Next stop Mexico? Analysing Chinese companies’ overseas factory choices

In 2023, China’s tyre industry experienced “ice and fire”. On the one hand, large tyre makers with sufficient foreign trade orders or with overseas factories doubled growth in revenue and net profit. On the other hand, the slow recovery of the Chinese market, especially the lack of demand in the radial truck tyre (TBR) sector, has put the entire downstream industry under tremendous pressure.

Some of the larger tyre companies enjoyed healthy performance in 2023. Tyrepress China met with Li Ying, director of international business marketing at Zhongce Rubber, at last year’s Citexpo show, where he told us that compared with other chemical industries, tyre companies achieved an excellent growth trend. The “good trend” mentioned by Li Ying is reflected in the performance disclosures of some Chinese listed tyre companies, such as Linglong, Guizhou Tyre and Jiangsu General, whose net profits have increased significantly. Some companies even increased growth 10-fold.

This impressive performance is inseparable from the strength of exports. The latest data shows that China exported 616 million tyres in 2023, with the export value reaching 150.1 billion yuan (£16.5 billion), maintaining double-digit growth compared with the previous year. Zhang Hui, who oversees foreign trade at tyre maker Wanda Boto, attributed the strong exports to a “consumption downgrade” in the European and American markets. He believes that declining real incomes have prompted European and American consumers to look less at international brands and, instead, increasingly consider “cost-effectiveness” when purchasing tyres. This has created specific opportunities for products made in China.

If foreign trade is one of the critical points for Chinese tyre manufacturers in 2023, setting up overseas factories to avoid trade barriers has become a secret weapon for major tyre manufacturers. A mid-level manager at such a tyre maker described the company’s decision to invest in plants in Southeast Asia as a “decision of last resort.” He opined that international sales, especially the US market, will determine the performance of many manufacturers in 2023.

The importance of the US market also means Mexico has gradually become a hotspot for capital investment. As far as Chinese tyre companies are concerned, Sailun has decided to establish a joint venture in Mexico, and Zhongce Rubber is evaluating its investment intentions. At the same time, Tyrepress China learned that another listed tyre company is also inspecting Mexico. Furthermore, Linglong has hinted that it will invest in “the Americas”.

The trade war between China and the US has caused the latter to set up trade barriers on Chinese products, including tyres. The North American Free Trade Agreement (NAFTA) allows many products exported from Mexico to the United States and Canada to enjoy extremely low or even zero tariffs. Therefore, in the past few years, some tyre foreign trade companies first transported their products to Mexico and then entered the US market from Mexico. However, this situation changed in 2023. In August 2023, Mexico increased import tariffs on 392 customs codes. Corresponding items will need to pay tariffs of 5 to 25 per cent when entering the Mexican market. Among them, the tariff rate of rubber products is as high as 25 per cent. Affected by this direct impact, some Chinese auto parts firms have chosen to establish companies in Mexico.

At the same time, another reason for establishing a factory in Mexico is to establish a stable supply channel to the United States through land transportation. With its backing from the United States, Mexico can avoid the impact of ocean shipping on the supply chain. In the past few years, events such as the pandemic and the Russia-Ukraine conflict have made shipping prices and timeliness key factors affecting foreign trade.

In addition, some auto parts companies considered OE business and followed OEM brands overseas and built factories in Mexico. For example, the Mexican factory of Lingong Group, a well-known Chinese machinery manufacturer (not to be confused with the tyremaker of a very similar sounding name to western ears – Linglong), officially opened in December 2023. XCMG, which belongs to the same industry, also has factories in Mexico. OTR tyres that serve construction machinery are the following high ground that Chinese tyre companies are preparing to seize. In other words, if Chinese companies want to provide OE services for Mexican factories, building factories is pretty much expected.