Chinese companies relocate to Mexico

张工工

In recent years, many domestic enterprises have set up factories overseas. In the eyes of the public, some regions in Southeast Asia such as Vietnam, Indonesia, Thailand, etc. are the main destinations for Chinese enterprises to leave. In fact, in addition to Southeast Asia, Mexico on the other side of the Pacific Ocean also gathers a large number of Chinese enterprises. Many people may not expect that Mexico has become a popular destination for Chinese enterprises to relocate.

According to data, during the pandemic, Mexico's trade with the United States has surpassed China. Now it has surpassed Canada to become the largest trading partner of the United States. On the surface, Mexico's trade with the United States has grown by leaps and bounds in recent years, and behind the data is the credit of countless Chinese companies.

According to statistics from the Mexican Ministry of Economy, China's (including Hong Kong) direct investment in Mexico reached US$663 million in 2021, an increase of 76% from 2020, setting a new high since 1999. In terms of country, it ranks 9th, approaching South Korea (US$684.7 million), which ranks 8th. As of 2022, the number of Chinese companies that have made direct investments in Mexico has reached 1,289.

At present, many well-known and unknown large companies in China have moved their factories to Mexico. For example:

One of China's largest furniture companies, Minhua Furniture, gradually moved its factories out of China in 2022. Now in Nuevo León, Mexico.

Taizhou Fuling Plastic Co., Ltd. is a Chinese plastic utensil manufacturer that produces paper cups and straws for American restaurants. In order to remain competitive in the United States, in the spring of 2019, Fuling announced plans to open a $4 million plant in Monterrey, Mexico. The plant was originally scheduled to start production in July 2019 and ship millions of paper straws to the United States.

China's Hisense purchased a manufacturing plant from Sharp in Rosarito, Mexico in 2015. In the spring of 2016, Hisense announced that it would double its investment in Mexico to update and expand its Mexican factory, that is, Hisense will inject another $30 million to strengthen automation and increase its production capacity to four million units.

Recently, according to the Global Times, Chinese automotive industry chain companies such as BAIC, MG, JAC, Chery, Jiangling, and Changan have gone to Mexico in recent years to layout production and sales locally. In addition, not long ago, Tesla also suggested that Chinese suppliers move their factories to Mexico as much as possible. In short, Chinese companies in Mexico have not only quality but also quantity.

So why has Mexico become a destination that Chinese companies are rushing to?

First, Sino-US trade barriers

Since the United States launched the 301 investigation against China, a batch of goods exported from China to the United States have encountered various obstacles. So far, Chinese companies have found that trading with the United States can be uncertain and costly. The United States may remain hostile to products imported from China indefinitely. By investing in Mexico, Chinese companies can take advantage of the free trade rules that allow free trade between the United States and Mexico while avoiding the tariffs on Chinese goods from the US 301 investigation.

Second, US-Mexico trade preferences

Goods produced by Chinese companies in Mexico can be imported into the United States duty-free under the North American Free Trade Agreement. At the same time, Chinese companies cannot simply use Mexico as a place where they can ship Chinese-made goods to the United States. On the contrary, in Mexico, any product cannot be considered a Mexican-made product if it has not undergone a "substantial transformation." The "substantial transformation" rule means that the product must undergo a fundamental change in form, appearance, nature or characteristics, thereby significantly increasing its value in order to obtain duty-free status. The North American Trade Agreement creates a natural competitive advantage for Mexican goods exported to the United States. In this case, investing in Mexico is indeed a wise move.

Third, labor cost advantage

Since the reform and opening up for 40 years, China's labor productivity growth has gradually slowed down, while labor costs have continued to rise at an annual rate of 5%. Since 2007, China's unit labor cost (ULC) has increased by 60% (in US dollars). At present, the daily wage of domestic manufacturing labor has exceeded 150 yuan. In contrast, in Mexico, the general minimum wage is about 170 Mexican pesos (about 60 yuan) per day, and the daily wage in the northern border area is about 260 pesos.

Today, more and more Chinese companies are going to or preparing to go to Mexico. In the entrepreneurial circle, there is a professional term called "nearshore outsourcing". It means outsourcing the manufacturing process to factories located in Mexico. Mexico has one of the world's largest trade agreement networks, and there is an additional incentive for manufacturers, that is, Mexican factories owned by foreign companies allow duty-free import of raw materials, machinery and equipment. But it should be noted that the factory structure can be an effective tool for nearshore manufacturing, provided that it is used correctly. For example, the most critical thing is that the products produced by the factory must be exported. Ownership must also remain abroad, requiring foreign ownership to reach 99%.

In fact, not only Chinese companies, but also many foreign-funded manufacturing companies that originally set up factories in China have gradually moved their factories from China to North America. Gradually shifting from offshore production to nearshore production has become a risk-avoiding solution for more and more American buyers.

There is reason to believe that in the future, more manufacturing companies will choose to withdraw from China and start a new manufacturing journey in Mexico. This will become the only way for more powerful, ambitious and visionary Chinese companies to go global.