2025 Upgrading of China Agrochemical Industry to Face the Manufacturing Return to U.S.

By David Li

At the very beginning of 2025, if we were to choose one of the most important topics to discuss, it would be the upcoming 60% additional tariffs on Chinese products by the new U.S. administration. The U.S.-China trade friction is about to enter a new phase. For Chinese pesticide companies, the first task after the New Year is the need to reconsider their globalization strategy.

Currently, more than 80% of China’s pesticide supply capacity is supplied to the international market, and the U.S. market is undoubtedly one of the key target markets for Chinese pesticide companies. Chinese agrochemical companies are not only supplying pesticide active ingredients (AIs) to U.S. distributors, but more importantly, they are also supplying AIs to multinationals and generic companies by B2B business model. Changes in trade policy between countries will have a significant impact on the future supply chain strategies of crop protection companies in both the U.S. and China.

The U.S. policy is now oriented toward promoting the repatriation of manufacturing. In order to cope with the hollowing out of the U.S. manufacturing industry caused by globalization, the trend of manufacturing repatriation also marks the end of the course of outsourcing of domestic industries to emerging countries since the 1990s, when the U.S. and overseas developed economies were deeply involved in globalization. For the Trump administration, claiming an increase in tariffs is certainly adding bargaining chips.

Geopolitical risks are forcing supply chains to shape-shift. From 2009 to the present, the U.S. chemicals manufacturing sector has added 4% of its value, topping the manufacturing sector’s value-added rankings. In terms of Foreign Direct Investment (FDI) in chemicals, FDI in the U.S. chemicals manufacturing accounts for 38% of total FDI in 2023. This may be due to the shift of traditional European chemicals to the U.S. after the outbreak of the Russia-Ukraine war. The return of energy industry and chemical production to U.S. could lead to a further recovery of the U.S. crude oil downstream development. This will give the potential for growth in downstream fine chemical production in North America.

In order to protect the U.S. domestic manufacturing industry, in addition to the tariffs that the Trump administration will impose on Chinese products, the U.S. may impose additional tariffs on neighboring countries, ASEAN countries, and European allies. While the purpose of targeting different countries varies, the immediate result for U.S companies and multinational companies will be an increase in the cost of importing products directly from China. At the same time, it will become more difficult for Chinese companies to enter the U.S. market through third countries’ investment.

On November 29, 2024, the U.S. Department of Commerce announced that it was conducting an antidumping investigation of crystalline photovoltaic cells (whether or not assembled into modules) from four Southeast Asian countries, including Cambodia, Malaysia, Thailand, and Vietnam. The preliminary affirmative determination was confirmed as: the anti-dumping duty rates of the four countries range from zero to 271.28%. However, the final determination will be announced in mid-2025.

Since then, almost all of the investments made by Chinese companies in Southeast Asian PV capacity in previous years have turned out to be sunk costs. The likelihood of Chinese PV companies investing in capacity and entering the U.S. market by investing in a third country is almost nil.

For the United States’ neighbor, Mexico, the situation could be even worse.

According to Caixin Global, “U.S. President-elect Donald Trump has said he will slap 25% tariffs on imports from Mexico, a move that experts say could jeopardize Chinese companies’ investments in the country while increasing prices for American consumers and hurting the broader economy. The golden age for Chinese companies investing in Mexico may be coming to an end.”

China’s manufacturing base is relatively well-developed with almost all basic consumer goods coming from Chinese producers. This fact is enough to worry politicians, even if cost-effective products made in China can help to reduce inflation in other countries. China has a competitive advantage in all areas of product manufacturing besides chips and other high-tech industries. In 2025, perhaps more anti-dumping investigations against China and India will continue to occur.

If we want to analyze the motivation for this event, then we need to ask a key question: who will be the beneficiaries? Obviously, U.S. domestic capacity is the biggest winner. Therefore, there is only one key point, and that is the return of manufacturing to U.S. territory.

In the post-pandemic era, the global economy is not recovering as quickly as it should. Starting in 2024, all regions of the globe are experiencing the effects of extreme weather, making global agriculture a huge challenge.

The bumper harvest of agricultural products in the South America has lowered prices in the global agricultural market. While low food prices are more favorable for consumers to secure their basic livelihoods during the economic downturn. However, low agricultural prices have also dampened farmers’ returns to some extent, thus making them hesitant in the input purchasing process.

A negative feedback loop in the market is festering and affecting upstream Chinese pesticide suppliers, whereby low prices trigger hesitation in purchasing, which in turn prompts distributors to have to sell at discounts or lower prices. This supply chain whip effect from the end users to the upstream raw material supplier is greatly affecting the offers of Chinese manufacturers.

Of course, overcapacity in China is also a cause for concern. But in the case of chlorantraniliprole, for example, the so-called huge production capacity of Chinese suppliers has not really been put into practice. With an overall operation rate of less than 20%, the production of chlorantraniliprole AI in China is more concentrated in the hands of enterprises with the advantages of the whole upstream industrial chain. This situation is spreading to other product categories in the Chinese pesticide supply market.

In addition, the Chinese government level is also conscious of adjusting the enterprises to the abandon price based on their scale effect and capacity planning. In 2025, China’s overcapacity problem will rapidly change due to the adjustment of market factors and policy guidance.

