Located in Monterrey, the largest industrial city in northern Mexico, the North America Huafushan Industrial Park has witnessed the boom in investment and construction of factories in Mexico by Chinese companies in the past two years.
“Since 2022, it is almost hard to find a place in our park, including the city where I am located. Chinese companies are rushing in to ‘grab (factory) buildings and land.'” Hu Hai, chairman of Huafushan Industrial Park, told the media said during the interview. A survey by Spain’s BBVA found that one-fifth of newcomers to private industrial parks in Monterrey, Mexico’s industrial hub, were Chinese companies.
Chinese companies gather in Huafushan Industrial Park, which is inseparable from the unique conditions here. Lawyer Lin, the resident leader of the Landis Law Firm’s Mexico team, told Xiaguang News, “Monterrey is the capital of the state of Nuevo Leon in northeastern Mexico, about 200 kilometers away from Laredo, the Texas border port in the United States. Its city’s reputation and public security situation Ranked first in Mexico. The Huafushan Industrial Park is an industrial park co-founded in 2015 by Wang Jianyi, chairman of the Zhejiang enterprises Holley Group and Fortis Group and chairman of the Zhejiang Chamber of Commerce, and the SANTOS family of Mexico. Chinese companies gather here , communication with each other is relatively smooth, and it is also convenient to do some combinations of upstream and downstream industry chains.”
Huafushan Industrial Park is a microcosm of the rise of Mexico’s manufacturing industry. In fact, in recent years, as the restructuring of the global supply chain accelerates, Mexico is becoming a new manufacturing hub. From Chinese car companies, auto parts manufacturers, home appliance companies to American car giants such as Tesla, they are all going crazy. Enter this new world of manufacturing.
The pointer of the times seems to be quietly shifting. Why is there such a surge in the number of Chinese companies entering Mexico? Why does Mexico stand out in the reshaping of the global supply chain landscape? What barriers and challenges will Chinese companies encounter in their journey to Mexico?
1. Tianshi: The beneficiary of the “near-shoring” strategy
The rise of Mexico’s manufacturing industry is inseparable from the once-in-a-lifetime development opportunities brought about by changes in international geopolitics.
On the one hand, border closures, increased freight costs, and consumer demand for instant gratification caused by the COVID-19 pandemic that has spread globally in 2020 have continued to prompt companies around the world to consider shortening supply chains; at the same time, the decoupling of China and the United States As a result, Western countries, led by the United States, gradually changed their original “offshoring” strategy and turned to “near-shoring” and “friendly-shoring”.
Mexico, adjacent to the United States, is the manufacturing center where the United States is reshaping its North American supply chain.
On July 1, 2020, the United States-Mexico-Canada Agreement (USMCA), a free trade agreement between the United States, Mexico and Canada, officially came into effect, stipulating that cars or trucks with at least 75% of their components produced in the United States, Mexico or Canada can be imported from scratch. Duty sold. This is an increase of 12.5% from the 62.5% required by the North American Free Trade Agreement (NAFTA) that came into effect in 1994.
The direction of the agreement is clear – to further stimulate North American automobile production.
Two years later, this pace accelerated further. In 2022, the United States passed the “Chip Act” to accelerate the transfer of Asian industrial chains to Latin American countries, and Mexico, which is adjacent to the United States, has become the focus of the transfer. The subsequent “Inflation Reduction Act” clearly stipulates that the U.S. government will implement a tax reduction of US$7,500 for electric vehicles, but the prerequisite is that battery assembly, raw material procurement, processing, etc. must be carried out in North America.
The opportunities don’t stop there. Mexico is a member of the World Trade Organization (WTO) and has 13 free trade agreements (FTAs) covering 50 countries, including the Agreement for Trans-Pacific Partnership (CPTPP). Diversified trade policies have made Mexico one of the most open and active markets in the world.
These measures have attracted global companies and capital to flow into Mexico.
From an industrial perspective, according to data from the Mexican Automobile Industry Association, Mexico’s passenger car production will reach 3.3 million units in 2022, making it the seventh largest automobile manufacturer and the fourth largest parts producer in the world. Meanwhile, electronics and appliance manufacturers are expanding in central Mexico. Along the border with California, the aerospace and plastics industries are growing.
At present, in the Huafushan Industrial Park where Chinese companies gather, more than 30 companies have settled in the 3 square kilometers of industrial land that has been developed. Representative industries include automobiles and parts, home appliances and home furnishings. For example, the Chinese home appliance giant Hisense convenience An industrial park was set up here.
