Chinese enterprises go global and participate in reshaping the "global supply chain"

Editor's note: Since 2023, it has become a trend for Chinese enterprises to go global again. According to data from the Ministry of Commerce, the number and total amount of non-financial outward investment enterprises in 2023 increased by 23.1% and 11.4% year-on-year, respectively. Although it is no longer news for Chinese companies to go global, this wave of Chinese companies going global has shown more new features. Global Times reporters focus their attention on Vietnam, which is closest to China's production base, and Mexico, which is closest to the US market, to talk to the overseas people there. They told reporters through their own experiences that while China is facing numerous challenges in the process of reshaping the global industrial chain, it is also in this era of "going global" that China has the potential to produce truly "world-class enterprises".

"The second pie", Chinese enterprise "Ink Road Racing"

"There are more Chinese people here!" - In Monterey, the largest industrial city in northern Mexico, this may be the biggest feeling for locals in the past two years. Whether in local parks or neighborhoods, or on international flights, you can always see a few Chinese faces.

In recent years, Mexico has become a new "gold mining destination" for Chinese companies going abroad. The "triangular relationship" between the United States, China, and Mexico has formed the popular term "nearshore outsourcing" in the Mexican business community in recent years. Many Chinese manufacturing companies have moved their production lines to cities in northern Mexico such as Monterey.

The Huafu Mountain Industrial Park in North America, located in Monterey, is a witness to this grand occasion. Hu Hai, Chairman of the Industrial Park, told Global Times reporters that there are currently more than 40 Chinese enterprises in this industrial park, mainly concentrated in manufacturing industries such as automotive parts, home appliances and furniture, and equipment processing. "About 80% of Chinese enterprises entered Mexico after 2020, and most of their products are exported to the US market."

"A pie falls from the sky" - Hu Hai describes the rise of Mexico's manufacturing industry in recent years. "If the North American Free Trade Agreement, which came into effect in 1994, was the first pie to fall from the sky to Mexico, then 'offshore outsourcing' is the second pie." For Chinese enterprises, the biggest significance of setting up factories in Mexico is that the products can be seen as 100% Mexican made, thereby avoiding the tariffs and non-tariff barriers set by the United States on Chinese goods in the Sino US trade friction. According to the updated 2020 US Mexico Canada Agreement, many categories of products exported from Mexico to the United States and Canada can enjoy lower or even zero tariffs. For example, if 75% of a car's components are produced in Mexico, it can be exported to the United States with zero tariffs.

It is worth mentioning that compared to many other developing countries, Mexico itself has a better industrial foundation: as early as the 1920s, American automotive company Ford came to Mexico to build a factory. After the North American Free Trade Agreement came into effect in 1994, many companies from other countries also transferred a portion of their industrial chains to Mexico.

However, a Chinese business person familiar with Mexico's manufacturing industry told Global Times reporters that despite Mexico's current favorable timing and location, Chinese companies still face many challenges in setting up factories locally. "Besides its freight and tariff advantages, Mexico has almost no advantage over China in other production costs." He believes that Mexico finds it difficult to compete with China in terms of labor and management efficiency, supply chain differences, raw material costs, and other aspects. Especially, some Chinese enterprises find it difficult to find local Mexican suppliers who can meet their needs in terms of price and quality in the short term.

According to data from Mexican government departments, the monthly wages of Mexican manufacturing workers typically range from $400 to $1000 depending on different manufacturing sectors and skill levels. In China, this figure is approximately $620 to $930. In Vietnam, it is $250 to $500. "The unique employment environment in Mexico means that companies cannot simply copy the management model operated in China to Mexico," Hu Hai told Global Times reporters.

Going global, Chinese enterprises are experiencing three new characteristics

If Chinese companies go abroad to Mexico to get closer to the "shore" of the US market, then going abroad to Vietnam is largely due to being close to the "world's factory" headquarters in China. Although the entry of Chinese enterprises into Vietnam is not a new thing, in recent years, there have been significant differences in the number of Chinese enterprises going to Vietnam compared to the past.

Zhang Weijie is a Vietnamese market consulting consultant. In the past two years, he has been in contact with a large number of Chinese companies going abroad to Vietnam on the front line. In his view, compared to 10 or 15 years ago, Chinese enterprises going abroad to Vietnam have presented three new characteristics: firstly, manufacturing enterprises that go abroad have upgraded from low value-added industries such as clothing and luggage to mid-range manufacturing industries such as photovoltaic 3C (computing, communication, consumer electronics), and initially only conducted downstream assembly in Vietnam, but in recent years, more upstream supply chains have also shifted to Vietnam; The second is the overseas expansion of Chinese chain offline consumer brands, such as Hai Di Lao, Mi Xue Bing Cheng, and other contemporary Chinese chain catering brands, which have achieved considerable success in landing in Vietnam in recent years; The third is the overseas expansion of Chinese technology and Internet giants represented by TikTok.

"The previous wave of Chinese companies going abroad to Southeast Asian countries was mainly based on the familiar logic of labor costs, with labor-intensive enterprises as the main focus. However, this wave of Chinese companies going abroad has seen significant improvements in their technological content and added value." Zhang Weijie told Global Times, in addition, Chinese companies going abroad to Vietnam in this round have far exceeded their previous brand influence. "From an unknown OEM enterprise in the industrial park in the past to a well-known 'Chinese brand' that has emerged at the forefront, this is a significant change in perception."

Guo Wenchang is the Deputy General Manager of Ansheng Crane&Steel Structure Co., Ltd. His company is exactly what Zhang Weijie referred to as the mid-range manufacturing industry. In 2020, this enterprise, which has been exporting crane equipment to Vietnam for a long time, officially purchased land in Hanoi to establish a factory, and started production locally in 2022.

