Exxon Mobil Corp. is forging ahead with a multi-billion-dollar petrochemical complex that’s the cornerstone of its growth strategy in China, even as political tensions push other corporations to reassess their exposure there.
Exxon executives have made multiple trips this year to check progress on the project in Huizhou, China, according to people familiar with the matter who asked not to be identified while discussing internal matters. The facility is the biggest of a dozen or more new projects in the country being developed by companies that will produce ethylene, a plastic feedstock, according to S&P Global. It is designed to allow for expansion beyond its initial build-out, according to six people who worked on the project.
The prize is a major stake in the top growth market for petrochemicals, which supplies the plastics, resins and fibers used by China’s manufacturing industry to make everyday consumer products that end up in homes all over the globe. But diplomatic strain between the US and China — over the Asian country’s friendship with Russia, spying claims, and policy toward Taiwan – has intensified the strategy’s risks.
Exxon’s commitment to the new facility stands in contrast with some other companies’ moves, with the likes of Apple Inc., Nike Inc. and Adidas AG as well as auto-parts makers diluting their supply-chain exposure in China by investing in nearby countries like Vietnam and Thailand.
Many executives are growing more pessimistic about the relationship between Washington and Beijing, according to an American Chamber of Commerce in China survey published in April.
“Business sentiment has definitely soured as the relationship turns more adversarial,” said Nikhil Celly, a professor of international business at the University of Houston. “Previously, almost every company said China was a great place to invest, but now they’ll be more careful, especially with future investments.”
Still, Exxon has powerful incentives to proceed with its investment there. The company views demand growth in petrochemicals, which are derived from fossil fuels, far outlasting that of oil, which it expects to effectively flatline through 2050. Chemicals such as ethylene and polypropylene, the building blocks of plastic bottles, food packaging and medical instruments, are much harder to replace with low-carbon alternatives. Exxon expects global demand for chemicals to increase 42% from 2017 to 2030, compared with just 5% for gasoline.
China is at the center of that explosive growth. Despite a sluggish rebound from its strict Covid-19 policies, its economy is expected to grow faster than the US or Europe over the long term, supporting demand for plastics in a rapidly developing country of 1.4 billion people. China also accounts for nearly a third of the world’s manufacturing.
The Huizhou complex, dubbed “China 1,” is located in Guangdong province and slated for startup in 2025. Exxon is also setting up a research and development center at the site, its first with pilot plants outside of North America, and is exploring the potential for carbon capture.
Exxon announced the decision to build the China 1 facility in late 2021 – well before this year’s deterioration in US-China relations but after the tit-for-tat trade war under the Trump administration. At the time, chemicals boss Karen McKee called it a “competitive growth platform.” Chinese officials have said the project will cost $10 billion. As with any big commodity project, once the final investment decision is made and money has been committed, there’s rarely any turning back. Still, recent developments do not appear to have curbed Exxon’s appetite for Chinese petrochemicals.
“We are very ambitious and very bullish about our plans in China,” Fernando Vallina, chairman of Exxon’s China division, told state media in February, days after US fighter jets shot down an alleged Chinese spy balloon in American airspace. “Our model is not to build just one plant — it’s to build first a complex and then keep on adding phases, keep on investing for many years.”
Exxon says its investment in China is different than those of other US corporations that count the country as a critical part of their supply chains. The Texas oil giant will make chemical feedstock solely for local manufacturers.
“The products we will make there are largely intended for domestic use, meaning there is no parallel to US companies relocating manufacturing from China to secure their supply chain,” the company said in a statement. Ethylene and its derivatives are used in basic industrial processes and not subject to any US government restrictions on supplying China with high-tech or military equipment.
It’s also not alone in deepening its presence in China. Airbus SE and Ford Motor Co. forged closer trade ties with China in recent weeks while German industrial giants including Mercedes-Benz AG, Siemens AG and BASF SE are vowing to maintain links to the world’s second-largest economy. BASF, the world’s largest chemical maker, is building a complex similar to Exxon’s in southeast China.
US Ambassador to China Nicholas Burns recently encouraged business ties as part of President Joe Biden’s policy to maintain economic links, but not at the expense of national security. Biden voiced optimism last month that relations would “begin to thaw very shortly.”
Chinese officials are working hard to prevent US companies from getting jitters, including by meeting in May with JPMorgan Chase & Co. CEO Jamie Dimon and Tesla Inc. CEO Elon Musk.
Any future expansions of Exxon’s Huizhou complex could be a decade away and would depend on factors including market demand and financial returns as well as political risks, according to a person familiar with the company’s strategy.
The decision to build the petrochemical plant in China may help protect Exxon from shifting geopolitical winds because its production would be immune from tariffs, sanctions or export levies. This would help it avoid situations like in 2018 when imports of butyl — synthetic rubber — were caught up in Chinese anti-dumping measures at a time of retaliatory tariffs under the Trump administration. Exxon denies dumping any product, including butyl.
Exxon’s global footprint and importance in energy markets give it considerable diplomatic clout independent of the US government in a way few other companies can match. It has operated for decades in countries with autocratic regimes and has shown the ability to pivot quickly when needed, including when it exited Russia last year.
“We have been in China since 1892 so it’s more than 130 years now,” Vallina said in February. “And we plan to be here for another 130 years at least.”
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