Behind China's export push is increased competition and slowing growth at home, and a move by its leaders to use exports to boost the economy. By Reshma Kapadia
Chinese companies have quietly gone global, popping up in the lives of Americans everywhere. Teens play Honor of Kings on phones powered by Anker chargers. Homeowners cool off with Haier air conditioners and peer into Midea or GE refrigerators for a snack. Car owners grab their Dirt Devil vacuum to clean up a mess in their Volvo.
Americans are long used to buying products made in China for U.S. companies. The difference now is that Chinese companies are the owners and innovators. Honor of Kings is among Tencent Holdings' stable of games. Anker Innovations is a Chinese consumer electronics company founded by a former Google software engineer. Haier Group and Midea Group are appliance giants. Dirt Devil is among the brands owned by Hong Kong--based Techtronic Industries, and Volvo is owned by Chinese auto maker Geely.
The overseas push by a broad range of Chinese companies helps ensure that China remains a factory for the world -- increasingly for higher-value-added products like semiconductors, electric vehicles, and commercial aircraft. Behind the effort is increased competition and slowing growth at home, and a push by Chinese leaders to use exports to boost the nation's overall growth. One result is overproduction, threatening to flood the world with cheap electric vehicles, batteries, and industrial parts. Many of these lesser-known companies have escaped controversy even as fast-retail giant Shein, TikTok owner ByteDance, and telecom giant Huawei Technologies face congressional probes, trade restrictions, and tariffs.
Upended Markets
Nations that have seen China upend their steel and solar markets with cheaper products are scrambling to get ahead of the growing threat. President Joe Biden in May imposed tariffs on Chinese clean-energy goods, including electric vehicles, just weeks before Europe unveiled its own tariffs. Former President Donald Trump is proposing a 60% tariff on Chinese imports.
Vice President Kamala Harris, the Democratic nominee, is expected to continue the Biden administration's efforts to restrict China's access to critical technologies, nudging allies to do the same and pushing proposals to restrict investments into China and by China while finding ways to bolster U.S. production of critical goods.
The focus by the U.S. and others on national and economic security complicates China's plans but has done little to deter its push abroad. In 2019, the U.S. restricted Huawei's access to critical parts and lobbied other governments to rethink using them in their 5G infrastructure, citing spying concerns. Today, Huawei remains a leading telecom giant whose products are used in networks around the world. Heavy Chinese investment has allowed it to pivot to efforts such as new smartphones that are taking market share from Apple.
Not everyone shares the concerns of the U.S., which accounts for just 13% of global imports, a distant second to Europe. "This is not China to the U.S. story but China to the world, selling sunscreens, trucks, buses, and excavators on the cheap," says Andrew Mattock, a portfolio manager at Matthews Asia.
That creates another challenge for U.S. multinationals: "It's not going to be about competing with China here but abroad," says William Reinsch, the Scholl Chair in International Business at the Center for Strategic and International Studies, who previously represented multinational companies on international trade and tax policy issues.
Many of these exporters have the backing of Beijing, reinforced by signals from this summer's Third Plenum meeting, where senior officials presented their long-term economic plans. "Beijing is seeking to circumvent developed market tariffs by expanding both direct sales and manufacturing in emerging markets," says Rory Green, head of China research for TS Lombard. "This is one area where the state and corporate sectors are aligned."
Supersize Playbook
In some ways, China is following Japan's playbook -- and supersizing it with the breadth of industries in its sights. Facing slowing growth and an aging population, Japanese companies -- including Toyota Motor and Honda Motor -- headed abroad to become global giants, largely in industrial sectors. When policymakers in the U.S. said they had to set up production stateside if they wanted to sell to U.S. consumers, many did. They became more successful and more multinational.
Early in the last decade, a wave of Chinese companies went on buying sprees. China's foreign direct investment peaked in 2016 at about $200 billion. The acquisitions that year included Tencent's purchase of a majority stake in Clash of Clans developer Supercell and Haier's purchase of GE's appliance business.
