Chinese battery producer Leoch International Technology has been pressing ahead with the first instalment of its US$200 million factory in Mexico before a June launch, with the Hong Kong-listed firm just one of many getting to grips with unpredictable US tariff policies.
Executive director and chief investment officer Helen Hong Yu said the company originally chose the country because of its tariff-free status under the United States-Mexico-Canada Agreement and its proximity to the US.
Setting up directly in the US would have also incurred higher costs and talent recruitment would have been more difficult.
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She said the Hong Kong-listed company was also planning to take its non-China business public in the US.
But US President Donald Trump’s wide-ranging tariff policies caught her, and many others, off guard.
“When [Trump] suddenly raised tariffs, everyone found it quite surreal and asked if he was really going to impose such increases?” she said.
Since taking office, Trump has ramped up the tariff on Chinese imports to 145 per cent, following a string of tit-for-tat moves between Beijing and Washington. But he has also announced a 90-day suspension on the implementation of “reciprocal” tariffs on other US trade partners.
Mexico is not entirely out of the firing line, although it has so far avoided being added to the list of countries facing the so-called reciprocal duties. Certain goods from the country are still subject to tariffs if they are not considered compliant under the trade agreement.
Hong said the latest levies contrasted with those previously applied to its goods entering the US – 25 per cent for China-made products and 3.7 per cent for those from Vietnam and Malaysia.
She said the company had pressed ahead with relocating its factory to Mexico amid the threat of tariffs, even though production costs in the country were 15 per cent higher than in China.
The first phase of the new factory in Monterrey city, which is located on a 200-acre plot, will be completed in May and start production in June. As the first on its own land in Mexico, the initial development was expected to be able to meet demand for around 15 per cent of sales, Hong said.
“Currently in Mexico, we already have a relatively small rented factory that has been in operation since last year,” she said, referring to another assembly plant worth several dozen million yuan in an industrial estate in Monterrey, in the northeast part of the country near the border with the US.
Leoch plans to shift its production for the US market from Vietnam, Malaysia and China to Mexico. Last year, the company’s sales in the Americas accounted for 15.9 per cent of its 16.1 billion yuan (US$2.2 billion) worth of revenue.
Its markets in Europe, the Middle East and Southeast Asia are primarily served by production in Malaysia and Vietnam. The company’s operations in India cater to the country’s domestic market.
Hong predicted sales would expand this year by 20 to 30 per cent, driven by the demand for industrial batteries for data centres, the “explosive” growth of artificial intelligence and the need for regular car battery replacements.
She said Leoch used Free on Board (FOB) or Cost, Insurance and Freight (CIF) terms in its transactions with US-based importers, which meant tariffs were borne by customers and “profits have not decreased”.
With 11 factories in mainland China and 10 overseas, the company’s products and services are present in 150 regions.
Hong added that the Leoch’s experience in overseas expansion gave it an edge over others that might struggle to shift production from Southeast Asia to other regions amid the imposition of sweeping tariffs.
Vietnam was one of the countries that benefited from companies embracing a “China plus one” strategy to set up part of their supply chains in neighbouring economies as a hedge against tariffs and geopolitical risks.
But the tariffs have put the moves into question, with Vietnam threatened with one of the highest rates.
Marshall Lee, head of climate and sustainability at insurance broker and risk manager Marsh Asia, warned that any companies looking to shift production should factor access to talent, geopolitical risks, dealings with local businesses, energy availability and the setting up of financial accounts.
Ben Simpfendorfer, a partner at management consultancy Oliver Wyman, said countries that had strong free trade agreements were “a priority for companies thinking of relocating”.
He noted that global brands wanted suppliers with facilities in multiple countries for flexibility.
“Relocating as part of a global brand’s supply chain helps to de-risk. Relocating alone is high-risk,” Simpfendorfer said. “Hiring a good chief financial officer and human resources head is key to taking control of financial and talent challenges.”
He added that having factories located “next to larger global players” was one way to ensure there would be “sufficient talent and labour”.
Bag retailer Moral Team is one of the companies slowing down its development in the US to focus more on the mainland, Taiwan, Singapore and Japan, while also exploring Europe.
“About 10 per cent of our business is in the US, tariffs will definitely have some impact on us,” said Charlotte Chui Hiu-yan, the marketing manager at the Hong Kong-based company.
Sunarsih Krisfilia, who was born in Hong Kong and is a director of the Indonesia Chamber of Commerce in the city, said her joint venture, Essence Guangzhou, was considering moving production to the southeast Asian country to benefit from a lower tariff rate.
She said the joint venture produced 500 million yuan worth of cosmetic, skincare and shower products on the mainland for the US market.
“War is not good for [any] business and entrepreneur. I don’t think Indonesia or other countries can benefit from this war of tariff ... because they all lose,” she said.
“It’s very realistic right now. We already increased our cost [for exports] to the US, so I don’t think I can benefit. I can only escape or survive.”
Additional reporting by Oscar Liu
More from South China Morning Post:
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