The Daily - Why ‘Made in China’ Is Becoming ‘Made in Mexico’

Episode Date: February 21, 2023

The great supply chain disruption caused by the coronavirus pandemic scrambled the shipping system across the Pacific.Although mostly over, the turmoil has led to alterations in the way the global economy functions. One such change can be seen in Mexico, where companies from China are increasingly setting up shop.Guest: Peter S. Goodman, a global economics correspondent for The New York Times.Background reading: Alarmed by shipping chaos and geopolitical fractures, exporters from China are setting up factories in Mexico to preserve their sales to the United States.Laredo, a Texas border city, is primed to become one of the world’s most important land ports as American companies reduce their reliance on factories in Asia.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday.

From The New York Times, I'm Sabrina Tavernisi, and this is The Daily. The great supply chain disruption caused by the pandemic is mostly over. But it's led to a larger and more permanent change in the global economy. Today, my colleague Peter Goodman reports from the forefront of that change. Today, my colleague Peter Goodman reports from the forefront of that change, an industrial park in Mexico where companies from China are setting up shop. It's Tuesday, February 21st. Peter, we all remember that during the pandemic, we couldn't get our stuff. Mattresses, couches were all stuck out at sea, taking forever to get to us. And as you explained to us on the show in October

2021, that was because the supply chain was totally disrupted. And specifically that the factories in China were totally disrupted, which really scrambled the entire shipping system across the Pacific that feeds everything that Americans want to buy. But now you've reported that there's been a big shift in all of this. So what was it? So the last time we talked, we were talking about giant container vessels that were stuck floating off of large American ports for weeks and sometimes even months, waiting their turn to pull up to the dock. That's largely gone. At least it is on the big West Coast ports in Los Angeles and Long Beach. There are trucks moving and picking up containers. A lot of the shortages are gone. Shipping prices, which had spiked dramatically,

have plummeted and have returned, you know, largely to pre-pandemic normal. But meanwhile, something really significant has shifted. The kind of globalization that we've all been accustomed to over decades has given way to something much more regional. And what does that mean, Peter? Well, you know, for decades, China was at the center of globalization. Multinational companies went pouring into China. We talked about the China price, which was code for the cheapest possible price.

This assumption that China, this country of 1.3, now 1.4 billion people, essentially has a limitless supply of workers, eager for factory jobs, streaming in from the countryside, and that this was just an unbeatable combination along with investments into ports and other infrastructure by the government and the buildup of the supply chain. You could get everything in China to make just about any product that you could imagine

from top to bottom. But since the pandemic, multinational companies have come to revisit this central faith in China. I talked not that long ago to the CEO of Columbia Sportswear, this, you know, giant sportswear company that's headquartered in Oregon, who said for years, as we invested in Asia, we operated as if shipping was essentially free. Shipping was cheap, it was reliable, and we don't feel that way anymore. And now we're trying to figure out what comes next. And what comes next for many companies is figuring out how to make their products closer to their largest markets.

Right. They're rethinking that model because the pandemic showed how vulnerable the shipping system we all relied on actually was. Yeah, that's exactly right. Companies are looking for alternatives to factories in China. Now, the biggest market is the United States. And so this takes us to Mexico, which is an obvious place if you're looking for lower wage production and easier land transportation to the United States, just glance at the map, you end up in Mexico. And I had heard, in fact, that as production shifts from China to Mexico, a lot of goods are being moved by truck through the port of Laredo,

Texas. This is this border town that has for a long time been the busiest overland port in the United States. And so I go down to Laredo to see how this is playing out there. And on my first morning there, I'm invited to a press conference at City Hall. There's just so much to be happy about. For the mayor at the time, Pete Saenz is celebrating the fact that in the most recent month, October, there are more goods crossing the border at Laredo than there are goods coming into the ports of L.A. and Long Beach. Wow. Incredible. Yeah Long Beach. Wow. Incredible. Yeah, it was amazing. And, of course, the expectation there is that it's going to increase international commerce for everyone.

