Offshoring Goes Full Circle: Chinese Firms Shipping Out
For decades, China was the top destination for foreign companies moving their operations abroad. But now it is Chinese companies that are shipping out of their home market in search of new business horizons.
Lebanon, a small town with a biblical name located in the middle of Tennessee, recently celebrated the arrival of opportunity with a ribbon-cutting ceremony. The occasion was the opening in April of American Wonder Porcelain, a 46,000-square-meter ceramic tile plant. The $150 million facility is expected to eventually provide more than 200 jobs for the community.
The investor, Wonderful Group, is a ceramics manufacturer based in the southern Chinese industrial hub of Guangdong Province. It is one of many Chinese firms now moving manufacturing to the United States to offset rising labor costs in China, and to expand new markets overseas.
“We’ve seen this trend since about 2009, but there’s been an uptick especially in the past two years,” says Cassie Gao, a Research Analyst focusing on China’s international trade and investment flows at the Rhodium Group. “In terms of dollar value, the top industries we see are automotive and other transportation equipment, chemicals, metals and basic materials.”
According to the Rhodium Group’s China Investment Monitor, Chinese companies are spending huge sums in the United States on new projects and expansions of existing subsidiaries. Between 2000 and 2016, Chinese firms spent $8.6 billion in the US on 778 greenfield investments (that is, when a parent company builds a new foreign operation from the ground up). Last year alone, companies spent $1.4 billion on 34 greenfield projects in various manufacturing sectors.
Fuyao Glass, China’s biggest maker of automotive glass, has invested over $1 billion across the Midwest and opened a factory in Moraine, Ohio. Keer America opened a highly automated cotton-thread production facility in South Carolina in 2015, investing $218 million. In the same year, Shandong Tranlin Paper broke ground on a $2 billion plant in Virginia, which is expected to employ about 2,000 people by 2020.
Winwin International, a shoemaker based in Dongguan, Guangdong, is now working on relocating to the United States, which accounts for 60% of its business, and the Yuhuang Chemical Company from Shandong Province is building a $1.86 billion methanol factory in Louisiana.
“Chinese companies are going to the US because they believe they can lower the cost of production,” John Ling, President of the Council of American States in China (CASIC), told CNBC in an interview in May. CASIC facilitates dialogue and business between US state and local governments and China. “In certain parts of the US, the land will be much, much cheaper than in China.”
Lower prices for other resources like electricity, natural gas and logistics also make production in the US appealing to Chinese manufacturers, said Yao Yang, the Director of the China Center for Economic Research (CCER) at Peking University. Yang also believes efforts by the US government to promote foreign investment play a role in the move. “To attract Chinese companies, local governments in the US may offer very preferential policies in land and tax,” Yang says.
The overall trend represents an important step in China’s and, indeed, the world’s economic development. And the US is not the only place China is shipping production to—South-East Asia, known for cheap labor, just like China two decades ago, is also a destination. More importantly, signs point to this being the beginning of a trend that will continue to build.
Since the beginning of the reform period, but particularly since it joined the WTO in 2001, China has become a manufacturing powerhouse. Cheap labor and input costs attracted textile and equipment factories. Shoe and clothing makers were the first to leave the US, and furniture and electronics manufacturers soon followed.
China soon became known as the “world’s factory,” in many cases producing cheap goods with imported parts for little added value. By 2013, 23.3% of all global manufacturing output came from China, according to the Economist. Between 2001 and 2011, the US lost an estimated 2.1 million manufacturing jobs to China, according to a 2012 report from the Economic Policy Institute entitled The China Toll.
But the landscape in 2017 looks very different. Wages in China have risen substantially, and land and electricity prices are also up. This challenges China’s decades-long global armlock on the mass production of goods at low cost.
While wages in China have been growing 10% to 15% every year since 2001, wage increases in the US have been much slower. Data from the US Department of Labor indicates a 2.0-2.5% annual increase. Boston Consulting Group’s Made in America, Again project found that the estimated average manufacturing cost in the US in 2015 was only about 5% more than manufacturing in China. BCG projects that by 2018 it may be 2-3% cheaper to manufacture products in the US than in China.
Also not factored in were the substantially lower cost of land and electricity. These can be far cheaper in parts of the United States compared to Chinese manufacturing centers such as Guangdong. Industrial land costs about $21 per square foot in Shenzhen, for instance, but only $1.30 to $4.65 in Tennessee and North Carolina.