"Our sales target is mainly some enterprise workshops, so we have a strong 'dependence' on customers. In recent years, due to the US imposing tariffs on China and other reasons, many Chinese factories that do export have come to Vietnam, and suppliers like us have also set up factories locally." Guo Wenchang told Global Times reporters, "The overall cost of our production in Vietnam is higher than shipping from China to here. However, customers require us to have factories in Vietnam to stabilize the supply chain and ensure after-sales service, otherwise we will not be able to place orders with us."

As more and more Chinese companies shift their production processes to Vietnam and Mexico, there has been ongoing discussion on whether these countries can replace China as the next "world factory". Many people are more concerned that in the process of reshaping the global industrial chain, there may be a situation of "teaching apprentices and starving masters"? For this question, the answer from almost all Chinese seafarers interviewed by Global Times reporters is: it's difficult.

"Based on the information I have gained from my interactions with some companies, many Chinese companies' production costs in Vietnam are not actually lower than those in China, and some even higher." Zhang Weijie told Global Times reporters that although Vietnam's labor prices appear to be lower on the surface, a company's production costs need to take into account many factors such as production efficiency, logistics and customs clearance costs, and economies of scale. In these aspects, Vietnam does not have an advantage over China. Especially the lack of technical talents and infrastructure level, which are very important for enterprises, is not a problem that can be solved at the enterprise level.

It is worth noting that most Chinese enterprises and enterprises from other countries do not transfer technology to local enterprises when entering Vietnam. "Firstly, Vietnam's market size is ultimately limited and lacks the confidence to negotiate 'technology for market' with foreign investors like China did back then. Secondly, even if technology is transferred, the local talent density is still a major issue. Often, even with technology, one cannot learn or do it," he explained. The situation in Mexico is also very similar. According to Hu Hai, compared to China in the 1980s and 1990s, the Mexican government's awareness and willingness to seek technology transfer are not strong. As long as Chinese enterprises can establish factories locally to solve employment problems, pay taxes, and create exports to the United States, the Mexican government will welcome them.

In addition, unlike Tesla or Apple's entry into China to cultivate a large number of domestic suppliers in China, few Vietnamese domestic suppliers have risen due to the entry of Chinese enterprises. Guo Wenchang told reporters that in recent years, after a large number of export-oriented Chinese enterprises have transferred to Vietnam, there will also be a demand to "localize" some suppliers. However, the size and scale of the Vietnamese market make it difficult to incubate local suppliers that can compete with Chinese enterprises in the short term. Whether it is in terms of technology level, production quality, or price, it is difficult to meet the needs of Chinese enterprises going abroad.

The rise of connector countries?

In Zhang Weijie's view, the core reason why Vietnam has truly become a destination for Chinese companies to go abroad is actually only one, and that is the influence of geopolitics: in the political climate where some American politicians seek to "decouple" from China, many of the demands originally placed by the US and Europe on Chinese domestic enterprises have shifted to some "connector countries" or "intermediate countries", and Chinese companies have also shifted some of their deliveries to these places due to avoiding US tariffs, which has led to the rise of these countries.

In his view, the roles played by countries such as Vietnam today are somewhat similar to those of Hong Kong in the past. However, before 1978, there were few existing connections between China and the West, and one Hong Kong was enough to serve as a "connector". Today, China's economic ties with the West are highly intertwined. The so-called "decoupling" actually creates a group of "intermediate countries", and Southeast Asia, Latin America, and the Middle East may all play this role.

Of course, the dividends of geopolitics often come with danger: if one day the United States closes these "connectors" from a policy perspective, the manufacturing development prospects of these countries will face great uncertainty. This risk is not impossible. Just in May this year, the United States announced that it would end tariff exemptions for photovoltaic module imports to Vietnam, Cambodia, Malaysia, and Thailand, and launch a new "double anti" investigation.

"I just met with a factory manager from Shenzhen who came to Vietnam for inspection last week. They started renting factories in Vietnam at the end of last year, but are now hesitant about buying land and building factories here for long-term investment. Guo Wenchang told reporters," The reason they came to Vietnam is because of US tariffs, but the boss believes that the international situation may still change greatly in five years. Whether it is the US lifting tariffs on China or raising taxes on Vietnam, staying in Vietnam is no longer meaningful. "

But for China, the proposition that needs to be considered and faced may be even more complex: from the history of countries such as Europe, America, and Japan, when a country's manufacturing and macroeconomic development reaches a certain level, the migration of the industrial chain seems to be an inevitable process. In Zhang Weijie's view, this will undoubtedly have a certain impact on domestic employment, macroeconomic growth, etc. in the short term. However, from another perspective, it is precisely in this era of "going global" that China is likely to produce a group of truly multinational giants, just like Japan has produced world-class enterprises such as Toyota and Panasonic. In the future, Chinese enterprises with the ability to deliver overseas are expected to experience a wave of counter trend growth.

"In my opinion, even without the 'boost' of US tariffs, Chinese enterprises will ultimately have to move towards the path of global production capacity layout. Production will ultimately be close to the market, which is an economic law." Hu Hai also holds a similar view. "In the future, 'Made in China' should gradually become 'China headquarters, global delivery', where the research and development of core technologies and the production of key components are still within China, while other production processes are transferred to countries and regions where delivery is more convenient."

Zhang Weijie described, "In the future, let's welcome China's transition from the 'era of large GDP' to the 'era of large GNP' together."