In June, Chinese polyurethane producer-Jiahua Chemical announced an investment of $20 million to build a new plant in Mexico; in July, Shindanda’s subsidiary Shindanda Power, through its subsidiary Shindanda Hungary, invested in the first phase of a new energy automobile power battery plant in Hungary with its own and self-funded funds; in September, Trina Solar announced that it will build a Velmer, Texas, U.S.-based over 1 million square feet solar PV manufacturing plant ……
From automobile manufacturing, wind power labor-intensive industries to photovoltaic new energy industry, from Southeast Asia, Latin America to Europe and the United States, Chinese enterprises going abroad began to intensively build factories overseas.
I. Build factories overseas, reduce costs and increase efficiency
1.Southeast Asia, lower labor costs
China is in the golden age of labor dividend, attracting a large number of foreign enterprises to build factories. However, in recent years, China’s manufacturing costs have gradually risen, from 2009 to 2014, China’s minimum wage almost doubled (960 yuan to 1,820 yuan). According to Statisata, in 2020, the labor cost of manufacturing in China (6.5USD per hour) will be about twice as much as in Vietnam (2.99USD per hour).
(source: Statisata)
Faced with growing labor costs, both foreign and local firms have embarked on a journey of manufacturing relocation, with many beginning to move their factories to regions such as Southeast Asia, India, and Mexico.
Since the early 2000s, for example, footwear brands in particular have begun to move out of China. As of 2006, Nike produced 29 percent of Vietnamese shoes, compared to 31 percent in China. And by 2017, Vietnam accounted for nearly 50 percent of Nike’s manufacturing.
According to the Ministry of Planning and Investment, as of September 2022, China’s total FDI in Vietnam alone amounted to US$1.7 billion, ranking fourth after Singapore, Japan, and South Korea among 103 countries and territories that invested in Vietnam during the same period. As many as 200 Chinese companies have listed and built factories in Vietnam.
In the field of new energy, in May this year, BYD and local authorities to discuss matters related to investment in Vietnam to build factories, plans to invest more than 250 million U.S. dollars. Trina Solar is now one of the largest solar panel manufacturers in Vietnam, with two factories in the country. In the furniture sector, Chinese furniture companies Gujia Home Furnishings and Henglin Chair have opened factories in Vietnam. In the electronics industry, Foxconn, Lixin Precision, Winston, PEGATRON, and Gore have all announced plans to invest and build factories in Vietnam.
2.Transit station, policy support
Many Chinese enterprises that build factories and invest overseas will consider the cost-effectiveness when choosing a place to go to sea. Very often Chinese enterprises will be the country as a transit point, the use of geographical advantages and policy support, to develop a broader overseas market.
Mexico has become the first stop for Chinese enterprises to go to the United States by virtue of its unique geographical location and policies.
By the U.S.-China trade war, Chinese enterprises directly into the U.S. Market risk and difficulty gradually increased. And Mexico and the United States, Canada signed the “United States, Mexico and Canada Agreement” (USMCA) to reduce or even cancel the tariffs of products from Mexico to the United States.
As an atypical place to build factories abroad, Hungary has attracted a large number of Chinese electric vehicle battery manufacturers: in August last year, Ningde Times announced an investment of 7.34 billion euros to build a factory in Hungary; in July this year, Shindanda announced plans to build a power battery factory in Hungary ……
Hungary is in the center of Europe and has a unique geographical location; at the same time, Hungary has 120 years of history of automobile manufacturing industry and more than 700 automobile and parts manufacturers, in addition, the Hungarian government has more policy support for the automobile industry.
For example, last year, Hungary provided a cash grant to Chinese electric car company Weilai Automobile to pay for 30 percent of the investment in the factory. In June of this year, BYD invested around HUF 10 billion in Hungary, while the Hungarian government provided it with 10% (HUF 1 billion) to “enhance Hungary’s role in Europe’s e-mobility transition, to strengthen Hungary’s leading role in this economic process, to contribute to Hungary’s job security and to help Hungary attract new capacity in the most important sectors of the future. important sectors to attract new capacity.”
(source: Unsplash)
At the same time, the construction of the “One Belt, One Road” is also one of the reasons why Chinese enterprises are attracted to go overseas. The “One Belt, One Road” program provides an unprecedented opportunity for Chinese companies to promote their brands, products and services to the global market more conveniently.
According to the white paper “Building a Belt and Road: A Major Practice of Building a Community of Human Destiny” released by the State Council Information Office on October 10, China’s total import and export volume with the countries where it is building a belt and road will be nearly 2.9 trillion U.S. dollars in 2022, accounting for 45.4 percent of China’s total foreign trade over the same period, an increase of 6.2 percentage points compared with that in 2013.
And according to data from the China Association of Automobile Manufacturers (CAAM), from January to September this year, China’s auto exports amounted to 3.388 million units, up 60 percent year-on-year. Among them, the “Belt and Road” countries have become the main market for China’s auto exports, accounting for nearly half of the export volume.
