The rise and rise of ‘China Plus One’ risk strategies

China, as the world’s primary manufacturing superpower, has earned a reputation as “the world’s factory”. However, evidence in recent years has suggested that China’s iron-like grip on global supply chains may be weakening.

Back in 2022, the CNBC Supply Chain Heat Map showed that China was losing manufacturing to other APAC nations, namely Vietnam, Malaysia, Bangladesh, India and Taiwan.

At the time, China’s “Zero Covid” policy, which greatly impacted the Port of Ningbo-Zhoushan, the world’s largest port, on the coast of the East China Sea in the Zhejiang province, was seen as the primary cause.

However, as the dust has settled on Covid’s supply chain impact, the popularity of “China Plus One” risk strategies have continued to grow.

The “China Plus One” strategy looks to reduce the risks associated with complete reliance on China’s market or supply chain by diversifying manufacturing operations and expanding into other countries, even as companies maintain a presence in China.

What are the key factors driving “China Plus One” strategies?

“Rising labor costs in China in the early 2000s prompted Western firms to consider a ‘China Plus One’ strategy by establishing production facilities in Southeast Asian countries such as Vietnam and Indonesia,” said Christopher Tang, a Distinguished Professor at the UCLA Anderson School of Management, focused on global supply chain management.

Kuo-Yi Lim, co-founder and managing partner of Southeast Asian venture capital firm Monk’s Hill Ventures, told CNBC that geopolitical tensions have “accelerated these activities, which started during the Covid lockdowns.”

Tang said this shift was supposed to be gradual, but heightened US-China tensions have expedited a shift that has been occurring since the US-China trade war that began in 2018.

“The Covid-19 pandemic exposed the supply chain vulnerabilities caused by being over-dependent on China, and there was public support for reshoring and near-shoring to improve supply chain resilience. With the IRA and CHIPS Acts approved in 2022, there were also incentives for firms to increase their production in the US.”

Who is benefiting from more “China Plus One” strategies?

“Southeast Asia is well-placed to benefit significantly from the China Plus One phenomenon as both foreign and Chinese companies diversify their supply chains and operations,” said Lim.

Tang said the likes of India, Vietnam, Malaysia and Indonesia have been some of the main winners of this sea change.

“For example, personal computers, solar panels and home electronics assembly operations are booming in Vietnam. Smartphone manufacturing operations are expanding rapidly in India. Many US firms are shifting away from China to other countries such as India, Thailand and Vietnam.

“In 2022, Dell announced a shift to at least 20 percent of its laptops being made in Vietnam. In June, Apple announced plans to shift 18 percent of its global iPhone production to India,” said Tang.

Many US companies are increasing their sourcing volume from near-shoring countries such as Mexico and Canada, said Tang, to take advantage of the USMCA free trade agreement.

What are the major challenges and keys to success?

“As firms shift their production to other Southeast Asian countries or even Mexico, this ‘re-risking’ strategy is not risk-free. Instead, it creates other types of risks,” said Tang. “Specifically, de-risking from China by diversifying suppliers across various countries can amplify operational risks due to the complexity and lack of transparency in global supply chain operations.”

According to a 2021 McKinsey survey, just 2% of companies reported having visibility beyond their second-tier suppliers, who provide materials and parts to their direct suppliers.

“To reduce risk, firms must obtain supply chain visibility so that they can ensure compliance, with no violation of labor laws, environmental regulations and worker safety,” added Tang.