Why Chinese Companies Are Investing Billions in Mexico

Bill Chan had never set foot in Mexico, let alone a secluded area of ​​desert in the country’s north, where he suddenly decided to build a $300 million factory. But it seemed an insignificant detail amid the pressure to adapt to a rapidly changing global economy.

It was January 2022, and Mr. Chan’s company, Man Wah Furniture Manufacturing, was facing serious challenges moving sofas from its factories in China to customers in the United States. Shipping prices were skyrocketing. Washington and Beijing were locked in a fierce trade war.

Man Wah, one of China’s largest furniture companies, was eager to manufacture its products on the North American side of the Pacific.

“Our main market is the United States,” said Mr. Chan, chief executive of Man Wah’s Mexico subsidiary. “We don’t want to lose that market.”

This objective explains why a large number of large Chinese companies are aggressively investing in Mexico, taking advantage of the North American Trade Agreement. Tracing the path taken by Japanese and South Korean companies, Chinese companies are setting up factories that allow them to label their goods “Made in Mexico,” then export their products duty-free to the United States. Makes it happen

Chinese manufacturers’ interest in Mexico is part of a wider trend known as nearshoring. International companies are moving production closer to customers to limit their vulnerability to shipping problems and geopolitical tensions.

The involvement of Chinese companies in this shift testifies to the deep belief that the breach dividing the United States and China will be a permanent feature of the next phase of globalization. Yet it also reveals something more fundamental: Whatever the political tensions, the commercial forces binding the United States and China are even more powerful.

Chinese companies have no intention of abandoning the American economy, which is still the largest on Earth. Instead, they are setting up operations inside the North American trading bloc as a way to supply Americans with goods ranging from electronics to clothing to furniture.

The Mexican border state of Nuevo León state has positioned itself to seek the reward. Under the leadership of the 35-year-old governor, Samuel Garcia, the state has attracted foreign investment while pursuing highway improvements to ease border crossings.

Mr. Garcia recently attended the World Economic Forum in Davos, Switzerland to recruit more companies.

“There is a geopolitical planetary alignment in Nuevo León,” the governor declared during an interview inside the government palace in the state capital of Monterrey, a suite of grand rooms with high ceilings and balconies overlooking the jagged peaks of the Sierra Madre. Warren. “We’re getting a lot of Asians who want to get into the US market.”

Since Mr. Garcia took office in October 2021, nearly $7 billion in foreign investment has flown into Nuevo León, according to the Mexican Ministry of Economy, making the state its biggest recipient after Mexico City.

In 2021, Chinese companies were responsible for 30 percent of foreign investment in Nuevo León, second only to the United States with 47 percent.

Some of this money is funding factories that will make finished products for sale in the United States. But much is focused on a sweeping refashioning of global supply chains.

As the pandemic disrupted Chinese industry and clogged ports, companies with factories in the United States faced a shortage of parts made in Asia. Many are now demanding that their suppliers set up plants in North America or risk losing their business.

Lizhong, a Chinese manufacturer of automobile wheels, is setting up the company’s first factory outside Asia in an industrial park in Nuevo León. Lizhong’s biggest customers, including Ford and General Motors, pressured the company to open a factory in North America, said Wang Bing, general manager for Mexico.

DY Power, a South Korean company that makes parts for construction equipment, is considering northern Mexico as a site for a factory near a major customer in Texas.

“Having gone through the pandemic and supply chain crisis, China COVID shut down, many North American manufacturers will want to eliminate risk,” said Sean Seo, Seattle-based executive of DY Power.

“Globalization is over,” he declared. “It’s localization now.”

Cesar Santos has placed a lot of bets on the veracity of such declarations.

Mr. Santos, 65, a corporate lawyer, runs a sideline venture as a developer in Monterrey, an industrial boomtown filled with upscale restaurants, upscale shopping malls and spas.

A decade ago, he was approached by a developer in Los Angeles representing a Chinese electronics company that was considering a factory in Mexico. Mr. Santos controlled a property of considerable interest – a parcel of 2,100 acres of land.

