What is your company’s readiness?
Is your manufacturing company looking to grow revenues? Then it’s time to consider exporting your products. The 2016 Small Business Exporting Survey by the NSBA (National Small Business Association) indicates that 65% of small businesses exported to increase sales and profits, with 21% exporting to meet customer’s requirements. Clearly, the data supports that exporting products can be a huge growth play. But which market/s should you consider? Mexico has experienced the greatest market growth in recent years.
Global automotive manufacturers and their tier 1 suppliers have poured more than $25.8 billion into Mexico since 2010 according to reports from the Center for Automotive Research in Ann Arbor, Michigan. Mexico’s Economy Minister Ildefonso Guajardo predicts Mexico’s auto output will rise from 3.4 million in 2015 to 5 million by 2020. Nearly a 50% rise in 5 years. For small businesses, Mexico is currently the number 2 country to receive exports from small businesses in the United States, in 2010 Mexico was number 7 on the list.
Some U.S. SME’s have launched manufacturing operations in Mexico because of the significant investment by Automotive OEMs and Tier 1 suppliers. These larger companies are constantly soliciting Small to Medium Entities (SME) as they look to Tier 2 and 3 suppliers to start manufacturing operations in Mexico. Based on the NSBA report sited above, only 1 in 7 of the SME engaged in overseas business have operations outside the US. Investing and building a manufacturing plant in a foreign country is a significant commitment, which comes with much more risk than exporting goods and should ONLY be undertaken after in-depth analysis and planning.
So, how do you know if exporting to Mexico is a winning strategy for your business?
First, build a plan highlighting how you will service customers outside of the United States and include at a minimum the following 3 steps:
- Assess Your Operational Readiness:
- Understand financial capability; Profit Margin, Cash Flow etc., as well look at key operational performance indicators. Internal Scrap Rate, Customer Quality Measurements, Inventory Turns and Operating Efficiency are also important measurements.
- Understand your company’s ability to continuously improve operations. An environment for and a system to encourage and measure continuous Improvement are imperative for sustained growth.
- Test the Export Market:
- Test operational capabilities by exporting products on a limited basis.
- Based on the 2016 Small Business Exporting Survey by the NSBA, 95% of exporting SMEs internally manage their export business. Per NSBA “most SME utilize the internet and wholesalers to sell their goods and services. In terms of marketing and establishing new trade markets, online inquires, customer referrals and trade shows are the top three resources SME use”.
- If your company cannot commit sufficient resources to perform these tasks internally, utilizing an Export Management Company (EMC) is always an option. There are numerous outside resources to assist a company begin exporting. The Federation of International Trade Associations (FITA) is an excellent source of information on EMC. Nelson T. Joyner, Chairman of The Federation of International Trade Associations says “An EMC is an independent firm which, in effect, acts as the exclusive export sales department for non-competing manufacturers. Their loyalty is to their U.S. manufacturers and they are working hard to develop a successful export business. An EMC can function in foreign markets as a sales representative or exclusive wholesaler for a manufacturer in the U.S. market.” One disadvantage of an EMC is that the manufacturer risks losing control over foreign sales. This requires a strong legal agreement and open communication.
- Commit and Enter with Intense Conviction:
- Once you’ve successfully completed the first two steps, the next move may be to locate a plant in the foreign country you are servicing. Be cautious, only 17% of SME’s who choose to have an operating plant in a foreign country did so to reduce cost. So be sure you assess the risk versus the expected value of starting an operation in Mexico.
- If your customer tries to convince you to start an operation near him, it is because this reduces his risk and cost simultaneously. Make sure to understand the cost versus benefits for your company.
- If considering a manufacturing site in Mexico, I would recommend the assistance of a Manufacturing Facilitator. American Industries Group is an example of a firm that has the experience of assisting other companies open foreign factories. Additional help can be found at local, regional, and national banks like J.P. Morgan and including the U.S. Federal government’s Export Import Bank.
As we’ve seen many SME’s approach long-term sustained growth through foreign market opportunities, similar to training for a half marathon, slowly and methodically. First, assess your operational health, then determine your ability to continuously improve; do you have the right tools, support, and a comprehensive plan to meet your goals. And finally, surround yourself with a positive and dynamic team. If you need assistance, hire an expert with the knowledge and experience you are lacking.