For decades the world’s corporate titans have seen China as an essential place to do business. Chinese firms, it turns out, were no different. Their domestic market was vast and growing at a dizzying pace, so they had little reason to hunt for customers abroad. China’s colossal manufacturing sector, meanwhile, with its legions of cheap workers, made producing goods elsewhere unnecessary. In spite of the fuss in much of the rich world about Chinese investment, Chinese firms have a comparatively small global footprint.

Firms listed in China generated a mere $1.5trn in foreign revenue in 2023, whereas those listed in America took in $5.8trn and their European counterparts $6.4trn. China’s stock of outbound foreign direct investment (fdi) was equivalent to just 17% of its gdp last year, compared with 34% for America and 49% for Germany. Many of those investments, moreover, focused on securing access to raw materials or acquiring foreign intellectual property. Even China’s status as the world’s biggest exporter is slightly misleading: a big, although shrinking share of what it ships abroad is produced by foreign businesses.

This relatively inward focus is now changing—quickly. Since 2016 Chinese firms’ foreign sales have more than doubled. Their greenfield fdi (building a new mine or factory, say, rather than buying one) surged to a record $162bn last year, up from $50bn a year before, according to fdi Markets, a data provider. Nearly three-quarters of that was in manufacturing.

Home affront

This outward expansion is a reflection of the dwindling allure of China’s domestic economy. It no longer grows as zippily as it once did. It is also fiercely competitive, plagued by price wars in industries from cars to wind turbines. Even excluding the troubled property sector, the average return on invested capital for China’s listed non-financial firms was a meagre 4.9% last year, compared with 6.6% for European companies and 8.7% for American ones.

The faltering domestic economy has induced ever more Chinese firms to “go out”, to use a slogan with which the government cajoled them to invest abroad in the early 2000s. Many would like to increase sales in rich countries, which account for three-quarters of consumer spending outside China. Expanding in those markets, however, has become tricky for Chinese firms as the political mood has shifted against them. Chinese carmakers have been slapped with hefty tariffs on both sides of the Atlantic. Western politicians grumble about Shein and Temu, two fast-growing Chinese e-emporia. TikTok, a short-video app, faces a ban in America unless its Chinese parent, ByteDance, sells it.

Some Chinese firms are trying to skirt trade barriers by shifting production from China to other developing countries. That is an approach long taken by Chinese solar firms, which were, in effect, locked out of the American market in 2012 by anti-dumping duties. America imports almost no solar panels directly from China, but buys lots from South-East Asia, where Chinese firms like JinkoSolar, Trina Solar and Longi, the world’s three largest producers of solar modules, have built big factories.

That strategy is now being emulated in other industries, which explains Chinese firms’ surging investment in manufacturing abroad. Although some factories are being built in the West, the lion’s share of activity is in the global south, home to nine of China’s top ten destinations for greenfield fdi last year (see chart 1). In July byd, a Chinese electric-vehicle company, opened a new car factory in Thailand, its first in South-East Asia. catl, a Chinese battery firm, is expanding production in South-East Asia and reportedly exploring investments in Morocco and Turkey.

Trade data suggest that these new factories rely heavily on imported Chinese components rather than local supply chains. In the top ten destinations for Chinese greenfield fdi, imports from China of intermediate goods used in manufacturing have nearly tripled over the past decade. cosco, a Chinese shipping giant, recently added capacity between China and Mexico, in large part to ship more to factories near Mexico’s border with America.

Johnson Wan of Jefferies, an investment bank, reckons the main reason Chinese firms are building factories abroad is to avoid tariffs. Proximity to China’s robust supply chains has typically been a competitive advantage for Chinese firms, notes Guoli Chen of insead, a French business school. True, factory wages in China have risen sharply, quadrupling since 2010 to over $8 an hour, well above the average in South-East Asia. But manufacturing at home is usually still the cheaper option, thanks to China’s huge economies of scale and well-developed infrastructure.

