Chinese companies setting up new plants in US

A growing number of labor-intensive companies in China are expanding their production lines into the US where the costs are believed to be lower and local governments are issuing policies to restore their manufacturing industry.

Golden Dragon Precise Copper Tube Group, a Chinese copper pipe maker in Xinxiang, Central China's Henan Province, recently announced that it had finished the construction of a plant occupying 446,667 square meters (44.6 hectares) in Alabama, a state in southeast US.

With an investment of nearly $100 million, the plant is now in operation, aiming to produce 60,000 tons of seamless refined copper pipes every year, said a press release posted on June 11 by the company on its official website.

Golden Dragon is not the first one to set foot in the world's biggest economy and will not be the last one either.

Zhejiang textile manufacturer Keer Group in last December bought space in South Carolina, planning to build a 150,000-square-meter plant in five years with investment of $218 million.

According to the Ministry of Commerce, Chinese companies' direct investment into the US surged 144 percent in the first five months through May 2014 from a year earlier, hitting $2.03 billion, while the total amount dropped 10.2 percent year-on-year.

With China's labor costs spiking by 10 to 15 percent annually, experts say that an increasing number of Chinese companies see less financial benefit in staying in their home market.

Low energy costs as well as the establishment of high-tech plants in the US will help them level the playing field, Wang Danqing, a partner with Beijing-based ACG Management Consultancy, told the Global Times Monday.

Low costs

Li Changjie, president of Golden Dragon, believes that running a plant in the US requires less expenditure and is more economical than in China, even though the company has to pay higher salaries to local employees.

He was quoted by the China Business News on Friday as saying that electricity in the US market, for instance, usually costs 0.38 yuan a kilowatt-hour, below the more than 0.67 yuan per kilowatt-hour in China, which means that the US plant can save 51.94 million yuan every year compared with other plants in Xinxiang.

Other items such as lubricant and taxes in the state are either cheaper or nearly the same as in China, according to Li.

Keer will also see reduced spending, estimating that its US plant can save 750 million yuan ($120 million) every year due to cheaper cotton in the US, according to media reports.

A report issued in April by US-based Boston Consulting Group (BCG) says that many emerging markets that are known for low costs are not cheaper than the US any more.

"China's manufacturing-cost advantage over the US has shrunk to less than 5 percent," reads the report.

In addition, the construction of plants in the US can help companies like Golden Dragon avoid anti-dumping duties levied by the US, which further offset the high labor costs, said Bai Ming, a research fellow at the Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce.

Golden Dragon started to build a US plant in 2010, in response to the US Department of Commerce's decision of setting anti-dumping duties ranging from 11.25 percent to 60.85 percent on seamless copper pipes imported from China, according to the company.

Favorable policies

Regardless of the costs, Chinese manufacturers also find policies offered by local governments for boosting the manufacturing sector and increasing employment opportunities appealing, Bai told the Global Times Monday.

According to the BCG, the US has lost almost 7.5 million industrial jobs since the employment in the sector reached the highest point in 1979, as the country's manufacturers moved production out to low-cost countries and regions.

Given rising unemployment rates and a depressed economy, US President Barack Obama emphasized in a State of the Union address in February 2013 that the manufacturing sector is a key solution and announced it would build three manufacturing innovation bases.

State governments are devoting full efforts to attracting overseas investment.

In order to draw companies like Golden Dragon, the government of Alabama, one of the poorest states in the US, promises to offer subsidies of up to $20 million for foreign companies who have directly invested $100 million in the state and created 100 jobs.

Golden Dragon has reportedly acquired more than $15 million in subsidies from the local government.

Since 1967, there had been no big manufacturing plants opening in the state, according to media reports.

Li noted that the state also fundraised $4 million to build a road and railway bridge for Golden Dragon's US plant.

Challenges

But not all Chinese manufacturers can receive such a warm welcome and favorable policies, said Bai, noting that State-backed companies or those in sectors like energy resources and telecommunication equipment will face strict scrutiny from the US government.

An affiliate of major Chinese heavy machinery maker Sany Group, for instance, planned to build wind farms in Oregon in 2012, but the bid was rejected by the US government citing concerns over national security.

The reason why Alabama values Golden Dragon is that the US state expects to further attract Japanese fluorochemical products maker Daikin Industries with the advantage of Chinese companies' copper pipe products that are widely adopted in air conditioner manufacturing, according to Li.

Even though some Chinese companies have successfully set foot on US land, they still seem to face difficulties in the ensuing integration.

Bai said that letting local people manage themselves can hinder potential labor disputes and help Chinese companies blend in rapidly, but this will weaken the parent companies' control over its overseas branches.

Another block is the high barriers to employment visas for Chinese. At an administrative committee meeting of the China Cotton Textile Association held in Qingdao, East China's Shandong Province, in March, delegates with Keer Group said that it is not easy to send technicians and management staff to the US, as the US government only allows companies to hire Chinese workers for jobs that cannot be completed by US people.

Bai expects the Chinese government to devote more effort to talking with the US to open up a visa policy between the two economies.

Meanwhile, Chinese companies should undertake full preparation for these difficulties and work out a clear road map rather than flock to the US in a rush, he remarked.

"Some companies may still find it is expensive to produce goods in the US," Bai noted.