In 2019, the United States imposed an additional 25% tariff on US$200 billion of Chinese goods exported to the United States, involving many home products. Affected by this, many home furnishing companies have relocated their industrial ecological chains to Mexico. Well-known home furnishing brands Senon Furniture and Manhua Holdings and others have also settled in Huafushan Industrial Park.
The new energy vehicle ecological chain is becoming a thriving investment outlet. In the first half of this year, the American electric car giant Tesla bet on Monterey and announced plans to build a fifth overseas factory in the city. It is said that the Monterey factory will become Tesla’s main production force in the next stage, radiating the entire North American market, with an investment of more than 5 billion US dollars, a planned production capacity of 1 million vehicles, and an area that will be 20 times that of Tesla’s Shanghai factory.
This news immediately attracted many Chinese auto parts companies to follow Tesla to build factories in Mexico. Several Tesla suppliers have also settled in Huafushan Industrial Park, including Lens Technology, which makes central control screens, Yinlun Technology, which makes heat exchangers, and Anjie Technology, which makes charging modules. Before Tesla, other automakers such as General Motors, Kia Motors and BMW have announced investments in electric vehicles in Mexico starting in 2021.
The influx of capital has more concretely demonstrated the attractiveness of the Mexican market. According to a report by the United Nations Conference on Trade and Development (UNCTAD), Mexico will rank 11th among the world’s major recipients of foreign direct investment (FDI) by 2022, with an investment volume of US$35 billion and an annual growth rate of 12%. Since the signing of the North American Free Trade Agreement in the 1990s, Mexico has never been more attractive to investors.
2. Geographical location: good industrial foundation and policy support
If the development opportunities brought about by changes in the global geopolitical landscape are “the right time,” then Mexico’s own development endowments and policy support are the “right location.”
As we all know, the development of manufacturing industry cannot be separated from the blessing of demographic dividend advantage. According to the latest statistics from the United Nations, Mexico’s total population exceeds 128 million, ranking 10th in the world; and the average age is only 29.8 years old. The large population size and young population structure can provide long-term and sufficient impetus for the development of Mexico’s manufacturing industry.
But when it comes to this, many emerging markets around the world have demographic advantages. For example, Indonesia, with a population of 276 million, is the fourth most populous country in the world, but it has not become a regional manufacturing center like Mexico. What is unique about Mexico in comparison?
Looking back at the history of changes in the world’s manufacturing centers, from the United Kingdom and the United States to Germany and Japan to the “Four Asian Tigers” and mainland China, whether it can drive its own economic development through commodity exports and whether it can transform demographic dividends into economic growth depends on sufficient In addition to population, it must also have a relatively complete industrialization system, a sound industrial structure and an open policy environment.
First of all, from an industrial basis, Mexico is a traditional manufacturing center.
As early as 1925, Ford came to Mexico to build a production plant, starting the Mexican automobile manufacturing industry’s take-off. In 1961, Mexico produced its first fully domestic vehicle, a small truck called the Rural Ramírez produced by the Ramirez Truck Company.
In the 1960s, labor-intensive processing plants sprung up along the U.S.-Mexico border. In the 1990s, Mexico’s manufacturing industry ushered in a milestone development opportunity. On January 1, 1994, the North American Free Trade Agreement signed by the United States, Canada and Mexico officially came into effect, attracting mainstream car companies such as General Motors, Toyota, and Nissan to produce and export cars in Mexico.
In terms of the population agglomeration effect, Mexico’s urbanization has entered a stage of rapid development since the 1940s. Currently, Mexico’s urbanization rate is over 80%, making it almost the most urbanized emerging market.
The ultra-high level of urbanization stems from the large-scale land annexation in the history of Latin American countries, which led to a large-scale influx of landless farmers into cities. However, this “adgressive” urbanization does not match the level of industrialization in the country. Due to the lack of employment opportunities Insufficient, a large number of farmers flocked to the city and became the surplus labor force gathered on the edge of the city. Therefore, in Latin American countries such as Brazil and Mexico, high-rise buildings and slums can be seen everywhere. However, during the critical dividend period of industrial upgrading and transformation, a large gathering of working people is also conducive to the formation and development of industrial belts.
Data from Statista shows that manufacturing workers in Mexico have lower wages than those in China. In 2020, the hourly wage of manufacturing workers in China is expected to be US$6.50, an increase of more than 12% from 2019. Meanwhile, hourly wages for manufacturing workers in Mexico are expected to be $4.82, an increase of just over 3% from the previous year.