Dotted by cactus, the property sat less than 150 miles from the Texas border. While surrounding states struggled with violence related to drug trafficking, Nuevo León gained a reputation for safety. The state boasts a highly skilled workforce, given the presence of universities churning out engineering graduates, among them the Tec de Monterrey, often referred to as the “MIT of Mexico”.

When Mr. Santos was a child, this land was his family’s ranch, the scene of horse-riding adventures. Now, he saw a lucrative opportunity to convert it into an industrial park.

He traveled to China, riding a high-speed train from Shanghai to the lakefront city of Hangzhou, to meet the Hawley Group, which had built an industrial park for Chinese companies in Thailand.

“China was a country that developed everything so fast,” Mr. Santos said. “I was really amazed.”

By 2015, it had joined with Holly and another Chinese partner to form a joint venture, Hofusan Real Estate. They plan a grid of warehouses and factories in front of which is a hotel and temporary apartments for managers, as well as homes for over 12,000 workers.

The Hawley Group sent Jiang Xin to oversee the enterprise. He previously worked on the company’s project in Thailand. Mexico presented a different proposal.

“Chinese companies had no idea about Mexico, and we only knew bad things, dangerous things,” Mr. Jiang said. “Then came Trump.”

When he became president in 2017, Donald J. Trump demanded that American companies leave China. By 2018, he was imposing heavy tariffs on hundreds of billions of dollars in Chinese imports.

“The tariff thing helped us,” Mr. Jiang said. “Chinese companies wanted more options. And we are one of their options.

By the time Mr. Chan began considering Mexico in the autumn of 2021, 27 other Chinese companies had locked down land inside Hofusan Park. Only one large parcel remained.

Man Wah had already responded to the tariffs by building a factory in Vietnam and using it to manufacture products for the American market. But the rising cost of shipping superseded that strategy.

The Man Wah was carrying 3,500 40-foot shipping containers a month from Vietnam to the Pacific. The trips that previously cost $2,000 suddenly increased 10 times as much.

Mr. Chan used the Chinese social media platform, WeChat, to connect with Mr. Jiang. His questions were blunt. How soon can Man Wow start construction? (Immediately.) How were the highways? (Not great, but improving.) Were there any authentic Chinese restaurants in the vicinity? (No.)

Within weeks, Man Wah had promised to buy the land. In January 2022, Mr. Chan signed the contract before boarding a flight to Mexico in the Chinese city of Shenzhen, leaving behind his wife and two children.

While the new factory is being built, Man Wah has already started producing sofas in a smaller, leased plant nearby.

Before he found the temporary site, Mr. Chan loaded 70 containers full of machinery and raw materials in China, loading them onto a ship bound for Mexico.

He said, ‘We always work quickly. “Don’t worry about anything, just do it.”

Mana Wah worries about a few things: hiring enough workers and getting local suppliers ready.

The company plans to manufacture about 900,000 pieces of furniture per year in Mexico. This would require hiring and retaining 6,000 employees.

Man Wah is accustomed to working in China and Vietnam, where independent labor unions are essentially banned, and where rural people stream into industrial areas in search of jobs.

The unemployment rate in Nuevo León is 3.6 percent. The growth of investment has set up a fierce competition for labour.

Wise companies entice their employees with amenities like quality food and transportation to work. But Man Wah and other Chinese companies answer to bosses in China, who tend to austerity with a mindset that workers can be easily replaced.

Finding local suppliers is also a challenge. Under the terms of the North American Trade Agreement, manufacturers must use a minimum percentage of parts and raw materials from within the region to qualify for duty-free access to other countries in the bloc.

Three years ago, Chinese computer maker Lenovo opened a new factory in Monterrey dedicated to making servers that hold data for cloud computing.

Until last year, Lenovo shipped a critical component — the so-called motherboard — from a factory in China. But as the international shipping crisis intensified, the company turned to a supplier in the Mexican city of Guadalajara.

Lenovo stopped importing packaging materials from China, instead buying them in Mexico.

But Lenovo continues to import many key components from China, from memory devices to specialty cables.

“There is no supply chain for these things in Mexico,” said Leandro Sardella, the company’s director of western operations.

at least not yet.

Source: The New York Times