(Yicai Global) Feb. 2 -- Whether to build a factory in the United States is a matter that many Chinese companies need to carefully consider, as a result of China-US trade frictions. Yicai Global recently contacted a number of Chinese firms with US production base there to better understand the benefits and risks.

North America is the largest overseas market for Zhejiang Hailiang Group, the world’s largest copper pipe manufacturer. In 2010, the Zhuji-based company set up a US subsidiary, and in April 2016 it spent more than USD30 million to acquire JMF, a US air conditioning equipment business.

But the US government’s anti-dumping policy on copper pipe products was always a shadow hanging over Hailiang’s further expansion in the country.

Jiang Feng, the firm’s deputy director for investment, mergers, and acquisitions, told Yicai Global that around 2010, the United States launched anti-dumping measures on copper tubes exported from China to the US, so Hailiang unveiled plans to build a factory in Vietnam to avoid the measures.

But in 2021 the US extended the anti-dumping campaign to copper pipes exported from Vietnam as well, making Hailiang more eager to build a factory in the US, Jiang said. The company had already started planning such factory in 2018, and it finally chose to set up a copper pipe production base in Sealy city, Texas.

Before Hailiang, Golden Dragon Precise Copper Tube Group, another Chinese copper pipe manufacturer, set up a US plant in 2014. The firm’s then-Chairman Li Changjie said the decision was mainly based on the US anti-dumping measures. 

Chinese mattress brand Mlily also went to the US to build a factory to avoid anti-dumping tariffs. Mlily’s products are sold in 73 countries and regions including Japan and the United Kingdom, but North America is the most important market, accounting for 62 percent of the company’s revenue in 2021.

A few years ago, the US also imposed high tariffs on mattress imports, causing huge challenges for overseas exporters. That led Mlily to consider opening a factory there, not only to avoid the tariff problem but also to maintain US market share, said Mao Zhiyong, general manager of its Arizona production base.

The company has production bases in China, Serbia, Thailand and Spain, and it now has two in the United States. Ninety-nine percent of Mlily US-made products are sold locally, with a tiny portion delivered to South Korea and Japan.

Need for Globalized Positioning

Chinese household appliance manufacturer Haier Group and meat processing giant WH Group have also established a presence in the US, however unlike Zhejiang Hailiang their aim is not to avoid anti-dumping measures, but rather to branch into overseas markets and build brand awareness.

Haier’s fridge factory in South Carolina opened for business in 2000 with an annual production capacity of 500,000 units. Three years after it started, Haier’s annual sales in the US surged eight-fold to USD250 million.

Haier acquired loss-making GE Appliances, the home appliance unit of US multinational General Electric, for USD5.5 billion in 2016, and turned it into a profit-making enterprise within a year without upgrading any equipment nor hiring any new executives. As of 2021, GE Appliances’ business volume had almost tripled from 2015 before the acquisition, and net profit more than tripled.

Haier also set up a logistics hub along the west coast, in order to relieve GE Appliances’ supply chain pressure in areas close to Los Angeles, halving the time needed to deliver goods to customers in the north of California state, the southern part of Oregon as well as in the west of Nevada. Customers can now receive their purchases the day after placing their order.

Since being taken over by Qingdao, eastern Shandong province-based Haier, GE Appliances has invested USD2 billion in its US manufacturing and distribution business, recruited an additional 3,000 staff and created 88,000 job opportunities in the US.

Haier runs R&D centers, manufacturing hubs and sales networks in the US in order to become more localized by leveraging local resources.

Despite the huge investment, independently developing a brand enables Haier to become more familiar with foreign markets and customers in the long run, Haier Smart Home, which is in charge of the group’s US business, told Yicai Global. This will not only help it build the value of its brand and generate greater brand-related premium, it will also help digest the cost pressure caused by surging prices of raw materials.

Chinese meat-processing giant WH Group, formerly known as Shuanghui Group, bought the US’ top pork producer Smithfield Foods for USD7.1 billion in 2013, mainly motivated by the cheap price of US pork which would allow it to stay competitive in China.

Unit Henan Shuanghui Investment & Development has managed to buffer the fluctuations in the price of pork in China by buying imported meat, according to a research report by Waton Securities International.

The average price of a live hog in the US was 35 percent cheaper than that in China in the nine months ended Sept. 30 at USD1.70 per kilogram, compared with USD2.60 per kg, according to WH Group’s latest earnings report.

Actual Costs

Online rumors have it that US workers earn an average wage that is eight times that of Chinese employees. But the labor cost when building factories in the US is actually only four to five times that in China, said Jiang Feng and Mao Zhiyong.

Wages vary in different parts of the US. In the west, for example, Milly pays employees USD18 an hour for a 50-hour week, which, together with overtime and other benefits, comes to about USD4,000 a month, above average for the area, Mao told Yicai Global, adding that wages in the San Francisco Bay area are higher.

