait anywhere from 2 to 3 weeks -depending on the type of product, for the creation of your samples
- One or more prototyping runs may be necessary to turn out the perfect product –budget accordingly
You´ve made up your mind. You are hiring a Contract Manufacturing broker to take care of your outsourcing needs in Mexico.
How can you make sure that the outsourcing endeavor will be successful?
Well, there are sides to this equation:
- Buyer´s side (the company requiring the Contract Manufacturing)
- Broker´s side (the outsourcing agent, who will be responsible for the Contract Manufacturing in Mexico)
- The relationship between the two
The probabilities of success increase significantly when each of these sides minds some fundamental principles.
Commitment. The highest ranking executives in the company must be fully on board with the idea of outsourcing. They should get involved from beginning and demand frequent updates.
Clear goals and objectives. The company should fully understand the scope of the agent´s services and what he or she can and cannot ask the suppliers to do.
Trust. The ought to be confident that the outsourcing broker is providing the best suppliers for your needs. A knowledgeable agent will not aim for the cheapest supplier if he knows the choice will be more expensive for your company in the long run.
Partnership mindset. The outsourcing broker is more than a service provider. He or she is your partner and will be looking out for your interests. Treat the outsourcing agent with the same courtesy as you would an in-house employee.
Set realistic goals. Would a factory in the U.S. be able to fulfill an order without previous notice? Would you be able to get raw materials overnight in the U.S.? If that does not happen in the U.S., chances are it does not happen in Mexico either. So talk to the agent to set-up a realistic time frame and budget.
Assign a contact person. A representative of the American company must be assigned to communicate with the outsourcing agent and coordinate talks with other team members, receive updates and keep track of goal completion.
The Contract Manufacturing Agent
When thinking of manufacturing in Mexico, some people are tempted to fly solo.
However, the D.I.Y. route has it is serious caveats, especially if you have no experience outsourcing in Mexico.
Before we go on, let me confront the elephant in the room. That is, the notion that I am promoting the use of contract manufacturing brokers because we at Outsourzia are, duh, contract manufacturing brokers.
If you are considering outsourcing to Mexico to decrease production costs, why pay a broker´s fee?
These are the reasons:
Local expertise. Labor laws are different in Mexico than in the U.S., taxes work in a different way, even time seems to run at a different pace. Getting a broker to help navigate the production process is all the more important when manufacturing in a foreign country. Before setting out to produce, a broker will ensure the factory can accommodate your orders in due time and proper form.
To actually save money on production. Unexpected fees and expenses eat away at profits. Outsourcers must be very informed about taxes, customs fees, transportation costs and manufacturing overhead. Lack of planning can trigger unnecessary expenditures in last minute shipping of raw materials -which may be unavailable locally. Also costly are corrective production runs and unplanned storage.
American companies looking to outsource their manufacturing to Mexico constantly approach me for consultation. They usually have many questions. Some wonder about wages in Mexico, others about NAFTA, taxes or the speed of the process.
More telling, though, are the things they DON´T ASK, for it is usually those assumptions that hurt companies making their initial forays at outsourcing.
So here is a list of useful questions that will help your company better understand what to expect while outsourcing in Mexico.
What is the typical wage in Mexico?
- The general minimum wage for workers all across the Mexican territory is $70 MXN per day, as stated by the National Commission for Minimal Wages, on October 2015.That is equivalent to $4.37 USD per day*.
- The Commission also provides an index based on technical skills. At $90 MXN (roughly $5.62 USD per day*), the work of a seamster /seamstress at a factory, is at the upper end of the scale**. Compare to the $10 USD minimum hourly wage in California***.
- On some occasions, wages are established by labor unions and employers through annual negotiations.
Is it true that, because of NAFTA, an American company outsourcing in Mexico is not required to pay taxes in Mexico?
Not entirely. NAFTA does provide tax exemption for products made in Mexico, with Mexican commodities. But if you incorporate foreign supplies to your product –say, Korean cloth or Chinese components, the product will be taxed.
What about the IMMEX program?
IMMEX certification allows companies a duty free, temporary import of supplies for manufacture. This program was created as an incentive for foreign companies looking to outsource in Mexico. Though it is a very attractive concept, the reality is that only a handful of large manufacturers are offering IMMEX product certification. Strict regulations surrounding the program have impeded some manufacturers from qualifying, and discouraged others from applying.
On a practical level, IMMEX may not be worth pursuing by companies planning small or medium scale production.
Do IMMEX or NAFTA exempt the company from transportation costs?
Contract manufacturing is one of those topics where everyone has a different opinion, mostly based on their own experience. Sadly, misconceptions often have roots in personal negative experiences. Don't let your competitor's mistakes affect your ability to make a profitable choice for your business.
CM done right can mean more revenue for your company, so it´s important to examine these myths before making any decisions:
1) Myth: When choosing a CM, low cost outweighs any other consideration.
True. And false. More important than getting a low quote is to obtain a real quote. In the business, we often hear stories about costs ending up at 20 to 30% more than the initial quote, due to hidden fees and unexpected charges. To avoid such scenarios, it is important to work with a contractor or broker who will provide a comprehensive quote, especially when outsourcing to Mexico or any other country. A realistic quote will allow for better margin estimates –not to mention a smoother ride.
2) Myth: You should choose a Tier 1 manufacturer in Mexico.
False. Be wary of the assumption that a larger CM company will produce your product at a lower cost. This is not always true. Tier 1 manufacturers are great for large operations, but not a fit for every company. For startups or businesses in the early stages of development, a smaller manufacturer may be more appropriate. It will also afford the possibility of producing smaller product batches. A good fit entails a variety of elements, including geographical location, technological capabilities and a good track record in your industry. An experienced outsource manufacture broker will be able to match you with the most compatible manufacturer for your needs, and save you unnecessary expenses.
3) Using a CM, especially abroad, means giving up control of my operation.
When thinking about outsourcing your manufacturing to México, you may wonder why some people swear by it, while others have had disastrous experiences…
As with any kind of plan, the difference between success and a nightmare is always in the implementation. How to implement the manufacturing plan and who your partners are, is critical if you are seeking a profitable and smooth operation (and who isn´t?).