This is the logic behind the move of Keer, the Chinese thread producer. Though labor costs in that industry in the United States are double the China rate, for Keer, US-based production is still significantly cheaper. “In the US, land, electricity and cotton are all much cheaper,” Zhu Shanqing, President of Keer, told CNBC in May. “My production cost per ton of textiles is 25% lower.”
Another driver behind the shift across the Pacific is the general ease of doing business in the US. The financial system in China remains dominated by state-controlled banks and often regulated by opaque informal guidance from the government. Applying for loans from Chinese banks can be a lengthy process for business owners with strict collateral requirements, so many small- and medium-sized businesses in China rely on shadow financing. “We have to wait for a long time to borrow money from banks, which also requires a good relationship with bank managers,” says Sun Guojin, a clothing factory owner in the inland province of Hubei.
By comparison, investing in the US is a breeze. Add to that the fact that the US is a huge market, and making goods close to the point of purchase makes sense for any business. “Chinese companies are building factories in the US so that they can be close to the market and save shipping costs,” says Yao at CCER. “This also gives them flexibility to adapt to changing market demand.”
The average annual disposable income in the United States is slightly more than $14,000, about triple that of China. And average daily spending by Americans is $97 compared to $7 in China where, according the Goldman Sachs report The Rise of China’s New Consumer Class, currently half of all spending is on food and clothing.
“Chinese consumers spend today’s money, while Americans spend the money from tomorrow,” explains Jill Qu, a Senior Manager at Deloitte and the Research Lead on China’s manufacturing industry.
Addressing the US market effectively means that Chinese companies have to do more than just move manufacturing there. To move up the chain and offset the negative stereotypes attached to “Made in China,” the Chinese government has been encouraging industries to upgrade and build brands. This is easier said than done.
“It can be really hard to persuade my clients to put faith in ‘Made in China’,” says Peter Ragonetti, a New York-based industrial designer who works with American clients and factories in southern China. He notes that the level of experience and quality control that some Chinese factories have reached is quite high, yet negative perceptions persist. “They don’t believe Chinese factories can produce high-quality products,” he says.
Some Chinese companies have managed to build strong reputations overseas through good products and effective marketing. Lenovo acquired IBM’s personal computer division in 2005, and has grown into a successful brand with over 20% of the global PC market. Another telecom giant, Huawei, is rolling out plans to conquer the US market. It has cast actor Justin Long, who played a Mac in an Apple marketing campaign in 2007, in a commercial for its Mate 9 handset, which will be released this year.
Another way to beat the China stereotype is to sidestep the definition. A product made by a Chinese company in the United States, after all, is “Made in the USA.” “This label helps as consumers may consider it [higher value],” says Qu.
While American companies usually tout their American origins when selling into the Chinese market, Chinese companies moving overseas tend to be less explicit about their “Chinese blood.” Wonderful Porcelain does not mention its Chinese parent company on its website, emphasizing that it is “an American company with international roots.”
There is yet one last, important reason for Chinese companies to move manufacturing to the United States: politics. During the presidential campaign last year, Donald Trump accused China of stealing jobs and “raping” the US economy, all while calling for a rejuvenation of US manufacturing.
“Bringing jobs back” was one of the President’s central planks. Trump also threatened to levy a 45% tariff on all Chinese goods entering the United States. The effect, ironically, may have been to spur Chinese manufacturing investment in the US.
“We may… see more Chinese manufacturing investment in the US if trade frictions result in additional tariffs being imposed,” says Gao of the Rhodium Group. She also pointed out that Trump’s plans to rebuild America’s infrastructure could be attractive to Chinese firms. “Infrastructure investment is one area with potential opportunities for Chinese investors if President Trump’s promise materializes.”
But regardless of how much media airtime is taken up by national-level politics, it is the attitudes and actions of state and local governments that are important in driving the trend. Chinese factories are welcomed across the United States for creating job opportunities and boosting local economies, and local governments are trying hard to win investors from China by providing incentives like tax preferences and even grants.
“Here in America, our local and state governments have been working together to diversify investments from foreign countries, and we appreciate investments from Chinese investors,” says Mayor Randall Hutto of Wilson County, Tennessee, where Wonderful Group’s new facility is located.
Mayor Hutto believes preferential tax policies are one of the big attractions for Chinese investors, noting that there is no income tax in Tennessee. Further, corporations can enjoy up to seven years’ tax exemption if they provide enough local jobs. In contrast, China has a corporate tax of 25%, higher than the world average of 22.5%.
