---
title: "Going abroad is China's scaling law"
type: "News"
locale: "en"
url: "https://longbridge.com/en/news/218401346.md"
description: "Tianfeng Macro pointed out that there are three main motivations for Chinese companies to go abroad: actively seeking low-cost production bases, responding to trade frictions, and brand strategy. As the cost of production factors rises, companies are gradually relocating their production bases to lower-cost countries such as Southeast Asia, forming a broader industrial chain and supply chain layout. This trend is not limited to the textile and apparel industry but also extends to fields such as home appliances, where companies enhance their international influence through overseas mergers and acquisitions and the establishment of production bases"
datetime: "2024-10-31T00:35:54.000Z"
locales:
  - [zh-CN](https://longbridge.com/zh-CN/news/218401346.md)
  - [en](https://longbridge.com/en/news/218401346.md)
  - [zh-HK](https://longbridge.com/zh-HK/news/218401346.md)
---

> Supported Languages: [简体中文](https://longbridge.com/zh-CN/news/218401346.md) | [繁體中文](https://longbridge.com/zh-HK/news/218401346.md)


# Going abroad is China's scaling law

The motivations for Chinese companies to go overseas can be roughly divided into three categories.

## **The first is "proactive going overseas" to seek lower production costs**

**As the cost of production factors rises, the growth of labor-intensive industries tends to stabilize, prompting companies to relocate their production bases to economies with lower costs**, such as Vietnam and other ASEAN countries, represented by the textile and apparel, and home appliance industries.

From 2011 to around 2017, China's textile and apparel industry entered a plateau period. To reduce labor costs, textile and apparel companies began to shift to countries with lower costs, such as Vietnam and Cambodia. The intensification of Sino-U.S. trade friction in 2018 further propelled this trend, with companies more actively relocating their production bases to regions with low labor costs, low tariffs, and urgent demands for industrial development to gain more favorable cost advantages.

**Initially, the processing segment of the textile and apparel industry chain began to move overseas, gradually expanding to areas such as raw materials and auxiliary materials.**

In the past decade, several upstream dyeing and textile companies have expanded their production capacity in Southeast Asia, such as Huafu Fashion establishing a 300,000-spindle spinning and 20,000-ton dyeing project in Vietnam, Baolong Dongfang's subsidiary in Vietnam having a production capacity of 1 million spindles, and Shengtai Group's construction project of 100,000 spindles of yarn in Vietnam.

**Branding has become a new strategic goal for companies**, with many apparel companies like Youngor enhancing their international influence through overseas mergers and acquisitions. However, **the demand for fashion, quality, and emotional value among consumers in different countries is increasing, and merely pushing existing apparel products and brands into the international market cannot gain sufficient attention and recognition in fierce competition.**

Similar to textiles and apparel, since the 1990s, Chinese home appliance companies have actively expanded into overseas markets to explore new market opportunities.

By the late 1990s to the early 21st century, leading home appliance companies such as Haier, Midea, Gree, and Hisense established production bases in countries like Vietnam to shorten the distance between production and consumption, thereby better serving local customers. Those companies that had not yet established brand recognition went overseas through OEM production and other means.

Chinese home appliance companies represented by Haier Smart Home have made some achievements in building "international brands." In Vietnam, consumers may not be very familiar with Haier, but they are quite familiar with AQUA. In 2011, Haier acquired Sanyo Electric's washing machine, refrigerator, and other home appliance businesses in Japan, Indonesia, Malaysia, the Philippines, and Vietnam.

After more than 20 years of development, AQUA's position in the Vietnamese market has become increasingly solid. By the end of 2022, 15 million households in Vietnam used AQUA brand or AQUA manufactured products, serving more than half of the households in Vietnam.

**In brand operation, Haier Smart Home has not tightly bound AQUA with Haier, emphasizing its identity as a Chinese brand, but has positioned AQUA as a relatively independent brand, focusing on meeting local user needs and winning market share by providing high-quality products.**

## **The second type is "proactive going abroad" by leveraging advantageous products to expand overseas markets**

**Enterprises rely on their competitive advantages in international markets to actively establish production bases overseas in order to further expand their market share.** The construction machinery industry is a typical representative of such advantageous enterprises going abroad.

In the past, China's construction machinery industry primarily "hitched a ride" abroad, mainly relying on participation in international engineering projects and infrastructure cooperation under the "Belt and Road" initiative. The research and development, sales, and service of construction machinery products need to be more closely aligned with local demands. After years of development and exploration, enterprises have established an international development model that includes overseas production bases, localized quality services, and cross-border mergers and acquisitions, achieving independent "going abroad."

Taking SANY as an example, since 2002, SANY has embarked on a journey of globalization through investment in factories and acquisitions. Between 2006 and 2009, SANY successively established research and manufacturing bases in India, the United States, Germany, and Brazil, becoming one of the earliest construction machinery enterprises in China to invest in overseas factories. SANY's localization strategy overseas is not limited to factory establishment but also includes localizing its workforce.

