Plants and warehouses are sprouting up south of the border as companies try to avoid US duties. Kuka Home’s factory at Hofusan Industrial Park. Photographer: Marian Carrasquero/Bloomberg By Max de Haldevang 14 September 2022 https://www.bloomberg.com/news/arti...-with-some-help-from-mexico?srnd=premium-asia When César Santos was growing up in the 1960s, he spent his weekends surrounded by horses and cattle on his father’s ranch outside Monterrey, Mexico. Today, a red monolith emblazoned with the words “Hofusan Industrial Park” announces that the patch of dusty wasteland has a new purpose. Located in a prime spot between Mexico’s industrial capital and the US border, Hofusan has become a haven for Chinese manufacturers looking to sidestep US tariffs and shorten supply chains that have been strained to a breaking point during the pandemic. The 11 plants and warehouses on the 850-hectare (2,100-acre) estate are part of the latest chapter in Chinese capitalism: The country dubbed the world’s factory now also exports white-collar managers to set up and run operations in places such as Vietnam, Thailand, and Mexico. Three years ago there was just one building on the site. Today, 10 Chinese companies have plants there and three more are being built, say the park’s officials, who expect to have 35 businesses within two years. They predict there will eventually be 15,000 people working at Hofusan—about 10% of whom would be Chinese managers—and plan to build restaurants to cater to them as well as homes to house them. There’s already “more than $1 billion in investments here,” says Santos, sheltering in a glass office from the blazing heat and din of construction. César Santos turned his father’s ranch near Monterrey, Mexico, into an industrial park whose tenants are all Chinese companies. Photographer: Marian Carrasquero/Bloomberg Among the park’s tenants are electronics company Hisense, furniture businesses Kuka Home and Sunon Furniture, auto-parts maker Hangzhou XZB, and garden equipment manufacturer Skyish. “If you want to do good business with America, you must have something close to the market,” says Simon Huang, country manager for Kuka Home. Proximity to the world’s biggest consumer market isn’t Mexico’s only selling point. Thanks to the country’s free trade pact with the US and Canada, a chair made at Kuka’s factory in Hofusan can travel across the border duty-free, whereas one shipped to the US from China would be hit with a 25% tariff, according to Huang. Kuka Home is China’s biggest home furniture company. Photographer: Marian Carrasquero/Bloomberg Chinese investment in Mexico jumped from $154 million in 2016 to $271 million the following year, when Donald Trump took office threatening a trade war. The pandemic’s supply-chain snarls and the angst caused by Chinese President Xi Jinping’s tech crackdown have catapulted yet more Chinese companies across the Pacific, with investment in Mexico hitting just under $500 million last year. “China’s looking to service the world, and not all of it is going to happen from China itself because of a lot of these tensions,” says Shannon K. O’Neil, author of the forthcoming The Globalization Myth: Why Regions Matter and a columnist for Bloomberg Opinion. “So, Chinese companies setting up in Mexico is part of this process of shifts in globalization.” This isn’t a top-down initiative like Xi’s “Belt and Road,” which has financed power plants, bridges, and ports across scores of countries. Yet for the most part, Chinese policymakers have blessed the drive by low-margin businesses to offshore production as Beijing’s focus shifts to fostering advanced manufacturing industries such as semiconductors and new-energy vehicles. In 2015, China’s cabinet issued a document encouraging “international cooperation on production capacity.” Chinese companies aren’t the first to seek shelter from US tariffs in Mexico. Japanese automakers began opening plants in the country in the 1990s in response to a barrage of import restrictions that began under Ronald Reagan. Says O’Neil: “For China, there is a similar mix of sticks and carrots that is making relocation to North America for some companies and industries attractive.” One of the winners from this shift is Santos, a 63-year-old real estate lawyer whose vision of turning his father’s ranch into an industrial park took him to Shanghai in 2014. A Chinese investment fund was looking for a large site located a short drive from the US border. Santos’s property fit the bill, and