I've even heard the word a tsunami of commerce, trade. And the mayor is talking about the need to work with governments on the other side of the Rio Grande in Mexico to make sure there's enough infrastructure to of the Rio Grande in Mexico to make sure there's enough infrastructure to handle the flow of all these goods. And he's invited a delegation from one of those border states, the state of Nuevo León. And the officials from Nuevo León play this promotional video touting the merits of investing in their state. In 1991, Puerto Colombia was inaugurated. In the video, they're saying that Nuevo León is already getting something like half of all the foreign investment that's coming to Mexico.

They're talking about how they're upgrading the highways and how they're only a two-hour drive from the border. La modernización del Puerto Colombia hará de este un hub logístico internacional de nivel mundial. And after this video was over and the press conference was done, I approached this economics minister who had made this presentation, and I asked him, well, you know, do you think that this trend, this trend where companies are shifting production from China to Mexico, will that last after shipping rates return to normal, after the pandemic is behind us? And he told me something that I found just astonishing. He said, listen, we've got Chinese companies

that are setting up aggressively. We've got a whole industrial park where there's 28 different Chinese companies that are now sinking billions of dollars into factories in Nuevo León to serve the American market. And he said, you should come down and take a look. And I was immediately intrigued. Right, because for so long, Chinese companies have been making all of their products inside China.

Yeah, that's exactly right. And I went down there just a couple weeks later. What do you find when you get there? Well, I land in Monterey, the capital of Nuevo León, which is this boomtown. There are all these glittering new shopping malls full of luxury goods outlets. There are some lovely hotels with interesting modern architecture. There's fine dining and very clean streets. Pec de Monterey, which is known as Mexico's MIT, is based here along with some other prestigious universities that are churning out engineering graduates and that are looking to boost the Mexican supply chain. But what I really wanted to do was go see what was happening out at these industrial parks where companies were setting up factories.

And so I get in the car, drive for about an hour north of Monterey. The city gives way to a bunch of ranches, villages, then just unbroken desert dotted by cactus. And at a very kind of blank spot in the map, suddenly there's this enormous construction zone, lots of heavy equipment. There's a gate marking the entrance to the Hufusan Industrial Park, where these 28 Chinese companies are erecting factories. Some are already producing, most are still breaking ground. And I'm introduced to a guy named Bill Chan, who is the head of the Mexico subsidiary for a Chinese furniture maker called Manwa. And he tells me the story of how his company adapts to the changes in the global economy by setting up a $300 million factory right there in Mexico.

So what is the story with this company? And how does Bill Chan talk about their decision to set up in Mexico? So Manhua is really a classic Chinese export story. Founded in Hong Kong in 1992, Manhua has been a dedicated producer of sofas, mattresses. They start with a bunch of factories in China throughout the country from the southern boomtown of Shenzhen to the northern city of Tianjin. They make really cheap, lazy boy-like reclining sofas. Manwa puts out 1.32 million sets of sofas a year, or more than 3,600 sets of sofas a day, providing quality and comfortable furniture to over 4,000 families a day. They export this stuff all over the world,

but the U.S. is their most important market. They sell through online merchants like Wayfair, wholesalers, various retail channels. In the years ahead, we will strive to build Manoit into a top international furniture center and steer the advancement of the global furniture industry. And you have to remember that even before the pandemic, that model was disrupted by the trade war

started by President Trump, really from the minute he took office. I mean, he starts off slapping punitive tariffs on Chinese goods across the board, which makes it more expensive for Americans to purchase Chinese goods. So long before the pandemic, Manwa is already searching out alternative places to make products for the American market. This prompts the company to buy a factory in Thailand. They build a new factory in Vietnam near Ho Chi Minh City. They even purchased a factory in Ukraine, though they had to abandon that once Russia invaded.

