| The “China Plus One” program is a business strategy, originally adopted by multinational corporations to diversify their supply chains and manufacturing operations beyond China, while still maintaining a presence in the country. It’s essentially about not putting all your eggs in one basket, particularly when that basket is China.
Where Did It Originate? • Early 2000s and SARS (2002-2003): While the term might not have been widely used then, the SARS epidemic highlighted the vulnerabilities of relying solely on one country for production. Some Japanese companies, for instance, began exploring diversification into countries like Vietnam, India and Thailand. • Rising Labor Costs in China (Mid-2010s): As China’s economy matured and wages significantly increased, the cost advantages that initially drew manufacturers to China began to diminish. This prompted companies to seek more cost-effective manufacturing alternatives. • Growing Global Dependency Concerns (around 2008-2013): A broader awareness emerged concerning the risks of over-reliance on a single country for global supply chains, due to factors like potential geopolitical instability or natural disasters. To address these concerns, the term “China Plus One” is believed to have been formally introduced around 2013. • U.S.-China Trade War (2018 onwards): The imposition of tariffs by the Trump administration on Chinese goods significantly accelerated the adoption of the “China Plus One” strategy. Companies faced higher import costs and increased uncertainty, pushing them to seek alternative manufacturing locations to avoid tariffs. • COVID-19 Pandemic and China’s “Zero-COVID” Policy (2020-2022): The pandemic exposed the extreme fragility of concentrated supply chains. China’s strict “Zero-COVID” lockdowns and factory closures caused unprecedented disruptions, further reinforcing the need for diversification and resilience. In essence, “China Plus One” emerged as a pragmatic business response to a combination of economic, geopolitical and public health challenges that highlighted the risks of extreme supply chain concentration in China. How Can U.S. Manufacturers Benefit from It? 1. Risk Mitigation and Supply Chain Resilience: • Reduced Geopolitical Risk: Less reliance on a single country mitigates exposure to political tensions, trade wars, or unexpected policy changes that could disrupt production. • Protection Against Disruptions: Diversifying manufacturing hubs helps safeguard against disruptions caused by natural disasters, pandemics or localized events in a single country. If one region faces issues, production can continue elsewhere. • Enhanced Business Continuity: By having alternative production sites, U.S. manufacturers can ensure their operations are more robust and adaptable, leading to greater business continuity even in volatile global environments. 2. Cost Efficiency and Competitive Advantage: • Lower Labor Costs: Countries like Vietnam, India, Thailand, Malaysia, Indonesia and Bangladesh often offer significantly lower labor costs compared to increasingly expensive manufacturing in coastal China. • Tariff Avoidance: Shifting production away from China to countries with favorable trade agreements or no tariffs with the U.S. can directly reduce import costs and improve competitiveness. • Government Incentives: Many “Plus One” countries actively offer incentives such as tax breaks, subsidies and streamlined regulatory processes to attract foreign investment. 3. Market Expansion and New Opportunities: • Access to New Consumer Markets: Establishing manufacturing in other regions could provide closer proximity to emerging consumer markets, reducing logistics costs and potentially allowing for more tailored products for local tastes. • Favorable Trade Agreements: Operating in countries with existing free trade agreements with the U.S. (or other target markets) can open new market access and reduce trade barriers. 4. Improved Logistics and Shorter Lead Times: • Nearshoring Opportunities: For U.S. manufacturers, Mexico is a prime “Plus One” location due to its geographical proximity. This enables nearshoring, which can drastically reduce shipping times, transportation costs and carbon footprint compared to sourcing from Asia. • Better Communication and Oversight: Shorter distances and overlapping time zones (with Mexico, for example) can facilitate easier communication, more frequent factory visits, and better real-time oversight of production. 5. Focus on Higher-Value Activities in China: • “China Plus One” doesn’t mean abandoning China entirely. Companies can maintain their presence in China for the vast domestic market and for more complex, high-value, or specialized manufacturing where China’s infrastructure and skilled labor remain unparalleled. This strategy allows businesses to leverage China’s strengths while de-risking other segments of their supply chain. By strategically adopting the “China Plus One” or “China Plus Many” approach, U.S. manufacturers can build more resilient, cost-effective, and globally competitive supply chains, better positioned to navigate the complexities and uncertainties of the modern global economy. |
Navigating the Challenges of “China Plus One”
Moving from a China-only sourcing model to a “China Plus One” or “China Plus Many” strategy is a significant undertaking driven by factors like geopolitical tensions, rising labor costs in China, and the desire for greater supply chain resilience. While it offers numerous benefits, it also presents significant challenges.
China has positioned itself to have built-in domestic supply chains that have the necessary infrastructure that produce all the tools and train employees in the skills that needed. The result is a seamlessly integrated supply chain that provides manufacturing facilities with raw materials and work-in-process goods. These facilities employ trained staff who assemble the final products to strict quality control standards. They also have highly trained engineers, mold makers and other skilled workers to get products made from drafting and conception to finished product.
Several years ago, our founder, Dave Akers, toured a toy production facility in Guangdong Province, China. It was a multi-floor facility that housed manufacturing for different and competing U.S. toy companies: one floor was dedicated to Hasbro, another built Mattel products, and yet another manufactured items for Playmates Toys. Within this facility, the types of toys being produced were also segregated by area, with one specializing in plush toys, another in dolls and extruded toys, and a third in die-cast items. Today, Guangdong Province boasts over 5,000 toy manufacturers and employs 1.5 million people, who collectively export approximately 70% of all toys made in China.