For instance, SANY India has achieved over 98% localization of its employees. Through localized production and services, Chinese brands are gradually being accepted and recognized in overseas markets.

Due to the competitive advantages in cost and pricing of Chinese-made construction machinery compared to products from Europe, the United States, and Japan, the rapidly growing export trend has caused a certain impact on the local manufacturing industries of these countries. This has led some countries to implement measures such as raising import standards, enhancing technical restrictions, and adjusting tariffs to limit the influx of Chinese products, with anti-dumping and countervailing investigations becoming common methods.

**The key for construction machinery enterprises seeking breakthroughs lies in overseas manufacturing and localized management.** In the face of export barriers in the European, American, and Southeast Asian markets, leading construction machinery enterprises are cleverly circumventing export restrictions through mergers and acquisitions and the establishment of overseas production bases, minimizing the impact of tariffs and other measures.

## **The third type is "passive going abroad" to avoid trade frictions**

**Faced with the increasing trade restrictions imposed by Europe and the United States on China, enterprises are forced to choose "going abroad," shifting their business focus from a single export model to a diversified development path that includes overseas production capacity layout.** These enterprises are often the "top performers," with products that are usually more competitive in price and performance compared to similar products from Europe and the United States.

This is represented by photovoltaic, new energy vehicles, and batteries. Since 2011, in response to the "double-reverse" investigations initiated by European and American countries against Chinese photovoltaic products and the subsequent trade restrictions, photovoltaic enterprises have expanded their production capacity to Southeast Asian regions such as Malaysia, Vietnam, Thailand, and Cambodia, serving as a springboard for exporting capacity to the global market.

**The relocation of the photovoltaic industry is closely related to the trade barrier measures implemented by the United States.** Initially, enterprises focused mainly on components and battery cells, gradually expanding upstream to include silicon wafer manufacturing and crystal pulling processes. Subsequently, the entry of auxiliary material companies such as Sunshine Energy, Foster, and Mingguan New Materials has promoted the development of auxiliary materials industries such as inverters, glass, adhesive films, back panels, frames, and quartz sand in Southeast Asia

However, as the "exemption period" for tariffs imposed by the United States on four Southeast Asian countries expires, new trade barriers are beginning to form. In response to this challenge, Chinese photovoltaic companies have mainly adopted three countermeasures: establishing production bases in other Southeast Asian countries, exploring new markets, and halting losses.

In the short term, transferring production capacity to other Southeast Asian countries to continue selling products to the U.S. market may be an effective strategy. **However, in the long run, to cope with the trade barrier network woven by the United States, the best way is to transform into a larger network, covering the industrial chain to more countries and regions, and allowing more stakeholders to join in the division of labor and cooperation in the industry and share benefits.**

## **Common Points of Three Types of Going Abroad**

Whether actively or passively going abroad, there are several common points.

The first is that **in most cases, companies do not migrate the entire industrial chain overseas, but choose to relocate specific production processes such as processing, production, and assembly, which is a form of "spillover" from the Chinese supply chain.**

For example, passive outbound companies responding to escalating trade frictions have spillover processes related to restricted areas. Although these companies initially "went abroad" passively, they gradually found a suitable development rhythm through "responding to challenges." Some companies first established a foothold overseas through OEM production, then began to build their own brands to serve local customers, gradually accumulating service experience, distributor networks, and customer credibility.

The second is that **building an international brand is a common strategy for outbound companies, but the process of going abroad is not smooth sailing and can even be described as fraught with difficulties.** The success of domestic business models in China does not guarantee success abroad; relying on past successful experiences in different cultural and political contexts may actually hinder companies' efforts to expand internationally.

For example, in recent years, Chinese companies have frequently encountered strict scrutiny in India. Some measures target all foreign investment companies, such as increasing import restrictions and strengthening data privacy regulations, while others specifically target Chinese companies, such as restricting Chinese investments and selective law enforcement against Chinese firms.

The third is that there are many factors for successful outbound ventures, but just as American observers have praised the management efficiency of Japanese companies in the past, **the management capabilities and organizational efficiency of modern Chinese enterprises are also core competitive advantages for Chinese outbound companies.** For instance, many "Chinese cadres" have gone to Vietnam as "technical experts" and "management personnel," mastering Vietnamese to communicate with local governments and workers, quickly establishing a foothold in management.

The management model of Chinese enterprises cannot simply be replicated in other regions. Outbound companies must confront the challenges of cultural diversity, and continuously reflecting, adapting, and flexibly adjusting business strategies are essential conditions for success abroad.

**In the long run, regardless of whether the motivation for Chinese companies to go abroad is active or passive, they ultimately converge on the path of internationalization. In a coincidental manner, Chinese companies have transformed into a larger network through going abroad, dispersing the industrial chain, supply chain, and benefit chain to more countries and regions. This is also China's scaling law and the U.S. AI "scaling law."** It has formed the most important narrative dispute in today's world economy.\*\*

Authors of this article: Song Xuetao (S1110517090003), Li Mengying, Source: Xuetao Macro Notes, Original Title: "Going Abroad is China's Scaling Law"

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