Dreamstime Images
Dreamstime L 80317801

Can China Plus One Help Alleviate Supply Chain Shortages?

Nov. 8, 2021
A look at a trend that started pre-pandemic but that more organizations are considering as they attempt to diversify their China-centric manufacturing operations and supply chains.

Download this article in PDF format.

Over the last few years, some companies have adopted a “China Plus One” supply chain management strategy. Rather than relying solely on Chinese manufacturers to make their products, these companies established additional supplier relationships in different countries, typically in Asia. This can graduate into a Plus Two, Plus Three or even more, depending on the number of countries where the company sources.

The China Plus One movement was underway before the global COVID-19 pandemic emerged in 2020, but has since reemerged as a viable way for companies to lessen their reliance on China for production during this period of uncertainty. Add the ocean container shortage, congested US ports and ongoing supply chain interruptions to the equation, and diversifying into new manufacturing centers appears to be an increasingly good idea.

The Driving Factors

Where just two decades ago China was seen as a low-cost manufacturing destination, rising labor rates between 2010 and 2020 pushed the country’s average yearly manufacturing wage up by about 170%. According to Insight Quality Services, these rising labor costs have led many importers to look at other developing countries as alternatives.

“Additionally, the US-China trade war, which started in 2018, accelerated the adoption of the China Plus One model,” the quality control and assurance services provider adds. “And the COVID-19 pandemic further accelerated it, as importers became more concerned about the impact of regional events on the resiliency of their supply chains.”

CME Group sees the “Tiger Cub” economies of Malaysia, Thailand and Vietnam as the most probable targets for manufacturers that want to supplement their Chinese operations with other centers of production in Asia. Some of the key attractors for those countries include manufacturing competitiveness and labor costs.

“The disruption wrought by the COVID-19 pandemic has been profound on the world’s factory floors, possibly accelerating the adoption of a China Plus One strategy by manufacturers wishing to diversify their sources of production away from the world’s second largest economy, which is currently locked in a trade dispute with the United States,” CME points out in its recent  China-Plus-One Strategy report. “As businesses seek to wean their dependence on China, moves towards diversification seem probable.”

Where Will They Go?

In Which Asian Nations Can Benefit From the ‘China Plus One’ Strategy?, Sara Hsu writes about countries like Thailand, Malaysia and Vietnam being the most logical plus-one choices for companies wanting to diversity outside of the China. Thailand has made strides in improving its ease of doing business; Malaysia has received an increasing volume of foreign direct investment thanks to its strong legal system and advanced telecom/internet infrastructure; and Vietnam is in close geographic proximity to China itself.

While Vietnam’s infrastructure is far behind that of China, Vietnam’s 2030 master plan for transport infrastructure aims to construct 5,000 kilometers of expressways, a deep-water port, high-speed rail routes, and the completion of Long Thanh International Airport near Ho Chi Minh City,” Hsu writes.

“Some Chinese firms have chosen to relocate to Vietnam in order to avoid tariffs imposed by the United States throughout the trade war,” she continues. “These include HL Corp, a bike parts maker; Shenzhen H&T Intelligent Controls, a company that specializes in intelligent controllers; and TCL Technology, an electronics producer.”

Offsetting Declining Optimism

Highlighting a recent American Chamber of Commerce survey of more than 300 businesses, CME says overall optimism in the Chinese economy declined 22 percentage points between 2017 and 2020, and that the proportion of business owners looking to decrease their investment in China increased by 22 percentage points during the same period.

“The changes are reflected in the decisions undertaken by major producers,” it points out. “Several large electronics companies are moving production from China to Vietnam; a manufacturer of motorcycles to Thailand, and a producer of rubber to Malaysia.”

With a growing middle class projected to challenge that of China by the mid-century, and more organizations deploying China Plus One strategies—CME says 84% of Japanese companies surveyed by Nikkei want to diversify their supply chains—both ASEAN and the Tiger Cub economies could become “manufacturing powerhouses over the next quarter century.”

Voice your opinion!

To join the conversation, and become an exclusive member of Supply Chain Connect, create an account today!

About the Author

Bridget McCrea | Contributing Writer | Supply Chain Connect

Bridget McCrea is a freelance writer who covers business and technology for various publications.