In addition to lower costs, the quality of Mexico’s manufacturing labor force is also relatively high. Mexico has an average of 115,000 engineers graduated from universities and technical institutes, ensuring its labor force advantage in undertaking high-end industrial chains.
In terms of policy support, the Mexican government is also committed to leveraging its unique strategic location adjacent to the United States to continue modernizing the U.S.-Mexico border trade corridor to ensure faster and more flexible flow of goods and people.
Currently, along the US-Mexico border, Coahuila, San Luis Potosí, Baja California, Nuevo León, Jalisco (Jalisco), Sonora and Guanajuato have become hubs for the automotive manufacturing, aerospace, medical device, electronics manufacturing and consumer goods industries.
Indonesia, known as the “Country of Ten Thousand Islands”, has a fragmented land area and heterogeneous ethnic and cultural diversity, resulting in a large working population stuck in the familiar language, culture and institutional system of their hometown. In addition, transportation between different regions in Indonesia is also extremely inconvenient.
According to the World Bank Logistics Performance Index, Indonesia ranks 61st in the world, far lower than Southeast Asian countries such as the Philippines, Vietnam, and Malaysia. “Indonesia consists of more than 17,000 islands, and more than half of the population lives on Java and Sumatra. These two islands can rely on railways and roads for transportation and transportation, but in other places, the population is too scattered and the distances between islands are very long. It is far away and it is impossible to build a bridge. The goods can only be transported by air and ship, which is inefficient and the transportation cost is extremely high.” An Indonesian e-commerce practitioner told Xiaguang News.
Indonesia’s unique landforms and social environment have undoubtedly affected the development of industrial clusters. According to official statistics from the Indonesian Ministry of Small and Medium Enterprises and Cooperatives, 98.7% of Indonesian enterprises (a total of 64.6 million) are micro-enterprises, employing a total of 110 million people, absorbing 97% of the total energy in Indonesia, and accounting for 40% of the total population of Indonesia.
In fact, after 2000, Indonesia’s economic center of gravity shifted to the tertiary industry, and the proportion of the secondary industry in GDP declined significantly, showing the characteristics of premature deindustrialization. On the one hand, this is because Indonesia, as a late-developing modern country, has a weak industrial base. Most of its manufacturing industries are mid- to low-end manufacturing and lacks core competitiveness. Once labor costs rise, foreign investment will flow to new labor price depressions in the world; on the other hand, Indonesia , in the era of machines replacing people, the manufacturing industry’s ability to absorb employment is far less than before, and the remaining labor force will be transferred to the service industry.
According to the “2023 Indonesian Employment Market Research Trend Report” jointly released by Xiaguang Society and Indonesian online recruitment platform kupu, wholesale and retail, accommodation and catering currently account for more than half of Indonesia’s employed population. With the growth of Indonesia’s per capita GDP and the acceleration of economic and social digital transformation, consumer retail and mobile Internet will become the golden track for Indonesia’s development in the future, and the proportion of Indonesia’s manufacturing value-added in GDP will continue to decline.
“Indonesia’s manufacturing industry is still dominated by low- to medium-end labor-intensive industries, because Indonesia’s labor force is the cheapest in Southeast Asia; while Mexico’s manufacturing industry has achieved industrial upgrading. In addition, Mexico is closer to the United States, so in terms of logistics costs , in terms of tariff policy, it has more advantages.” Lawyer Lin, the resident head of the Mexico team of Landis Law Firm, told Xiaguang News.
3. What risks may Chinese companies encounter in Mexico?
When it comes to Mexico, people have a widely circulated saying:
“It’s so close to America, but so far from heaven.”
To a certain extent, this sentence succinctly summarizes the root causes of Mexico’s socio-political and economic problems since world history entered modern times.
Uruguayan journalist Eduardo Galeano once made a profound analysis of the social pathology of Latin America in his book “The Cut Veins of Latin America”.
During the Western colonial era, the triangular trade engaged in by European and American countries provided a capital base for their industrial transformation, but it also caused poverty and weakness in Latin American countries for many years: “By 1845, the United States had annexed Mexico’s Texas and California, Slavery was established there under the banner of civilization. During the war, Mexico also lost Colorado, Arizona, New Mexico, Nevada and Utah, which are now part of the United States. Together they accounted for half of Mexico’s area, and the seized territory was equivalent to today’s The size of Argentina.”