And they were using these factories outside of China to ship goods to the American market to get out from under the Trump tariffs. Well, then the pandemic comes and disrupts shipping across the Pacific. So, you know, whether you're in Thailand or Vietnam or China no longer matters. You're on the wrong side of the Pacific Ocean. And they decide they need to get on to the right side of the Pacific Ocean. And that leads them to start exploring the possibility of opening a factory in Mexico. So first comes the trade war, prompting them to move production to Southeast Asia. But then comes the pandemic, which prompts them to move to, as you said, the right side of the Pacific, and they turn to Mexico. Yeah, that's right. And, you know, there are a bunch of factors

that bring them to Mexico. Proximity is the primary consideration. But, you know, there are a bunch of factors that bring them to Mexico. Proximity is the primary consideration. But, you know, they could set up in the United States, presumably. But the U.S. has labor shortages and the U.S. has much higher wages than they're accustomed to paying in China and Southeast Asia. Mexico, the wages are much closer to prevailing wages in Asia. the wages are much closer to prevailing wages in Asia. And when they factor in the savings on transportation, they think they can get pretty close to the overall costs of making a sofa and delivering it to a customer, you know, the same equation they're looking at in Asia. And not least, Mexico is part of a free trade zone with the United States and Canada. Right. And if they're able to make their products in Mexico

and qualify for the Made in Mexico label, they can ship them to the rest of North America duty-free. And so for all of those reasons, Manwa is looking very seriously at Mexico. Bill Chan reaches out to one of the marketing people at this industrial park he finds outside of Monterey, the one I'm visiting. They're texting on WeChat, the Chinese social media platform. He's asking basic questions like, can we start construction immediately? Yes. How are the roads? They're not that great, but they're getting better. Are there any real Chinese

restaurants around? Absolutely none. And then he is really feeling a sense of urgency to make this happen because they've got just scores of containers that are stuck in these floating traffic jams. They cannot get their product from Asia to the United States. So Chan has never set foot in Mexico. He doesn't even visit this industrial park, but he takes some reassurance from the fact that 27 of the 28 parcels in the first phase of this industrial park are already spoken for. And there are some companies he recognizes. And without even setting foot in Mexico, he signs a letter of commitment to build a $300 million

factory just a couple of weeks after he starts talking to the people in Mexico. And he signs the letter of commitment at Shanghai's Pudong Airport before he boards a flight to San Francisco on his way to Monterey, leaving his wife and children behind in China. So he moves really fast to get in on this. Yeah. You know, he just sort of shrugged when he's telling me this. He said, look, we have to move fast and we make our decisions and we execute. I mean, they are intent on figuring out how to continue selling into the U.S. market. Never mind the pandemic disruption, the trade war, whatever the politicians are saying.

This large Chinese company is simply not walking away from the largest consumer market on Earth. We'll be right back. So, Peter, there are all of these Chinese companies setting up shops south of the border in Nuevo León, Mexico. How is it going so far? Well, it's too early to know how it's going because lots of stuff has to happen. But, you know, there's a lot of enthusiasm. In Mexico, there's a lot of hope that all this investment is going to translate into jobs, potentially at higher wages as there's

greater demand and competition for workers. For American consumers, this could be a way to get out from under these product shortages and disruptions that we've seen through the pandemic, the trade war. There is some talk that there could be slightly higher prices for some things, but for some goods, there could actually be lower prices because a lot of people argue that after you factor in the cost of transportation, the costs of labor are more or less the same in many areas of Mexico and China. And so there could be savings. But the most important reason this might be good for the U.S. is because trade within the region tends to produce more job opportunities at home. You know, we've seen a hollowing out of the industrial base during the era of China-centric globalization in

manufacturing communities in the U.S. Well, the data shows that when we buy a good that's made in Mexico, roughly 40% of the value of that good is actually produced in the United States by American workers. The figure for China is something closer to 4%. And of course, Chinese state policy is aimed at driving that as close to zero as possible as China aims for self-sufficiency. So, you know, again, when we trade within the region, we're effectively creating demand for American-made goods. So you're saying that even though these factories are not in the U.S., it could still stimulate U.S. manufacturers because products would go to supply those factories in Mexico. Yeah, that's right. I mean, the supply chains in the U.S. and Mexico and Canada are increasingly intertwined.