In time, though, the commercial rationale for manufacturing abroad will strengthen. Over the past decade China’s Belt and Road Initiative has channelled more than $1trn of investment into power networks, railways and ports across the global south (much of which has flowed through Chinese firms such as State Grid, a power company, crrc, a maker of trains, and cosco). Those investments have made recipient countries more attractive places in which to manufacture.

For Chinese firms, that is just as well. Western governments are beginning to crack down on their use of factories in the global south in effect to disguise the origins of largely Chinese-made goods. In June American tariffs were extended to many of the solar products made by Chinese firms in South-East Asia, after the Department of Commerce judged that the factories in question were adding little value beyond final assembly.

Aurora australis

Another popular strategy for intrepid Chinese firms encountering growing hostility in the West is simply to peddle their products elsewhere. According to The Economist’s calculations, drawing on estimates from Morgan Stanley, a bank, listed Chinese firms have nearly quadrupled their sales in the global south since 2016, whereas Western firms have grown theirs by only a third. The $800bn in sales Chinese firms made in these countries last year exceeded what they made in rich ones (see chart 2).

Chinese companies battling Western rivals at home have tended to start by offering cheap alternatives. That has left them well positioned to serve poorer consumers in the global south. Half of the smartphones purchased by Africans are made by Transsion, a Chinese company that sells many of its devices for less than $100 under such brands as Tecno, Infinix and Itel. Chinese makers of household appliances, including Haier and Midea, are also dominant in Africa. Brazilians and Mexicans are among the biggest consumers of Shein’s inexpensive clothing.

As Chinese firms have honed their mastery of manufacturing, they have shed their reputation for poor quality, at least in the global south, note Lourdes Casanova and Anne Miroux of Cornell University. That has helped them sell more complex products, too. In Thailand Chinese carmakers including saic and byd accounted for 18% of sales in 2023, up from just 6% in 2020, according to MarkLines, a data provider. They account for half of the cars sold in Russia, which Western rivals have abandoned since its invasion of Ukraine. Mindray, a Chinese maker of medical equipment, is the leading supplier of patient-monitoring systems in Latin America. Chinese makers of wind turbines, such as Goldwind and Envision, have also been expanding sales in emerging markets.

Chinese firms will find it easier to sell in the global south if they shift production there, too. Transsion, for example, has a factory in Ethiopia, which allows it to distribute phones across Africa quickly and cheaply. Producing locally also fosters goodwill. Whereas Westerners are increasingly suspicious of China, many in the developing world think it plays a positive role in their domestic economy, according to Pew, a research centre (Indians are a notable exception). Building factories in poorer countries helps reinforce that view and casts China as a spur to development, rather than a threat to local livelihoods.

In a testament to its strengthening brand, China Inc is gaining momentum in the global south even in industries that do not rely on its manufacturing prowess. Cotti Coffee, a Chinese coffee chain founded in 2022, now has more than 7,000 stores across Asia and the Middle East. Of the ten countries with the most TikTok users, nine are in the developing world.

All this should ring alarm bells at Western multinationals. They have been steadily edged out of China in recent years by home-grown competitors. Many harbour ambitions to expand instead in the same fast-growing economies in which their Chinese rivals are now gaining sway. As recently as 2016 listed American and European firms together generated 15 times the foreign sales of Chinese firms in the global south. That ratio has since shrunk to five. Chinese firms already outsell Japanese ones in the developing world.

Western firms still enjoy some advantages. They have a decades-long head start building global brands and hiring local staff who understand what consumers in their markets want. China’s geopolitical ambitions, meanwhile, sometimes cause commercial problems. Its territorial claims in the South China Sea have soured relations with some of its South-East Asian neighbours. China is also unpopular in countries that received big investments through the Belt and Road Initiative but have struggled to service the associated debt, such as Sri Lanka and Zambia.

It is early, then, in the contest for the consumers of the global south. But Western firms may have less time than they think before Chinese rivals gain the upper hand. Protectionist politics at home will not save them abroad.