Category Archives: Mexico

Nearshoring? Not on this planet. At least not yet.

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

One of the predictions (or purported trends) we heard a lot about in the last few years is “nearshoring”. Google has 78,000 references to the term. Supposedly, trans-Pacific supply chains are so unreliable and complicated that US businesses are leaving their Chinese suppliers and moving to closer areas such as Mexico. If that were happening, I expect we would be seeing Mexican imports to the US being an increasing percentage of Chinese imports. Here’s the data. See for yourself. There was a surge in early 2008 but it went away. The data source is the U.S. International Trade Commission.

Dollar

value of US imports from Mexico as a percent of imports from China
2007 2008 2009
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
68 67 62 64 72 71 59 57 59 59 57 n/a

Here’s why I think many predictors are going astray:

First, they don’t differentiate between goods that usually travel by air and goods that travel by ocean. If your goods travel by air, an 8000 mile supply chain is only 12 hours longer than a 2000 mile supply chain. I agree that trying to have a long flexible supply chain is only possible if air freight is economically feasible. The economics work for laptop computers but not for clothing.

Second, the predictors overlook the main reason companies buy from a given country … that’s where the best suppliers are. You shouldn’t just say “I’m moving from country X to country Y” unless country Y has equal or better suppliers. (“Best” here means best against criteria that include landed cost.)

Economics Professor Michael Porter wrote a book called The Competitive Advantage of Nations. It has a great chapter on how countries become centers of excellence in building things. He says it requires four conditions:

  1. High degree of domestic competition
  2. Related and supporting industries
  3. Demanding customers
  4. Adequate factor conditions

Too many predictors focus on condition four, factor conditions. That includes labor, overhead and material costs, infrastructure efficiency and overall business environment. The other three conditions are also necessary. If factor conditions were the only criterion, Japan never would have become excellent in building cars.

I’m not saying that nearshoring will never happen. It will happen first in purchasing products that can’t be shipped by air and require supply flexibility. For any product, today’s best countries will not be best forever. Some external shocks to the system can speed up the process. If China allows the yuan to float, costs for the Chinese content of China’s exports will go up with respect to the US dollar. If energy costs soar or emissions from aircraft or ships are tightly controlled, the “best” countries could change. Both of these changes are likely to happen sometime.

The typical purchasing company cannot solve these problems. You can’t generate a nearby supply base for the parts needed to manufacture your supplier’s products if it doesn’t exist already. Because of that, “insourcing” may often be a better solution than nearshoring. If starting to manufacture something you are now buying isn’t practical, the company best positioned to solve the problem is your current supplier. I suggest you start probing your Chinese supply base about what they would do if the yuan increases in value. Farsighted Chinese companies are already looking in Africa and Latin America for both sourcing and manufacturing.

Dick Locke, Global Procurement Group.

A North American Near-Shoring Obstacle

Editor’s Note: Today’s post is from Dick Locke, Sourcing Innovation’s resident expert on International Sourcing and Procurement. (His previous guest posts are still archived.)

It appears that Mexican drug cartels are taking advantage of the US’ C-TPAT program to occasionally put marijuana into trucks that have been granted expedited clearance into the US. How serious is this?

Here are a couple of articles:
Trucker Program Attracts Drug Smugglers
Mexican Drug Smugglers Taking Advantage of New Program That Speeds Truckers Across the Border

If you dig into the articles you will see that there are about 5 million north-bound truckloads crossing the Mexican border annually. In two weeks CPB found four shipments containing marijuana. They say that ten percent of the trucks are inspected, but it’s not clear if that’s ten percent of all trucks or ten percent of the C-TPAT certified trucks. Worst case, that’s 20 trucks carrying marijuana per week, or 1,000 per year. That comes to 200 trucks per million. Your judgements will vary on how serious this is.

C-TPAT was not designed to catch drug smugglers. Of course, the obvious question is whether terrorists could substitute a weapon of mass destruction (WMD) for the marijuana. Theoretically it’s possible of course. However, I don’t think the Mexican drug cartels would do so voluntarily. A cynic would say that their customer base in the US is too valuable to them, and there are probably other reasons as well.

But the articles do raise some questions. Certified trucks are only required to notify the US Customs and Border Protection (CBP) staff 30 minutes ahead of reaching the border. This is in marked contrast to the Container Security Initiative that applies to ocean freight. For ocean freight, CBP must be notified of the contents of all containers 24 hours before a US bound container ship is loaded.

CBP is also finding trucks where secure seals have been broken or circumvented by removing doors at the hinges. That’s disturbing. These are the same seals that are used on ocean freight containers.

My thought is that there will probably be more delays at the border. One sensible approach would be to require trucks coming from further into Mexico than the immediate border area to provide more advance notice. CBP tries to judge security risks at least partly based on the names of the shipper and receiver and more time to react would help them select riskier for further inspection.

Dick Locke, Global Procurement Group.

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Overcoming Cultural Differences in International Trade with Mexico

Today’s post, which is partially based on materials from Dick Locke’s seminars on International Purchasing, is edited by Dick Locke, Sourcing Innovation contributor and President of Global Procurement Group.

This post is going to examine some of the cultural differences that you may encounter (as an American or Canadian Sourcing / Procurement Professional) if you are doing business with Mexico. We start by discussing each of the eight key cultural considerations outlined in our introductory post and then highlight a few other points that you should be aware of.

