Sourcing Metal Components: Closing China-Mexico Labor Cost Gap

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german dominguez mexico metal sourcing expert

Is it cheaper to source from Mexico than China?

We continue our chat with Mexico sourcing expert German Dominguez on the differences between sourcing from China vs. Mexico. German will speak on Day 2 of our upcoming commodity risk conference.

MetalMiner: A few years ago, you told us that Mexico is closing the cost gap on China for existing machined components. Where does that stand today?

German Dominguez: The gap continues to close every day, no doubt about it. However, I’ve seen it accelerate more in the last six months, than in the last six years combined. For example, the salary range for the average Purchasing Manager in the three biggest cities in Mexico (Mexico City, Guadalajara and Monterrey) is now the same as that of a Purchasing Manger in China.

Also, the difference in labor costs is not that wide, but the productivity of the Chinese labor pool is still higher than that of Mexico labor’s output. Therein lies the biggest opportunity for the Mexican supply base: to capitalize on the floodgate of opportunities that are being created by the Chinese increases in standard of living and the subsequent appreciation of their cost structure.

I am surprised to see that in every trade show I go to in Mexico, at least one-quarter of the suppliers advertising there are from China. It is very unlikely that you would find a Mexican supplier with a booth at a China trade show. I think the gap is close enough right now to creatively find profitable ways to make Mexico work for our sourcing efforts.

Again, the keywords here are “innovative” and “creative” approaches to supply-base development. It requires a “Coaching” approach from the buyer’s company. They need to be willing to take the Mexico supplier by the hand on the initial phase of the commercial relationship to make sure that they can walk before they run with them.

A couple of years ago I remember a U.S. Purchasing Manager who was sourcing large machined steel castings from Mexico and was not willing to do business with the Mexican supplier because the foundry that quoted competitively (only 15% above China) did not have any export experience. I explained to her that this is one aspect of the supplier development process that every US company should be willing to undertake.

But she was not convinced that they should “invest” any time or resources in helping the supplier figure out how to export. “Why should I do business with a supplier that does not even know how to export?” she said to me, implying that a supplier’s technical and quality competence equals their international trade competence. Needless to say, this company went out of business in subsequent years.

Please always keep in mind that there is no low-hanging fruit left in Mexico when you go about sourcing south of the border.

UP NEXT: Metal category case study examples.

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