Such investment dried up, first as Beijing instituted capital controls to limit the amount of money Chinese citizens were taking abroad and then with the Covid pandemic and the ensuing U.S.-China frictions that increased scrutiny of investments with an eye to national security and economic security, says Thilo Hanemann, partner at research firm Rhodium Group.
Now, Chinese outbound investment is picking up again, with completed projects around the world, including in Europe and Mexico , hitting $80 billion to $90 billion in 2023, up from $50 billion to $60 billion in the previous three years, according to Rhodium.
Beyond Belt and Road
China's foray abroad in the past decade revolved around infrastructure investments through the Belt and Road initiative that President Xi Jinping started in 2013, but that lending has fallen sharply over the past five years. The focus now is on building factories around the world, building and operating wind farms and solar parks, and so-called greenfield investing -- to get around some of the protectionist fever, companies are willing to accept demands to "localize," and are spending aggressively to build production facilities abroad.
Europe, Brazil, Turkey, and Thailand have used tariffs and incentives to get Chinese companies to produce in their backyards. Under the Biden administration, the U.S. has been more wary of Chinese investment. Both political parties are expected to ratchet up scrutiny of Chinese companies moving to Mexico to skirt trade restrictions.
For investors, China's global push offers both risk and opportunity. William Blair manager Vivian Lin Thurston is steering clear of Chinese companies in sensitive or strategic areas prone to national or economic security concerns, such as semiconductor chips, artificial intelligence, and other advanced technology. Ben Durrant, investment manager for Baillie Gifford's emerging markets equity team, pared back holdings in battery maker CATL, noting that the increased pushback from the U.S. diminishes its global growth prospects.
Thurston sees opportunity in exporters hit by fears of tariffs, as those levies tend to be passed on to consumers, doing less damage to fundamentals than investors initially fear. Durrant owns shares of appliance makers Haier and Midea, noting that they are representative of the many Chinese companies that don't face the same level of scrutiny as BYD, CATL, or others and that are gaining market share by being "very good at what they do."
Midea bought German automation firm Kuka in 2016, expanding globally and in its breadth of businesses. In its annual report, executives outlined plans to accelerate their foreign expansion to transform from a Chinese business into an international one. Those plans included creating an industrial complex in Egypt, where it has invested $247 million, and initiatives to bolster its presence in Brazil.
Midea, which gets roughly 40% of its sales abroad, trades for less than two times book value and generates 15% to 20% return on capital, Durrant says.
Zhengzhou Yutong, an electric bus maker, is seeing strong orders from Europe, Southeast Asia, Africa, and Latin America as countries look to green their economies through their bus networks. Yutong, which gets about 30% of sales from abroad, is capitalizing on having better technology and cost structure than peers. Its foreign business commands double the gross margins of its domestic business, helped in part by selling in dollars and euros, which means charging a higher price while the cost of production stays the same.
Foreign Factories
Chinese companies are also aggressively building manufacturing elsewhere in Asia. Some are doing it to diversify their own supply chains or tap cheaper labor, with wage costs in Vietnam about what they were a decade ago in China. Still others are looking to get easier access to critical commodities like nickel in Indonesia or existing manufacturing capabilities, such as for back-end testing and packaging of semiconductors, in Malaysia, says John Tsai, head of growth equities for Eastspring Investments, which oversees $230 billion in assets.
Shenzhou International, which makes garments for Adidas and Nike, has been setting up production outside of China. In the past, foreign firms typically would move their manufacturing to lower-cost hubs like Vietnam. Now, Chinese companies are now doing it themselves and retaining the business. Their advantages go beyond just the low-cost arbitrage. "They are a bit like the [Indian] IT outsourcing companies, which were historically about cheap labor but are now about their ability to organize talent, coordinate processes, and boost efficiency, " Durrant says.
China's expansion is also in areas that it hasn't typically been associated with -- including higher-value goods like ships and mid-haul jets, which the state-owned Commercial Aircraft Corporation of China, or Comac, is already flying domestically.
Global multinationals are about to face more competition, but it will take time to see which Chinese companies manage the foray abroad well enough to transform themselves into thriving global businesses.
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August 09, 2024 21:38 ET (01:38 GMT)
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