After the disintegration of the global colonial system in the 20th century, the United States began to export the theories of free exchange, free trade, and free competition, thereby denying the rights of developing countries to protect their national industries, weakening the role of governments in these countries, and through investment and transnational corporations. A neo-colonial system was established. “With only a small amount of investment, subsidiaries of major companies were able to bypass the customs barriers erected by Latin American countries against foreign competition and control the industrialization process of these countries from within.”
Nowadays, a prominent issue affecting the stability of Mexican society-drug cultivation and trade is also a major hidden danger caused by its proximity to the United States. For a long time, Mexico has not only been a drug producer in the United States, but also a transportation hub for drugs from South and Central America to be imported into the United States. The forces of the major drug lords are intertwined, occupying the mountains as kings, and separatist forces, which greatly affects social security. Thousands of Mexicans – including politicians, students and journalists – are killed every year in gang conflicts with drug lords. Since the Mexican government declared war on drug cartels in 2006, more than 360,000 homicides have occurred in Mexico as of 2022.
“One of the major pain points faced by Chinese companies going overseas to Mexico is the local security issues in Mexico.” Mr. Lin, a cross-border lawyer based in Mexico, told Xiaguang News.
According to local media reports in Mexico, in May this year, the deputy director of customs operations at the Mexican port of Manzanillo was shot dead. The official took office only two weeks ago. The chaotic and disorderly public security situation has seriously affected Mexico’s status as a regional supply chain center in North America.
Another factor affecting the development of Chinese companies in Mexico is that Mexico is greatly affected by U.S. policy intervention, which may cause instability in trade policy.
For example, on August 15, 2023, Mexican President Lopez signed the “Administrative Decree on Amending the General Import and Export Tariff Law” and announced an increase in import tariffs on 392 tax items including the steel and light chemical industries. As Mexico’s second largest trading partner and second largest source of imports, China will inevitably be hit hard by this tariff increase.
Moreover, Mexico will hold a presidential election next year, and two female candidates are competing: One is the protégé of the current Mexican President Lopez. After taking office, Lopez vigorously criticized neoliberalism and promised to conduct a campaign aimed at eliminating all Corruption and income disparity, a revolutionary movement to ensure the country’s self-sufficiency, he named Mexico’s “fourth transition”; while the other candidate came from a poor indigenous family and was popular as an independent, self-made woman. Their different foreign policies will also indirectly affect the development of Chinese companies in Mexico.
In this regard, Lawyer Lin suggested that Chinese companies exporting goods to Mexico need to check whether their products fall within the scope of this tariff increase based on tax policy adjustments, evaluate cost controllability and supply chain stability, and make timely adjustments to production models and Access to the Mexican market. “In the past, some companies paid less taxes due to incorrect customs declarations. When the goods were inspected, the goods had been sold out. This situation will cause the company to face the risk of penalties.”
Moreover, since companies that have obtained IMMEX certification can temporarily import raw materials or parts from abroad to Mexico, they can postpone or be exempted from paying tariffs. Therefore, qualified companies should apply for IMMEX certification as soon as possible to resist the impact of this tariff increase.
IMMEX certification is a product certification based on the “Decree for the Promotion of Manufacturing, Processing and Export Services” promulgated by the Mexican federal government on November 1, 2006. As long as the goods temporarily imported into Mexico are eventually exported to other countries after processing and manufacturing, IMMEX certified companies can manufacture and produce at very low tax rates and tariffs.
And what role will Mexico, which has rapidly emerged under the stimulation of the United States-Mexico-Canada Agreement and the “near-shoring” and “friendly-shoring” policies, play in the process of reshaping the global manufacturing supply chain?
In this regard, Xinfu Think Tank, an industrial globalization research organization, believes that the current global manufacturing industry chain and supply chain are accelerating adjustments in the direction of regionalization, near-shoring, and localization. The global manufacturing industry will form a model based on France, Germany, China, and the United States. As the three major areas in the center, the radiation drives the development of surrounding areas. In Europe, it is centered in Germany and radiates to the European Union and the United Kingdom; in Asia, it is centered on China, radiating to Japan, South Korea, and ASEAN countries; in North America, it is centered on the United States and radiates to neighboring countries such as Mexico and Canada.
In the context of the coexistence of multiple regional economic centers, how to leverage comparative advantages and build new economic and trade ties with other countries is a proposition that every country that hopes to join the world economic cycle system needs to think about.