The workers resided in dormitories within walking distance of the factory. Dave had lunch with workers at the factory and observed that many were highly skilled, performing complex assembly operations, electronic testing, plastic extrusion, die-cast molding and specialized tasks like hand painting and sewing. The workers were provided with subsidized housing and food, along with accessible schooling and training. If a manufacturer needs specialized workers, with specific skills, China will assist in identifying and relocating skilled workers.
Moving from a China-only sourcing strategy to a “China Plus One” or “China Plus Many” approach presents several challenges for businesses seeking to diversify their supply chains. These strategies aim to mitigate risks associated with over-reliance on a single country, especially in light of geopolitical tensions, rising labor costs in China, and supply chain disruptions like those experienced during the COVID-19 pandemic.
Here are the key challenges to replicate Chinese Manufacturing:
- Initial Investment and Costs: Setting up new factories, supplier networks, and infrastructure in new countries requires significant capital investment.
- While some alternative regions may offer lower labor costs, the overall cost of setting up and operating in a new location, including infrastructure, transportation and regulatory compliance, needs careful consideration.
- Unexpected costs can arise from import value added tax (VAT), customs clearance, import licenses and shipping, along with the need for customs bonds and certificates of origin.
Supply Chain Complexity and Logistics:
- Managing production across multiple countries adds layers of logistical complexity, including shipping, warehousing, and transportation.
- New suppliers, different regulations, and multiple customs processes can create inefficiencies, increase lead times, and complicate logistics.
- Most alternative countries will not have the same level of developed supply chain infrastructure as China, leading to potential delays in sourcing materials and delivering products.
- Even with diversification, many critical raw materials and components may still be produced in China, leading to indirect reliance.
Infrastructure Variability:
- Infrastructure Variability: China has decades of investment in a world-class manufacturing ecosystem with efficient logistics, modern ports, and deeply integrated supply chains. Many alternative countries are still developing these capabilities.
- Infrastructure Variability: For example, Vietnam has made strides in electronics assembly but lacks large-scale semiconductor fabrication, and India still faces logistics bottlenecks and bureaucratic hurdles.
Skilled Labor Availability and Cultural Differences:
- While alternative locations may offer lower labor costs, they often lack the same level of experienced and skilled workforce, particularly in advanced manufacturing sectors, as found in China. Companies may need to invest in extensive workforce training, adding to costs and slowing the transition.
- Understanding and adapting to different workplace cultures, communication styles, labor laws, and management styles is crucial. Cultural nuances can affect workforce integration, morale, and productivity.
Regulatory and Compliance Hurdles:
- Each country has its own tax laws, import/export regulations, and labor requirements, making compliance a significant challenge.
- New data security regulations, such as China’s Data Security Law (DSL) and Personal Information Protection Law (PIPL), add legal complexities and can impose substantial fines for non-compliance.
- Companies must stay informed about trade policies, tariffs, and potential changes that may affect their operations, as failure to research and prepare for such differences can result in chronic delays.
Quality Control Issues:
- Ensuring consistent product quality across multiple and potentially less experienced suppliers in different countries demands meticulous monitoring, testing, and compliance efforts.
- Establishing robust quality assurance processes and strong supplier oversight is critical to maintaining product standards and brand reputation.
Intellectual Property (IP) Concerns:
- Businesses must take measures to protect their intellectual property rights, such as patents, trademarks, and copyrights, in new jurisdictions, as some regions may have less robust legal frameworks and enforcement mechanisms compared to China.
Finding and Vetting New Suppliers:
- Identifying and building relationships with reliable new suppliers takes time and resources. Many new manufacturers may not focus on smaller orders, which can be challenging for some businesses.
By understanding these challenges, businesses can better plan and execute a successful transition to a more diversified global sourcing strategy.
Craig Akers
Executive Director
Sources:
Sourcify | China Plus One Strategy: Diversify Manufacturing to Mitigate Risks
Dimerco | Implementation Challenges of a China Plus One Strategy
Beroe | China Plus One Strategy – An Imperative to Achieve Supply Chain Resilience
ChinaLegalExperts | China Plus One: Key Benefits, Challenges, and Execution
Frigate | China Plus One Strategy And Why Companies Are Adopting It
Z2Data | Why “China Plus One” Has Become “Anywhere but China”
McKinsey & Co. | Supply chain resilience—in China and everywhere else
Plante Moran | De-risking offshore manufacturing: the “China plus” strategy
Z2Data | Why “China Plus One” Has Become “Anywhere but China”
Gembah | Embracing the China Plus One Strategy for Global Supply Chain Diversification
Adventa US | Pros & Cons of Importing from China
Freightos | Pros and Cons of Sourcing Your Production Outside of China
Jungle Scout | The Good, the Bad, and the Ugly: Sourcing Outside of China
SCMR | The Hidden Risk of Chinese Suppliers
Gembah | Moving Manufacturing Out of China: Opportunities and Risks in 2024
Itimanufacturing | The Risk of Over Reliance on Chinese Export Manufacturing
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