Why Chinese companies are investing billions in Mexico

Tracing a path forged by Japanese and South Korean companies, Chinese firms are establishing factories that allow them to label their goods “Made in Mexico,” then trucking their products into the United States duty-free.

Bill Chan had never set foot anywhere in Mexico, let alone the lonely stretch of desert in the north of the country where he abruptly decided to build a $300 million factory. But that seemed a trifling detail amid the pressure to adapt to a swiftly changing global economy.

It was January 2022, and Chan’s company, Man Wah Furniture Manufacturing, was confronting grave challenges in moving sofas from its factories in China to customers in the United States. Shipping prices were skyrocketing. Washington and Beijing were locked in a fierce trade war.

Man Wah, one of China’s largest furniture companies, was eager to make its products on the North American side of the Pacific.

“Our main market is the United States,” said Chan, CEO of Man Wah’s Mexico subsidiary. “We don’t want to lose that market.”

That same objective explains why scores of major Chinese companies are investing aggressively in Mexico, taking advantage of an expansive North American trade deal. Tracing a path forged by Japanese and South Korean companies, Chinese firms are establishing factories that allow them to label their goods “Made in Mexico,” then trucking their products into the United States duty-free.

The interest of Chinese manufacturers in Mexico is part of a broader trend known as near-shoring. International companies are moving production closer to customers to limit their vulnerability to shipping problems and geopolitical tensions.

The participation of Chinese companies in this shift attests to the deepening assumption that the breach dividing the United States and China will be an enduring feature of the next phase of globalisation. Yet it also reveals something more fundamental: Whatever the political strains, the commercial forces linking the United States and China are even more powerful.

Chinese companies have no intention of forsaking the American economy, still the largest on Earth. Instead, they are setting up operations inside the North American trading bloc as a way to supply Americans with goods, from electronics to clothing to furniture.

The Mexican border state of Nuevo León has positioned itself to reap the bounty. Led by a brash, 35-year-old governor, Samuel García, the state has courted foreign investment while pursuing highway improvements to ease the passage to border crossings.

García recently attended the World Economic Forum in Davos, Switzerland, to recruit more companies.

“Nuevo León is having a geopolitical planetary alignment,” the governor declared during an interview in the state capital of Monterrey, inside the government palace, a warren of grand rooms with high ceilings and balconies looking out to the jagged peaks of the Sierra Madre. “We’re receiving lots of Asians that want to come to the U.S. market.”

Since García took office in October 2021, nearly $7 billion in foreign investment has poured into Nuevo León, making the state the largest recipient after Mexico City, according to the Mexican Ministry of Economy.

In 2021, Chinese companies were responsible for 30% of foreign investment in Nuevo León, second only to the United States at 47%.

Some of this money is financing factories that will make finished products for sale in the United States. But much is focused on a broader refashioning of the global supply chain.

As the pandemic disrupted Chinese industry and jammed ports, companies with factories in the United States suffered shortages of parts made in Asia. Many are now demanding that their suppliers set up plants in North America or risk losing their business.