he ended up in a joint venture with two Chinese investors, with the park officially opening in 2016. (Hofusan is a portmanteau of the three partners’ names: the Holley Group, the Futong Group, and the Santos family.) Some of Hofusan’s tenants moved in shortly after Trump began slapping duties on Chinese imports in 2018 in a bid to shrink the trade deficit and boost manufacturing at home. Skyish executives “just took a plane and came here to look for a place,” says Santos. The entrance at Hofusan Industrial Park. Photographer: Marian Carrasquero/Bloomberg Although the cost of materials and labor is generally higher in Mexico than in China, the gap has been shrinking over the years, with wages in China growing at a more rapid clip. Trump’s tariffs—which his successor, Joe Biden, has kept in place—along with a pandemic-induced surge in freight rates have also eroded the economic advantage of manufacturing in China. “We’re betting that it will be the same cost as in China once you include maritime transport,” says David Martínez Garza, who’s overseeing construction of Sunon Furniture’s new $80 million factory on the site. “What’s our advantage? Delivery time,” he says, noting that goods take around 10 weeks to be made and shipped to US clients from the company’s headquarters in Hangzhou, vs. four weeks from northern Mexico. The Holley Group, which had no presence in Mexico before Hofusan, is now scoping out sites for two or three more parks in other parts of the country. The company, based in Hangzhou, also runs a park in Thailand and is working to set up another in Morocco. Other Chinese investors are also hunting for locations in Mexico. A subsidiary of Gezhouba Group, a construction conglomerate, has said it plans to build an industrial park near the Port of Lázaro Cárdenas in the Michoacán state. Contemporary Amperex Technology, the world’s biggest maker of batteries for electric vehicles, is considering locations in Chihuahua and Coahuila for a plant to potentially supply Tesla and Ford Motor, a project that could carry a price tag as high as $5 billion. Mexican President Andrés Manuel López Obrador, known as AMLO, has been criticized for failing to capitalize on US companies’ desire to lessen their dependence on China. The Inter-American Development Bank has estimated nearshoring—moving production closer to customers—could boost Mexico’s exports by $35.3 billion a year, or a bit over 7%. Kuka Home factory workers at Hofusan. Photographer: Marian Carrasquero/Bloomberg As recently as 2021, that scenario looked overly optimistic. The $31.7 billion of foreign direct investment Mexico booked last year was the lowest since 2016, excluding the height of the pandemic in 2020, according to official data. But the country raked in $19.4 billion in the first three months of 2022, making it the second-most successful quarter this century. China overtook Mexico as the top exporter to the US in 2003, but Mexico has been clawing back the gap since the US imposed tariffs. China exported almost $200 billion more in goods than Mexico to the US in 2018. That gap was down to under $130 billion in the 12 months through the end of June. Still, countries in Asia such as Vietnam and Thailand appear to be taking up a large chunk of manufacturing investment that might have once gone to China. From 2018 to 2021, the two countries’ combined exports to the US climbed in value by $68 billion, or 84%, vs. $38 billion, or 11%, for Mexico. Some contend Mexico would be reaping bigger rewards if AMLO hadn’t scared off investors with his nationalist rhetoric, including plans to increase state control of the electricity sector, and his administration’s stymieing of US and European companies’ efforts to plow money into wind and solar power. “Macroeconomic indicators have yet to reflect that Mexico is a clear winner in the move to nearshoring,” UBS wrote in a recent note, citing policy uncertainty, particularly on energy, along with violence and crime as “weaknesses” when it comes to attracting investment. “We could be catching a 10-foot wave, but instead we are catching a 3-foot one, which is better than nothing,” says Jorge Gonzalez Henrichsen, co-chief executive officer of the Nearshore Co., based in Brownsville, Texas, which helps businesses set up manufacturing facilities in Mexico. Gonzalez says energy issues are a major hurdle for his clients. Iván Rivas, economy minister of Nuevo León state, where Hofusan is located, says AMLO’s retrenchment on renewable energy “isn’t