So if you look at, you know, a car that might be assembled in Mexico, it draws on parts and components made across the U.S. There are goods that cross the border multiple times back and forth before a final product is assembled. So, in other words, things made in Mexico are also kind of made in America in a way that they just wouldn't be if they were made in China. Yeah, that's well put. You know, the other way in which it could be good for the U.S. and for Mexico is all of our tensions around the border involving immigration could be eased somewhat if Mexico develops and has more decent paying jobs. So whatever your feelings are about immigration from Mexico and Central America, it does seem like a positive if there are more decent paying jobs in Mexico. Right. So if the economy in Mexico is booming, migrants might stop in Mexico instead of coming across the U.S. border.

Yeah, that's exactly right. And instead of arguing over border and immigration policy, we can be celebrating economic growth that ideally benefits the whole region. And what about these Chinese companies? I mean, we know it makes a certain kind of sense for them on paper, right? Like that's why they're coming to Mexico. But now that the rubber is really starting to hit the road, how is it going for these companies? But now that the rubber is really starting to hit the road, how is it going for these companies? Well, it's challenging. And there are reasons to wonder how Chinese companies will adapt. The first thing that Chinese companies have to deal with is the reality that the supply chain in Mexico is just nowhere as abundant or sophisticated as it is at home in China. So they're still having to bring in

a lot of the key components. Apparel companies are bringing in fabric from China. I talked to one of the other 28 companies at an industrial park is a big wheel manufacturer. They have to bring in aluminum ingots from Dubai. I mean, that's not something they can buy in Mexico. So that will be a long-term challenge. The more immediate challenge is labor. They're operating in a place where there are labor unions. I mean, labor unions are very active in Mexico. You know,

Chinese companies at home are accustomed to operating in a place where unions are effectively banned. And there's this assumption, even if it's changed over time in reality, that you'll never run out of workers, that if you mistreat workers and they go somewhere else, there'll be some new people showing up from the countryside desperately in search of a job and willing to work at low pay. Well, in Mexico, and take just Nuevo León, for example, where the unemployment rate is around three and a half percent, they're going to be in fierce competition with European companies, American companies, other Latin American companies for labor. And there's also a gap between the expectations of the people on the ground and their bosses in China. I had some

conversations with Chinese executives in Mexico who said, look, we understand we have to do things like, you know, throw a barbecue for the workers. Think about offering them buses to help them get from their homes to the factory. But we're answering to bosses in China who are like, well, why are we paying for this stuff? What's up with this line item?

We're there to try to cut costs. So that's a tension going forward for sure. But this isn't just about barbecues and free shuttle buses, right? Like, given the labor dynamics you're describing here, I'm assuming that the relatively low wages these companies were counting on when they set their sights on Mexico in the first place may not last for long. Like, the workers could very easily demand more, knowing how much China needs them. Yeah, that's right. I mean, union power plus low unemployment is a prescription for higher wages, and a lot of these Chinese companies are simply not accustomed to having to compete with other employers to hire workers and to retain workers, and they're going to have to

distinguish themselves as good employers, or they they're going to have to distinguish themselves as good employers, or they're simply going to have a tough time getting the people they need. Manhua needs 6,000 workers in a place with 3.5% unemployment to fill out this giant factory that's now building for $300 million. So it sounds like while this could be really good for China, because this could be a way that they hang on to their giant market in the U.S., there are also profound risks because of this huge X factor you're describing, you know, whether they'll be able to work with a completely different labor market or not.

Yeah, that's true. But I guess I would flip that and say the status quo has risks and the model has changed. I mean, take Walmart, the world's largest retailer. 20 years ago, if you were a factory trying to sell a product to Walmart to put on their shelves and you weren't making it in China, they pretty much didn't want to talk to you because that was an indication that you weren't producing at the lowest possible cost. Well, now, I mean, I was just down in Bentonville, Arkansas, which is Walmart's headquarters, just last week. And I met with a representative from a bunch of factories in China

that's now exploring alternative factories elsewhere. And he's been going to see Walmart for 20 years to pitch them on products. And he told me that now, if you're only relying on Chinese factories, that's the end of the meeting with Walmart. Now they are so insistent that there be greater diversity of supplies that you better have an option where if you're selling to the United States, you've got a factory in Mexico or maybe Central America. I mean, regionalization is now being driven by the world's largest retail operations. So Walmart is trying to insulate itself from all of the vulnerabilities of manufacturing in China, the trade war stuff and the supply chain stuff, and basically forcing these companies to embrace this model of regionalization because it's fundamentally in Walmart's interest. Exactly.