3.Overcapacity and fierce domestic competition
Take the battery industry as an example, the domestic power battery has been the phenomenon of supply exceeds demand, while the foreign demand gap is large. This makes going overseas to build factories from a choice to become the norm.
According to the data of China Automotive Power Battery Industry Innovation Alliance, China’s power battery production reached 545.9GWh in 2022, a year-on-year increase of 148.5%. However, in the same year, China’s power battery installed capacity was only 294.6GWh, an increase of 90.7% year-on-year, supply exceeds demand.
And according to SNE Research’s forecast, by 2023, European EV battery demand will reach 406GWh, with a projected supply of 335GWh, a shortfall of nearly a quarter. According to mordorintelligence, in North America, the battery market share is mainly occupied by external companies (BYD, Ningde Times, Panasonic ……)
There is no larger domestic market, then go to sea to find opportunities. This year, the two major domestic lithium giants – lithium, Guoxuan Gaoke has been rumored to build factories in the United States. South Korea’s three major battery giants LG new energy, SKI, Samsung SDI, also landed in the United States last year to run factories.
In addition to the battery industry, in the United States to build factories in the sea enterprises are not a few. payInOne in the “Global entrepreneurial fertile ground U.S. and how overseas entrepreneurs can get in quickly?” The article mentioned why the U.S. can attract a large number of overseas enterprises: its retail market scale is huge, and the value of U.S. retail sales in 2022 will be more than 7 trillion U.S. dollars, far more than China’s 2 trillion U.S. dollars; in the field of mobile consumption, U.S. netizens have a strong consumption power, and the average profit of a single download of the U.S. app in 2021 will be almost seven times as much as that of China’s … …
According to the Inflation Reduction Act (“Inflation Reduction Act”) signed into effect by U.S. President Joe Biden in August last year, building factories in the U.S. can circumvent anti-dumping high tariffs and other related issues, while at the same time saving the time and cost of supply chain transportation. According to 36 Krypton’s report in June, Temu has started the construction of overseas warehouses and plans to build one in the eastern and western parts of the United States. For companies like Dream Home, which has a high percentage of market share in the U.S., going to the U.S. to build a factory is an important step to ensure the continued operation of the company and global expansion.
II. the hidden danger of compliance behind the overseas construction of factories
There are many benefits of building factories overseas, but there are also many challenges, especially legal and compliance risks.
1.Market Access
The first thing to do is to meet international and local laws, and different markets have different access principles. Take Mexico as an example:
Industries in which foreign investment is prohibited and laws and regulations
According to the Constitution of the United Mexican States and the Foreign Investment Law of Mexico, the industries in which foreign investment access is prohibited are:
(1) Ownership of oil and gas resources exploration and exploitation
(2) Ownership of lithium resources exploration and exploitation
(3) Power system planning
(4) Electricity transmission and distribution
(5) Nuclear power generation
(6) Radioactive minerals
(7) Telegraph
(8) Wireless telegraphy
(9) Postal Service
(10) Minting and Currency Issuance
(11) Ports
(12) Airport control and surveillance
Limitations on Shareholdings in Industries in which Foreigners are Allowed to Invest
(1) Maximum 10% participation: Production cooperatives.
(2) Maximum 25% participation: Domestic air transportation, airport-based cab companies, and special air transportation.
(3) Maximum 49% participation: enterprises that trade in and manufacture general explosives, firearms, ammunition, ammonia, and pyrotechnics (except for the acquisition and use of explosives for industrial and extractive purposes and the manufacture of mixtures of explosives used in the above activities), domestic newspaper printing and distribution companies, Class T shares of companies that occupy land for agriculture, livestock, and forestry, freshwater, coastal, and exclusive economic zone fishing (excluding aquaculture) enterprises, port complex management companies, companies that provide services to the public for the purpose of fishing, and companies that provide services to the public for the purpose of fishing, and companies that provide services to the public for the purpose of fishing. Enterprises, comprehensive port management enterprises, port services for vessels with legal inland navigation rights and shipping companies with inland and coastal routes (excluding sightseeing cruises, dredging development, and shipping equipment used for construction, protection, and port operations) vessels, fuel and lubricating oil supply for aircraft and railroad facilities, radio and television broadcasting.
Foreign participation of more than 49% in any of the following sectors is subject to consideration and approval by the Foreign Investment Commission of the Ministry of Foreign Affairs: port service companies in ports of call and anchorages for inland navigation vessels, tugboats and ferries, shipping companies operating vessels in the open sea, public airport concessionaires, private kindergartens, elementary schools, middle schools, high schools, higher education and comprehensive schools, legal service companies, and the provision of public railroad transportation services.
With regard to land, all types of land in Mexico, except for national nature reserves, ecological and environmental reserves, ecological forests and other restricted areas protected by the State, may be sold and leased to foreign investors and foreign companies, subject to the relevant provisions of the law and property rights.