As per our initial post, this discussion is high-level and general in nature and, as Dick Locke points out in his classic text on Global Supply Management, while it is too easy to stereotype a country, individuals in each country will vary from the stereotype. You need to take time to get to know the people you will be dealing with because their behavior may be nothing like the usual behavior of the country in which they reside and there is always a chance that you might run into people who are trained to act like you … while in your presence.

  • Power Distance
    In Hofstede’s classic text on Culture’s Consequences, International Differences in Work-Related Values, Mexico is the country with the highest power difference which indicates there are severe differences in power and influences between those at the top and those at the bottom. The leader is in charge, and everyone will defer to him. This means that you need to direct your questions at the leader, and not the interpreter, and that you should not direct questions at domain experts or subordinates unless specifically referred to them.
  • Uncertainty Avoidance
    Mexico also ranked quite high on Hofstede’s uncertainty avoidance scale, which indicates that they generally don’t like uncertainty. However, Locke who disputes Hofstede’s contention to some degree, finds Mexican factories very flexible in schedule and points out some low uncertainty-avoidance characteristics of Mexico, such as a lack of a standardized format for telephone numbers. What this means is that while larger companies who have been doing business with the US for years will be used to uncertainty, and will not have that much of a problem with it if you have already established a good working relationship with the company, if you are trying to engage a new partner, especially a smaller company who has not done much business outside of Mexico, you should be prepared for a great deal of hesitation if you can’t specify what you want, when you want it, and in what quantity (just in case).
  • Individualism
    Mexico ranked quite low in Hofstede’s individualism scale. While this may appear to be true when you are dealing with those companies where the power distance is high, you will find that younger generations in Mexico’s larger cities, especially those that are near the border or where there is a fair concentration of wealth, are a lot more individualistic as they have incorporated a lot of the youth culture from their northern neighbor over the past three decades. Furthermore, your average Mexican places a lot more importance on the uniqueness of the individual than Hofstede gave them credit for.
  • Polychronic vs. Monochronic Time
    Mexico, as per Hofstede’s classic work, was traditionally an authoritarian polychronic culture, but the pre-China manufacturing boom brought with it a heavily monochronic influence to the Mexican workplace. As a result, you might just find that a duality of cultures exists in your potential trading partner. While the plant will likely exhibit a monochronic culture thanks to decades of American influence, at least during your visit, the head office will likely retain the classic polychronic culture because punctuality is not high on the list of Mexican priorities.
  • Personal / Impersonal
    Mexicans are very personal and they prefer to do business with others who are highly personal. Between trusted parties, a handshake on a relationship is often all that is needed to seal a business arrangement. Note the use of the word “trusted”. By default, the Yanqui, who they naturally distrust, will not be a trusted party and you will need to sign on the dotted line before they start to do business with you.
  • Buyer / Seller Rank
    While you’ll generally have a higher “rank” than the seller, today, this really comes down to the relative state of the economy. Money talks, especially if it talks with respect. However, don’t expect emails from strangers to be returned, due to the highly personal nature of the country.
  • Importance of Harmony
    Due to the significant number of western values Mexico has adopted, harmony in the workplace is nowhere near as important as it is in some Asian countries. However, Mexico, which has the most Indian-oriented mindset among the major American countries, has a strong national honor, obedience to authority, an acceptance of the stratification of their society, and a group loyalty. As a result, you will likely encounter a significant desire for harmony in your relationship.
  • Importance of Face
    Personal dignity is of high value in Mexico, a country where the Aztec legacy and Yanqui trauma are ever-present realities and where Christianity holds sway over at least 95% of the population. As a result, you’ll find that Mexico is one of the few non-Asian countries where a core cultural value is to save face at all costs.

One point that is important to note when doing business with Mexico is appropriately summed up in Richard D. Lewis’ When Cultures Collide. While the Mexican gives freely to his guest, conducting business and obtaining many social services incure a cost which is normally obviated in U.S. and Northern European societies. Mexican civil servants, officials, and police are paid very little and usually seek to augment their meager salaries by accepting what Americans call bribes to facilitate the granting of permits and other services. In other words, time to have a detailed discussion with your legal counsel about what “facilitation payments” are acceptable (and what records you’ll need to keep)!

Other points to note is that while most Mexicans are generally very courteous and polite listeners, they are also very suspicious of Americans. Don’t try to blow though the friendly small talk that will precede your business meetings. Let them get to know you and only get down to business when the time feels right. And if you truly want to profit, go for a win-win relationship.

As a matter of courtesy, if you are from the U.S., try to avoid calling yourself “American” as if it’s different from “Mexican”. America is a continent in Mexican geography. We share it with other Americans.

Finally, as I strongly recommended in my first post, if you plan to start doing business with any new international country, including Mexico, you should do a thorough job on your homework. You can start with:

  • Dick Locke’s course on the Basics of Smart International Procurement (which is offered through Next Level Purchasing and counts towards the SPSM2 certification or ISM Continuing Education Hours), or
  • a customized seminar from Dick Locke’s Global Procurement Group. Dick Locke and his associates each have decades of experience doing business with over two dozen countries, including the fifteen biggest importers and exporters to and from the United States, and Mexico. A single day with an expert like Dick Locke could save you months of headaches.

Again, a big thank you to Dick Locke for serving as editor for this special series of posts and providing some up-to-date materials and information for the purpose of this series.

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