How Chinese companies are investing in Mexico to export to the U.S.
Internationalization and Globalization are two processes that, starting in 2020, have experienced profound changes. Today, globalization is no longer a phenomenon driven only by the economy, as a new context has become dominant: political risk, with repercussions in international trade due to new alliances between blocks of countries united by borders, interests, and common principles.
The USA-China decoupling, the process of loosening the interdependence between the two countries with a view to geo-strategic rivalry, has resulted in the transfer of production capacity back home and the nearshoring of American production in neighboring countries, especially in the Caribbean and Latin American areas.
The purpose of nearshoring is to optimize supply chain management, reduce transit times, and improve responsiveness to product demand, thus reducing risks from trade wars, geopolitical turbulence, factory or port closures, and demand volatility. Nearshoring developed in response to global supply chains becoming more vulnerable to disruption.
In particular, this has benefitted the Dominican Republic, which has become an industrial hub for large U.S. companies such as Johnson & Johnson,GEEnergy, and Medtronic, with transport advantages to ports on the American Atlantic seaboard. Multinationals such as Nestlé and IKEA have also chosen the DR as a distribution hub, benefiting from reductions or elimination of taxes and duties.
Now many Chinese companies have undertaken a strategic path to bypass the constraints imposed by the US-China decoupling by investing in Mexico. The goal is to export consumer and mass market products made in Mexico to the U.S., for reasons that include: the USMCA free trade agreement between the USA, Mexic, and Canada, which eliminates customs duties; finished products that are 100 percent Made in Mexico and therefore Mexican in all respects, even if the investment capital from China; reduced ground transportation costs to the largest consumer market in the world; low-cost skilled labor (the average wage of factory workers in the U.S. is $16/hour and $6.50 in China, but only $4.50 in Mexico).
Case in point: Man Wah Holdings, a Chinese company based in Hong Kong is the global leader in reclining sofas with electric mechanisms. In 2022, Man Wah invested in the Hofusan Industrial Park 25 miles north of the city of Monterrey, located just 130 miles by road from the U..S Customs crossing at Laredo, Texas. The 2.5 million sq. ft. advanced production facility delivers a manufacturing capacity of 3,500 containers per month to be shipped across the Mexico-US border. The remaining lots in the Hofusan Park have already been acquired by 35 Chinese companies interested in the U.S. market, 10 already active today and 25 with construction plans scheduled between now and 2027.
Other Chinese companies pursuing the same strategy include Shenzhen-based BYD Auto, the world’s largest manufacturer of electric cars, which plans to build cars in Mexico destined for the U.S. market (Warren Buffett’s Berkshire Hathaway is among its partners). The idea is to benefit from U.S. policies that grant electric cars produced in Mexico a tax credit of $7,500 dollars for American consumers who purchase these e-cars and to avoid the 27.5 percent customs duty on electric cars Made in China.
Also in 2023: Lingong Machinery Group, which produces excavators and heavy construction equipment, invested $5 billion in the state of Nuevo Leon; Trina Solar, a world leader in solar energy, invested $1 billion in photovoltaic production; and Lenovo, a Chinese technology giant, invested in a plant for the assembly of computers, servers, and racks.
Mexico may be replacing China as the main trading partner of the U.S., but not all of it will benefit Mexican corporations – or replace China.
Antonio Acunzo is CEO & Co-founder of MTW GROUP, an international business advisory company based in Miami and working with SMEs and Mid-Market companies looking to expand in the U.S.A. and select Asian markets.