It costs US electric vehicle giant Tesla less to run its megafactory in Shanghai, including workforce, electricity, equipment depreciation and logistics, than its California plant, according to US consulting firm Oliver Wyman. The biggest difference lies in the cost of labor which is CNY5,400 (USD800) on average to produce one vehicle.

Hailiang’s US plant uses robots to reduce labor expenses, Jiang said. The firm also took into account the age composition and education background of local workers as well as the labor unions when choosing the location for its plant.

Land is cheaper in the US. Hailiang spent a lot less buying a piece of land in the US to build its factory than it would do in China’s eastern coastal areas, Jiang said.

The local government gave Golden Dragon Precise Copper Tube a 0.2-square-kilometer plot for free to build its US plant, Li Changjie said.

Electricity prices differ. Jiang found when doing his survey that electricity in Texas costs around USD0.05 per kilowatt hour. Now it is USD0.01 to USD0.02 more expensive but still less than in China. And the price of natural gas is less than half that in China.

But in California, Tesla is paying USD0.13 per kilowatt hour whereas in Shanghai it is paying CNY0.75 (USD0.11).

Tax incentives are another important element that Chinese companies should take into account when considering building a factory in the US. The Texas government has exempted Hailiang from paying property tax for years, Jiang said. Texas is one of the few US states that does not levy enterprise income tax, he added.

Chinese Investment in the United States Has Changed

Chinese corporate investment in the United States has altered in recent years as a result of China-US trade frictions.

China’s foreign direct investment into the US fell 7.2 percent to USD5.6 billion in 2021 compared with the year before, accounting for only 3.1 percent of China’s FDI that year, according to official Chinese data. China’s FDI stock in the US accounted for about 3 percent of the country’s total global investment in 2021, down from 9 percent in 2016, per data from US management consulting firm Kearney.

Due to the China-US trade tensions, the willingness of Chinese companies to invest in the US has declined significantly, said He Xiaoqing, president of Kearney China. Chinese firms that still insist on investing and building factories in the US mainly do so because of clients or the consumer market in the country, He added.

Also the industries in which Chinese enterprises invest in the US are changing. Ten years ago, they were investing in the energy and financial services sectors, then they gradually switched to consumption and culture, while in recent years, the manufacturing sector has become more popular.

By the end of 2021, China’s investment in the US was mainly focused in manufacturing, accounting for 30.1 percent, followed by finance at 19.4 percent, according to official figures. Leasing and business services ranked third with 11 percent, while the wholesale and retail trade took the fourth spot with 9.4 percent.

In the past two years, the Biden Administration has vigorously promoted the development of the new energy industry, so more Chinese photovoltaic companies have built factories in the US, He noted.

Local government sources in the US told Yicai Global that the number of Chinese firms building plants in the country may jump in the next two years as the American government will likely move to buy more products from US-based suppliers, so if Chinese firms do not build factories there they may lose out on orders.

Investment Risks

Chinese companies will encounter many difficulties when setting up plants in the US due to the different culture and systems.

Applying for a US work visa is complicated and foreigners cannot work on tourist and business visas, Mlily's Mao Zhiyong told Yicai Global. That's why there are only a few Chinese staff when the plants are first established, he added.

Local governments carry out very strict reviews of factories, especially with regard to the safety standards of machinery. "To pass local reviews, we had to repeatedly make revisions and continuously improve the equipment," Mao said. "The procedure is less complex in China and Thailand."

Recruitment is another issue. "According to US law, we have to hire staff from different races, we cannot only employ Chinese people,” Mao said. "This means we need to hire many local staff who are not very enthusiastic about working, and who are not willing to work overtime even with additional payment."

Cross-cultural management is another area of concern. Management must have experience of international operations and know how to handle global communications, Zhejiang Hailiang’s Jiang said. They should also be familiar with local customs and culture, and it is better to have local plans and schemes.

"Compliance deserves the most attention in our view, such as labor-capital relations, workplace safety, investment safety, tax risks and technical risks," Jiang said, adding it is worth having a decent legal advisor.

Logistics is also an important factor in decision-making, as there will be delivery fees for raw materials and the finished products, Cheng said. The proximity of highways and ports is key. Indiana State is a freight hub thanks to its location in the center of the country, Cheng said.

Whether the investment will be a success depends on many factors, including the community where the plants are based, environmental approvals, labor levels, the willingness to accept foreign cultures and how much local governments care about the project, Raymond Cheng, chief executive officer of Alabama-based SoZo Group, told Yicai Global.

Editors: Dou Shicong, Shi Yi, Xu Wei, Kim Taylor, Martyn Cartwright