To express appreciation for the Wonderful investment, Tennessee Governor Bill Haslam visited the company in Dongguan last May. There, he signed a Memorandum of Understanding with the company’s CEO, Huang Jianping, strengthening the cooperation between Tennessee and Wonderful.
Many other US states have set up offices in China to attract investment, such as neighboring Virginia’s Economic Development Partnership office in Shanghai, which opened in 2011. The office helped Shandong Tranlin Paper launch its $2 billion paper mill project in Chesterfield County, Virginia, by giving the company a $20 million grant. The ground for the mill was broken in October 2015, and the project is the largest investment by a Chinese-owned company in US history. Tranlin is expected to eventually employ 2,000 people at the 850-acre site.
Not all is smooth sailing, however. Tranlin’s paper mill project has been delayed for almost two years, and the company has yet to receive the grant payout offered from the state. Operating in an environmentally-sensitive industry means the project has drawn attention from the beginning, and delays have been partly caused by complications in applying for more than 20 environmental permits, according to Tranlin.
“The company is finalizing its work on major project investment requirements and environmental studies,” Lisa Randall, Communication Director at Tranlin, said in an e-mail. This May, the company announced the project is again running months behind schedule because of new technology that the company wants to incorporate into the process. Tranlin expects the facility to be fully operational by 2020.
Moved to This Address
The United States is not the only place Chinese factories are moving to. In Europe, the pace of Chinese greenfield investment is increasing quickly. According to the European Commission, in 2015, China made up just 2.9% of total greenfield investment in the European Union, but that share quintupled to 15.4% last year, when €9.7 billion ($10.1 billion) was invested.
The US remains the top greenfield investor into the EU with a 46.7% share and €29.5 billion ($33 billion) in total in 2016. Chinese entities are increasing their presence there for the same reasons they are being enticed to the US.
Not all industries are moving to the West. Many firms in the low-value end of Chinese manufacturing, for example, the garment industry, are relocating to cheaper, less-developed neighboring countries, such as Vietnam. Not only is the cost of labor about half that of China, but Vietnam is taking extra measures to lure factories away from China—Vietnam lowered the corporate tax rate to 20% last year.
According to analysis by researcher Justina Yung at Hong Kong Polytechnic University, the number of factories owned by Hong Kong companies in the Pearl River Delta near Hong Kong fell by a third to 32,000 from 2006 to 2013. Many of them have moved on in search of lower wages.
The trend is having an impact on business in China. Yao Yang, the economics professor from Peking University, worries about unemployment. “We need to see the negative impact of industry transfer,” he says. “Our government should stay neutral about moving factories overseas and encourage more manufacturers to move from southeast China to inland cities.”
For Lin Xiuquan, a female worker in a clothing factory in Guangdong, where the manufacturing industry accounts for about half of the GDP, the pain is real. She lost her job because the company she previously worked for moved its factory to Vietnam. “I heard people there only make RMB 300 ($44) a month,” Lin said. “There is no way we can compete.”
The pace of factories leaving China for the US and elsewhere will increase in the coming years. According to the Rhodium Group, economic fundamentals point towards increasing Chinese foreign direct investment (FDI) of all types, including greenfield investments, into the US. As of December last year, Chinese companies had committed another $7 billion to projects yet to break ground.
The 2016 Deloitte Global Manufacturing Competitiveness Index, which was conducted with 540 CEOs, concluded that the US could again overtake China as the world’s number one manufacturing nation by the end of this decade. A key reason behind the prediction is the rise of smart manufacturing. The CEOs believe the US is well placed with advanced technology and scientific research capabilities to become the industrial hub in the smart manufacturing era.
Another survey report by Deloitte of Chinese firms, called Transforming from World Factory to Smart Manufacturing, shows smart manufacturing is still in its early stages in China. Compared to their American competitors, domestic manufacturers are slower to implement change due to internal management issues and high cost. Jill Qu adds that as new opportunities arise, “Chinese companies’ steps to explore production overseas may speed up.”
But the purest indication of the future comes from the manufacturers themselves—for many it is simply the next step. “We are committed to innovate our products and process to support future growth in the US,” said Wonderful Group CEO Huang Jianping, celebrating the company’s first overseas facility. “It’s a milestone for Wonderful Group to go out and make a world-class brand.”