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Copyright © 2005-2024 MTW GROUP All rights reserved
MTW GROUP CORPORATE HEADQUARTERS:
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MIAMI, FL 33131
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GLOBAL SCENARIOS:
The Nearshoring Strategy
for Exporting in the U.S.
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July 1st, 2024
Our new Column Published on:
by Antonio Acunzo
CEO, MTW GROUP
If nearshoring was immediately conceived and interpreted with a view to rapprochement, in practice it is also a two-way street, and many Chinese companies have strategically undertaken a reverse path to bypass the constraints and restrictions imposed by the US-China decoupling with the goal of exporting to the United States.
INTERNATIONALIZATION AND GLOBALIZATION are two processes that, starting from 2020, have experienced profound changes due to factors that have strongly contributed to redrawing the map of geopolitical and geo-economic relations at a global level, modifying their priorities, objectives and developments.
Today, globalization is no longer a phenomenon driven only by the economy, as a new context never considered before has emerged and has become dominant today: political risk, with repercussions of realignment and new alliances between blocks of countries united by borders, interests and common principles, with clear repercussions in international exchanges.
The USA-China decoupling, the process of loosening the interdependence between the two countries with a view to geo-strategic rivalry - carried out with a policy aimed at reducing American imports from China, increasing jobs in the USA and guaranteeing the safety and protection of American civil and military infrastructure – has seen the nearshoring of American companies along with reduced expansion plans and suspended investments in China, transferring production capacity back home and investing in neighboring countries, especially in the Caribbean and Latin American areas.
The nearshoring strategy aimed at optimizing supply chain management and involved the transfer of some phases of the supply chain process to neighboring countries, making it possible to reduce transit times and improve coordination and responsiveness to product demand, reducing risks related to the impact of trade wars, geopolitical turbulence, factory or port closures and demand volatility. And offering greater flexibility in the event of disruption, faster time-to-market and more effective planning cycles.
Indeed, nearshoring did develop in response to the globalization of production that made supply chains more vulnerable to disruption
A survey by AT Kearney revealed that 70% of CEOs of American companies have considered returning some operational lines to the USA, or moving production lines to closer countries.
In particular, this benefitted the Dominican Republic, that not only rose to the role of industrial hub for large US companies such as Johnson & Johnson, GE Energy, Medtronic, resulting in product quality, production optimization and transport advantages to ports on the American Atlantic seaboard, and promoted the country as a distribution center with quick access to regional markets. As a matter of fact multinational companies of the caliber of Nestlé and IKEA have chosen the country as a distribution hub, benefiting from reductions or elimination of taxes and duties.
If nearshoring was immediately conceived and interpreted with a view to rapprochement, in practice it is also a two-way street, and many Chinese companies have strategically undertaken a reverse path to bypass the constraints and restrictions imposed by the US-China decoupling with the goal of exporting to the United States. A strategy that the Chinese have adopted for greater geographical proximity to the target market, implementing a flow of direct investments in Mexico to produce consumer and mass market products intended for large-scale distribution in the US market (including some large retailers such as Walmart and Costco).
The FIVE good reasons:
Mexico offers, for this purpose, five good reasons:
1. the USMCA free trade agreement between the USA, Mexico and Canada allows exports without the imposition of customs duties;
2. a finished product that is 100% Made in Mexico and therefore Mexican in all respects, and not Chinese, even if the investment capital is of China origin;
3. geographical proximity to the US market, the largest consumer market in the world;
4. low-cost skilled labor (the average wage of factory workers in the USA is $16/hour while it’s $4.50 in Mexico, even lower than the average of $6.50 in China);
5. reduced ground transportation costs to the United States.
Focus on: MAN VAH HOLDINGS:
This is the case of Man Wah Holdings, a Chinese company based in Hong Kong and listed on the stock exchange in both Hong Kong and Singapore, a global leader in the segment of reclining sofas with electric mechanism that in order to develop and expand distribution towards the USA invested in 2022 in the Hofusan Industrial Park (40 km north of the city of Monterrey in the state of Nuevo Leon in northeastern Mexico) in a vertically integrated and technologically advanced production facility of over 230,000 m2, with a production capacity of 3,500 containers per month shipped across the border into the United States (the manufacturing facility is just 130 miles (219 km) by road from the US customs crossing in Laredo, Texas).
As mentioned, even if the capital is Chinese, the final product is 100% Made in Mexico and considered totally Mexican, all to the benefit of Mexican exports which not only records a constant growth trend, but has led the country to replace China as the United States' main trading partner.
Each lot in the Sino-Mexican industrial park of Hofusan has already been acquired by 35 Chinese companies interested in the US market (10 active today and another 25 with construction plans already scheduled between now and 2027) so that any consequences of the US-China trade war will not impact Chinese investments in Mexico, which has become the new offshore hub for Chinese investments aimed at export manufacturing.
Focus on: BYD AUTO:
BYD Auto, the world's largest manufacturer of electric cars, based in Shenzhen, plans to build an assembly line for cars destined for the US market (Warren Buffett's Berkshire Hathaway is also among its partners), benefiting from President Biden's industrial policies, such as the Inflation Reduction Act, a law that grants electric cars produced in Mexico a tax credit of 7,500 dollars for American consumers who purchase an e-car and, above all, avoids the application of the 27.5% customs duty on 'import of electric cars Made in China.
Also in 2023, the Chinese giant Lingong Machinary Group, which produces excavators and heavy construction equipment, invested $5 billion in the state of Nuevo Leon, including a greenfield operation for a new production plant; Trina Solar, world leader in solar energy, has invested one billion dollars in photovoltaics; Hisense Group, a Chinese multinational household appliance company and China's largest television manufacturer, has invested 260 million dollars in a refrigerator production plant as early as 2021; Lenovo, a Chinese technology giant, has invested in a plant for the assembly of computers, servers and racks, which is followed by a new investment of 15 million dollars specifically dedicated to the development of AI for Latin America.
#nearshoring #internazionalization #strategy #automotive #exportusa #chinastrategy
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