a priority that’s come up” in conversations with Chinese companies. Chinese businesses are less likely to be spooked by AMLO’s habit of railing against foreign companies, given that many have experience operating in emerging markets, says Mariana Rangel, a political scientist at Tecnológico de Monterrey. “They have experience in negotiating and investing with governments that aren’t so friendly towards investment or where there’s high uncertainty. They’re investors in Africa and also Latin America, dealing with populist governments,” she says. Unlike other countries in Latin America, Mexico has a federal government that’s never made much effort to tempt Chinese companies to its shores, in part because it’s long viewed them as manufacturing rivals and in part to avoid creating tension with the US, Rangel says. (Despite the recent surge, Chinese investment equaled just 3% of the $14.8 billion that American companies plowed into Mexico last year.) But some Mexican states are actively courting Chinese investment. Nuevo León is building two “superhighways” to the US border, including one to serve Hofusan, Rivas says. The state, like many of its neighbors on the border, also offers payroll tax exemptions for companies that meet certain criteria. “I can tell you that now between 15% to 20% of investment is from China,” he says. “Before it wasn’t even 5%.” Chinese companies have faced some operational challenges in Mexico. The US-Mexico-Canada Agreement, which replaced NAFTA, requires that a higher proportion of the value of any good must come from North America to qualify for tariff-free treatment. Yet, unlike China, Mexico doesn’t boast extensive networks of suppliers across a large number of industries. Sunon, the furniture maker, says it’s been unable to procure the kind of upholstery fabric it uses in China, and the Mexican producer of a chair part can only supply 2,000 a month, instead of the 10,000 it needs. Gonzalez says one potential client, a US company, decided to go to Vietnam over trouble finding suppliers. Some of the new arrivals have other issues to contend with. Huang of Kuka Home says his Mexican workers are more inquisitive than those at home. “Mexican people always ask why—‘Why should I do this?’ ‘Why should I do that?’” Huang says. “They want to understand the reason.” Another difference: Workers in Mexico generally won’t clock in 16-hour days, like employees in China are willing to do. “This is not life” for them, he says. —With Shawn Donnan and James Mayger
I thought China didn't give a f*** about the US and can do perfectly fine without the US market. They would actually go through such great lengths just to get into the US market?
China is diversifying away from the US in many arenas. It does not mean that the China wants to stop exporting to the US, which is obviously still a large market. Furthermore Mexico is a gateway to Mexico itself, Canada and South America.
@themickey is specialized in Anti-China propaganda. All his postings are Anti-China propaganda. I bet he get paid for his Anti-China propaganda... But: IMO a futile action
Based on the actions of the CCP, the US should be acting to reduce it's dependence on China. The Russia Ukraine war would have ended long ago and likely never would have happened without China's support. China supports North Korea by giving them military technology and trade. How China handled COVID, human rights issues, IP theft, cyberwar, fentanyl, and many others are reasons why the world should be looking for alternative trading partners to China. I have respect for the Chinese people, but I don't trust the CCP.
Simple truth: China does it right, and the US not. My advice: question the actions of your own side, as they are very... questionable... Ukraine war happened b/c the West denied security guarantee to Russia regarding Ukraine. Just research the news if you don't believe. Same with Taiwan: the more the US supports Taiwan, the more the risk of an invasion by China. It's all the guilt of the US and its vassals in the dying EU. Revolutions are due in the West b/c of such wrong decisions of their leaders. Ukraine soon will look like a Swiss cheese with many holes b/c bombed to the stone age...
China still has about 20% (including - HK to US) export to US. Politics play a big part in global trade. In the 70s and 80s, it was Japan and US trade friction. Now, it's China vs US. 20% is difficult to replace and US has the purchasing power. Frequent covid lockdown is not helping its supply chain.