However, in accordance with the provisions of the Mexican Foreign Investment Law, special provisions are made for the purchase of land within the control zone (within 100 kilometers of the border and within 50 kilometers of the coastline) by foreign investors: foreign investors purchasing land within the control zone shall first apply to the Mexican Ministry of Foreign Affairs, undertake to give up the protection of the home country in the event of disputes, and shall not purchase the land until they have obtained the consent of the Mexican Ministry of Foreign Affairs. Foreigners purchasing non-residential land in the control zone may not do so directly as foreign natural persons or as foreign companies, but must incorporate a company in Mexico and purchase the land in the name of that company, and they must report the land purchase contract and proof of transfer of property rights to the Ministry of Foreign Affairs of Mexico for the record within 60 working days of the purchase.
2.Labor Issues
When Chinese companies build factories overseas, they can’t get around issues such as employment, and complying with the relevant local labor laws becomes an important step on the road to compliance. If a company does not understand local labor laws and practices, it can easily lead to a series of problems such as labor disputes, demonstrations and protests, or tensions in labor-management relations.
In the documentary “Factory USA,” Chinese glass magnate Cao Dewang opens a factory in the U.S. and employs a large number of Chinese and U.S. local workers. But because of cultural differences, a series of tense labor relations broke out between the American employees and the factory.
U.S. workers left the Fuyao plant after unsuccessfully asking for a wage increase in the face of the plant’s continuous losses. In 2017, U.S. workers, too, left the factory because of the factory’s “paternalistic” management style, such as “disciplining workers for absenteeism if they don’t apply for paid leave early enough” and “exposing employees to harsh chemicals”. The company exposed the employee to harsh chemicals that blistered his arms and reduced his lung capacity,” among other reasons, and faced a fierce unionization campaign by the United Automobile Workers (UAW).
In the U.S., the legal regulation of labor relations consists of two levels: federal law and state law; in addition, certain counties and cities may have local regulations. At the same time, the U.S. labor union system is an obstacle that makes the road to compliance even more difficult. In terms of the private sector collective bargaining system, in 1935, Congress enacted the National Labor Relations Act (NLRA), which provides a collective bargaining system for employees in the private sector, with the exception of the railroad and air transportation industries, and prohibits five categories of “unfair labor practices” (ULPs).1 The NLRA provides for a system of collective bargaining for employees in the private sector, with the exception of the railroad and air transportation industries, and prohibits five categories of “unfair labor practices.
(1) Interference with employee assembly activities;
(2) Employer control of labor organizations;
(3) discrimination against an employee because of the employee’s participation in union activities;
(4) Retaliation against an employee for reporting an unfair practice;
(5) refusing to bargain with an employee.
As of 2013, about 7% of private sector employees’ labor relations are governed by collective bargaining agreements, mainly in industries such as transportation, communications, food processing, healthcare, manufacturing, retail, services, entertainment, hospitality, etc. For example, at General Electric Company in the United States, there are national and state-level labor organizations to represent the interests of employees working in different regions.
From this level, it is much more difficult to hire in the US in a compliant manner. PayInOne, as a one-stop global employment and payroll management platform, has products and systems that cover the employment guidelines of various countries, including laws and regulations, policy changes, labor protection, investment policies, entry thresholds, etc. It ensures that companies’ employment is in line with the employment standards and legal processes, and assists companies in maintaining control of data management, mitigating the impact of accidents, and reducing fines for non-compliance and lawsuits.
3.Environmental Issues
For large-scale engineering and construction projects, the development and construction process is likely to affect the environment of the relevant region. Enterprises building factories overseas need to comply with local environmental protection laws and standards. If the relevant laws and regulations are violated, the project may face the risk of suspension or closure.
This year, Ningde Times announced the establishment of a factory in Debrecen, Hungary, which was strongly opposed by locals, “Our most basic needs are clean water, clean air and healthy land, not batteries.” According to survey data from Telex, half of Hungarians believe there should be an outright ban on new battery factories because it jeopardizes the environment.
Although Hungary’s environmental protection laws have changed considerably in recent years, according to the Environmental Protection Act, they lay down the basic principles of environmental protection: the impact of economic and social activities on the environment must be minimized and pollution and damage to the environment must be prevented; environmental resources should be used efficiently, waste generation should be reduced, and efforts should be made to recycle natural resources and means of production; and state-of-the-art technology should be applied to the use of environmental resources in order to effectively minimize the impact on the environment.
At the same time, Hungary has set environmental protection standards for land, water resources, air, ecology and harmful substances related to the environment, as well as the basic principles of environmental protection that must be observed by users of the environment. When economic and social activities may cause obvious impacts on land and water resources, the implementing units must apply to the environmental protection authorities in accordance with the provisions of the “Environmental Management and Certification System” and obtain an environmental use license before engaging in the relevant activities.
In summary, building factories overseas is an important stage in the globalization of enterprises, the overseas market is full of opportunities and challenges, only compliance, in order to turn crisis into opportunity. How to ensure that all aspects of the sea are compliant is a problem that many overseas enterprises pay more attention to.
* The content of this article refers to the existing local labor-related laws and regulations, such as local policy changes. Please follow the actual policy implementation.