We have undoubtedly all seen Chinese pesticide continue to languish at low levels during the low return of investment phase of agriculture over the past two decades. Therefore, if we have more than ten years of experience in the field of pesticide sourcing in China, the current low-price predicament of China’s pesticide supply should not come as a surprise.

We need to always remember the theorem that supply and demand determine price. And the price will also adjust the balance of supply and demand in the opposite direction. It’s like the positive and negative sides of a coin, but it’s a whole. Therefore, market supply prices will eventually return, we just need to wait until the next global economic up-cycle.

As a consulting firm, our team never gives advice but can offer some possible options.

For most Chinese pesticide companies, they have had only one behavioral pattern over the past two decades, to be firm customer followers. As suppliers to multinationals, Chinese pesticide companies have performed very well, whether in terms of process improvement or cost reduction, etc. Service orientation is the strength of Chinese agrochemical companies.

However, from 2025 onwards, Chinese pesticide companies will need to undergo a fundamental “cultural upgrade” due to geopolitics and strategic adjustments by key customers such as multinationals. To be precise, Chinese companies should change from “followers of key customers” to “partners of key customers.”

As Chinese pesticide companies will need to compete in the market in a “much narrower environment” in the future. How to find cooperation opportunities in the gap of competition with other players becomes the breakthrough of business development for Chinese players.

Acquiring multinational companies’ product assets in the long tail and thus access to channels may be an option for Chinese firms. But deeper strategic partnerships from the supply chain to the marketplace may be even more important. Strategic supply partnerships, third-party alliance partnerships, niche marketing partnerships, and even innovation partnerships may be the match between Chinese companies and MNCs and local distributors.

If Chinese companies need to respond to the return of manufacturing to U.S., then the supply of AIs and formulations for the U.S. market may be able to be supplied directly from the multinational’s production base to the overseas branch of the Chinese pesticide company. All possible business model innovations should be on the table for Chinese companies, but only if they have the key talent to operationalize such a partnership and the willingness of multinationals and regional distributors to work together with Chinese to maintain market order.

While we cannot rule out the possibility that some Chinese companies are competing in the market with low prices, most of the leading Chinese pesticide companies we spoke to, with almost no exceptions, want to protect the “value of the target market.” Chinese agrochemical companies are more willing to innovate and differentiate their products than to offer low-priced, low-quality crop protection products. In the future, their profits will come mainly from their innovative formulations, biologicals with differentiation, and programs with patented compounds plus seed.

On this basis, I believe that Chinese companies should “begin with the end in mind.” Let’s imagine that a Chinese company has already established an overseas branch, local channel, and an overseas production base, how should the Chinese pesticide company run this overseas subsidiary? What value will this company bring to the local community and local partners? This is one of the most critical questions that many Chinese top management overlooks.

Perhaps the experience of a large Japanese trading company with a history of 150 years can give Chinese enterprises some inspiration. I used to work for Mitsubishi Corporation China Commercial Co., Ltd. And when I think about the management of Mitsubishi Commerce’s subsidiary in China, I think there is one thing that is very worthwhile for Chinese companies to learn from. That is Japanese companies’ insistence on localization. This includes localization of mindset, localization of management team, localization of supply chain and business, and localization of employment.

I have mentioned before that the cultural distance between China and the rest of the world is much greater than the gap in terms of economic volume. This is mainly due to the fact that there is an acute shortage of highly educated internationalized human resources in Chinese companies. In Japan, Japanese employees of large trading companies, especially businesspeople, are prepared to be sent to other countries from the first day of their employment. In Chinese companies, employees are more likely to follow the instructions of their immediate supervisors than to think independently. This difference in talent development makes it impossible for Chinese employees to quickly work with local staff with a local mindset when they are sent to overseas subsidiaries.

For the management team, the Japanese company will have Japanese managers in each business unit to participate in the daily business activities and to communicate and report to the headquarter in Tokyo in a timely manner. More importantly, Japanese executives are receptive to advice and strategies provided by local staff, acting more like a collaborator from Japan than a supervisor.

Overseas company executives of Japanese companies also have a degree of autonomy in making decisions. The dotted line reporting to the headquarters, while the actual decisions are made by the branch office on its own, allows the branch office of a Japanese company to have a higher degree of initiative in the decision-making and implementation process, thus stimulating the vitality and competitiveness of the branch office team. However, Chinese companies need to wait for the judgment from the big boss, the person who did not know exactly what happens in their overseas market.

More importantly, although the overseas subsidiaries of Japanese companies are subordinate to the head office in terms of corporate structure, Japanese subsidary companies can independently choose competitive local suppliers in response to the local business environment, thus enhancing the overall efficiency of the company’s supply chain and reducing operating costs. This positive attitude toward local cooperation also brings stronger influence to the development of Japanese companies in the local market. The soft power of Japanese companies can also effectively mitigate policy and regulatory resistance to competing in the local market. Cultivation of local market talent, contribution to local tax revenues, and generous investment in local social development all make Japanese companies attractive to local talent.

Therefore, before Chinese pesticide companies think about how to deal with trade friction and globalization problems, my suggestion is that they should first think about how to integrate into the development trend of the world in the future. More importantly, what kind of value Chinese companies want to deliver locally. If the key issues at the bottom of the logic can be solved, then the problems of trade friction and trade barriers may be solved accordingly. •

David Li: SPM Biosciences
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