BusinessChina looks to Mexico to satisfy the US market.

China looks to Mexico to satisfy the US market.

Bill Chan had never set foot in Mexico, let alone the lonely desert strip in the north of the country where he abruptly decided to build a $300 million factory. But that seemed like an insignificant detail to him, amid the pressure to adapt to a rapidly changing global economy.

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

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

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

That same goal explains why dozens of major Chinese companies are aggressively investing in Mexico, taking advantage of an expansive trade deal with North America. Following a path forged by Japanese and South Korean companies, Chinese firms are setting up factories that allow them to label their products “Made in Mexico,” then truck them duty-free to the United States.

The interest of Chinese manufacturers in Mexico is part of a broader trend known as nearshoring or nearby relocation. International companies are moving production closer to customers to limit their vulnerability to transportation problems and geopolitical tensions.

The participation of Chinese companies in this change shows the deepening assumption that the divide between the United States and China will be a lasting feature of the next phase of globalization. However, it also reveals something fundamental: Beyond the political tensions, the trade forces that bind the United States and China are even more powerful.

Chinese companies have no intention of leaving the US economy, which remains the world’s largest. Instead, they are setting up operations within the North American trade bloc as a way to supply Americans with goods, from electronics to clothing and furniture.

The Mexican border state of Nuevo León has positioned itself to reap the rewards of that trend. Led by a brash 35-year-old governor, Samuel Garcia, the state has courted foreign investment as it seeks to improve roads to make it easier to get to border crossings.

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

“Nuevo León is having a geopolitical planetary alignment,” the governor declared during an interview in the state capital of Monterrey, inside the government palace, a maze of large rooms with high ceilings and balconies that overlook the jagged peaks of the Sierra Mother. “We are getting a lot of Asians who want to come to the US market.”

Since García took office in October 2021, nearly $7 billion in foreign investment has been invested in Nuevo León, making that state the largest recipient after Mexico City, according to Mexico’s Ministry of Economy.

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 of those operations are focused on a broader reshaping of the global supply chain.

As the pandemic disrupted Chinese industry and overwhelmed ports, companies with factories in the United States have faced shortages of parts made in Asia. Many companies now require their suppliers to establish plants in North America or risk losing their business.

Lizhong, a Chinese maker of automobile wheels, is building the company’s first factory outside of Asia in an industrial park in Nuevo León. Lizhong’s major clients, including Ford and General Motors, have pressured the company to open a factory in North America, according to Wang Bing, its general manager for Mexico.

A South Korean company, DY Power, which makes components for construction equipment, is eyeing northern Mexico for a factory near a major customer in Texas.

“After going through the pandemic and supply chain crisis due to China’s COVID lockdown, many North American manufacturers would like to de-risk,” said Sean Seo, an executive at Seattle-based DY Power.

“Globalization is over,” he declared. “Now we are talking about localization.”

César Santos has made a substantial bet that these pronouncements turn out to be true.

Santos, a 65-year-old corporate lawyer, runs a side business as a developer in Monterrey, a booming industrial city filled with upscale restaurants, glistening malls and spas.

A decade ago, he was approached by a developer in Los Angeles representing a Chinese electronics company that was contemplating building a factory in Mexico. Santos controlled an asset of great interest: a plot of 849 hectares.

Dotted with cactus, the property was located less than 150 miles from the Texas border. While neighboring states struggled with drug-related violence, Nuevo León had a reputation for safety. The state had a highly-skilled labor force, given the presence of universities that churned out engineering graduates, including Tec de Monterrey, often referred to as “Mexico’s MIT.”

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The land had been his family’s cattle ranch when Santos was a boy, the setting for horseback adventures. He now sees a lucrative opportunity to turn it into an industrial park.

He took a trip to China, taking a high-speed train from Shanghai to the lakefront city of Hangzhou, to meet with the Holley Group, which had built an industrial park for Chinese companies in Thailand.

“China was a country that had developed everything very quickly,” Santos said. “I was really amazed.”

By 2015, he joined Holley and another Chinese partner to forge a joint venture, Hofusan Real Estate. They plan a network of warehouses and factories across from a hotel and temporary apartments for visiting managers, plus more than 12,000 homes for workers.

The Holley Group sent Jiang Xin to oversee the company. He had previously worked on the project of that company in Thailand. But Mexico represented a different proposition.

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

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

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

When Chan began contemplating operating in Mexico in the fall of 2021, 27 other Chinese companies had already secured land within Hofusan Park. There was only one large property left.

Man Wah had already responded to the tariffs by building a factory in Vietnam and using it to manufacture products for the US market. But the very high price of shipments impoverished that strategy.

Every month, Man Wah was moving 3,500 40-foot containers across the Pacific from Vietnam. Suddenly, the trips that cost $2,000 increased 10 times more.

Chan used the Chinese social media platform, WeChat, to connect with Jiang. Her questions were blunt. How soon could Man Wah start construction? (Immediately). How were the roads? (They weren’t great, but they were getting better.) Were there any authentic Chinese restaurants in the vicinity? (No).

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

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While the new factory is being built, Man Wah has already started producing sofas in a small plant nearby that they rented.

Even before locating the temporary site, Chan loaded 70 containers full of machinery and raw materials in China and put them on a ship bound for Mexico.

“We always do things fast,” he said. “Don’t worry about anything, just do it.”

Man Wah cares about a few things: hiring enough workers and cultivating local suppliers.

The company plans to manufacture about 900,000 pieces of furniture a year in Mexico. That will require hiring and retaining 6,000 workers.

Man Wah is used to operating in China and Vietnam, where independent unions are basically banned and people from rural areas flock to industrial areas looking for work.

In Nuevo León, the unemployment rate is 3.6 percent. Increased investment has unleashed fierce competition for workers.

Crafty companies have courted their employees with extras like quality meals and transportation to work. But Man Wah and other Chinese companies answer to bosses in China, who are conditioned to save while thinking of workers as easily replaceable.

Finding local providers is also a challenge. Under the terms of the North American trade agreement, manufacturers must use minimum percentages of parts and raw materials from the region to qualify for duty-free access to other countries in the bloc.

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

Until last year, Lenovo shipped a crucial component, so-called motherboards, from a factory in China. But as international transportation problems intensified, the company switched to a provider in the Mexican city of Guadalajara.

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

But it continues to import many key components from China, from memory sticks to specialized cables.

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

Peter S. Goodman is a New York-based global economics correspondent. He was previously a London-based world economics correspondent and a national economics correspondent in New York during the Great Recession. He also worked at The Washington Post as its Shanghai bureau chief. @petersgoodman

Source: NYT Español


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