embrace this model of regionalization because it's fundamentally in Walmart's interest. Exactly. Peter, given all of that, is China going to remain the dominant manufacturer in the world that it has been for so many years? Yeah, it probably will for several years for the simple reason that there's nothing else like China on Earth. In terms of the scale, in terms of the intensity of the supply chain, it's still really the only place where you can make a huge range of industrial goods, from furniture to clothing to higher value stuff like electronics, where you have all the components

and the raw materials right there. I mean, China is the world's second largest economy. I mean, China is the world's second largest economy. China can drive an enormous amount of economic growth simply making stuff for its own 1.4 billion people. And China will continue to do that as well as continue to be an export powerhouse. And so anybody writing an obituary for globalization is way off base. We're going to continue to trade. We're going to continue to look to different parts of the globe for specialties, and countries will still be defined by their various competitive advantages. But it is the end of the way in which we've conceived of globalization,

where China is the factory floor to the world. We've come out of this experience of the pandemic, combined with the trade war, with a profound understanding that there are risks that we used to pretend weren't there at all. And that argues for all multinational companies, not just Chinese multinational companies, all multinational companies, not just Chinese multinational companies, all multinational companies, keeping their production close to their ultimate markets.

We now have industrial policy in the United States designed to ensure that things like advanced computer chips can be made in the U.S., that electric vehicles and batteries can be made in the U.S. And this stuff involves erecting plants that cost billions of dollars in places like the U.S. and places like Mexico. China will still be an incredibly significant place for manufacturing, but there will be others. they will be driven by an emphasis on regionalization and an appreciation of the value of making your goods closer to where you're actually selling them. And that is a fundamental shift in the way the entire global economy works. Yeah, big time. I mean, it's really like the world map is being redrawn in real time.

Peter, thank you. Thank you. We'll be right back. Here's what else you should know today. It was one year ago this week that we spoke on the telephone, Mr. President. It was very late at night in Washington, very early in the morning here in Kyiv. On Monday, President Joe Biden made a surprise visit to Kyiv to meet with Ukrainian President Vladimir Zelensky. And I don't know if you remember what you said to me, but you said, and I quote, gather the leaders of the world, ask them to support

Ukraine. Biden rode 10 hours by train from the Polish border, the first time he had traveled to Ukraine since Russia invaded a year ago. The American stands with you and the world stands with you. Kiev has captured a part of my heart, I must say. He praised Ukraine's resilience and announced an additional $500 million in U.S. military aid. And he criticized Russia's president, Vladimir Putin, who's expected to make a speech of his own on Tuesday in Moscow. We know that there'll be very difficult days and weeks and years ahead.

But Russia's aim was to wipe Ukraine off the map. Putin's war of conquest is failing. And another earthquake hit Turkey and Syria on Monday. The 6.3 magnitude quake struck near Turkey's Hatay province, one of the areas most devastated by the earthquakes that struck earlier this month. Those quakes killed more than 46,000 people. Finally, over the weekend, Jimmy Carter, the 39th president of the United States, entered hospice care. He served from 1977 to 1981, but lost re-election after a sour economy and an American hostage crisis in Iran. At 98, Carter is the longest living president in American history. Today's episode was produced by Diana Nguyen, Rob Zipko, and Will Reed, with help from Stella Tan.

It was edited by Paige Cowett, with help from Anita Botticeau. Contains original music by Dan Powell, Sophia Landman, and Marion Lozano, and was engineered by Marion Lozano. Our theme music is by Jim Brunberg and Ben Lansford of That's it for The Daily. I'm Sabrina Tavernisi. See you tomorrow.