The global manufacturing has undergone a significant transformation in recent years. One of the most prominent strategies that has emerged is the China+1 strategy. This strategy aims to diversify manufacturing operations outside China’s borders to mitigate risks and leverage opportunities in other regions. As businesses deal with rising costs, geopolitical tensions and supply chain disruptions, the China+1 strategy has become more popular and is gaining additional momentum with the recent re-election of Donald Trump.
This guide investigates the core objectives, drivers, benefits and industry impacts of the China+1 strategy and provides a real-world example of its successful implementation.
- By diversifying manufacturing operations to include additional countries, firms can better manage production expenses and navigate geopolitical uncertainties, ensuring a more stable and predictable business environment.
- Establishing manufacturing facilities in various countries allows companies to access new markets and cater to local consumer preferences.
- Rising labour costs in China have driven companies to seek more cost-effective production sites in countries like Vietnam, India and Bangladesh.
Defining the China+1 strategy
The China+1 strategy involves companies expanding their manufacturing footprint to include at least one additional country. This approach does not necessarily mean abandoning China entirely; instead, it means reducing dependence on a single country for production needs.
Core objectives of the China+1 strategy include:
- Risk mitigation: Reduce reliance on a single country to mitigate risks associated with political instability, natural disasters and other unforeseen events.
- Cost management: Addressing China’s rising labour and production costs by exploring more cost-effective manufacturing locations.
- Supply chain resilience: Enhance supply chain resilience and agility by diversifying production sites.
- Market access: Gain access to new markets and consumer bases by establishing a presence in different regions.
Factors driving the shift away from sole reliance on China
Several key factors are encouraging manufacturers to adopt the China+1 strategy. Understanding these drivers provides insight into the changing dynamics of global manufacturing.
Higher wages impacting cost efficiency
China’s rapid economic development has led to significant increases in labour costs. According to the World Bank, China’s average annual wage has increased dramatically over the past two decades. As a result, the cost advantages that once made China an attractive manufacturing hub are diminishing. Companies are now seeking alternative locations where labour and production costs are more competitive, such as Southeast Asia.
Geopolitical tensions affecting trade
Ongoing trade tensions between China and major economies, particularly the United States, have introduced uncertainty to the global trade environment. Tariffs, trade barriers and shifting trade policies have created challenges for companies heavily reliant on Chinese manufacturing. The imposition of tariffs on Chinese goods has prompted many firms to explore other countries to avoid these additional costs and ensure smoother trade relations.
Supply chain vulnerabilities
The COVID-19 pandemic highlighted the vulnerabilities in global supply chains; many companies experienced significant disruptions due to factory shutdowns and transportation delays in China. This highlighted the importance of supply chain diversification in strengthening resilience. By spreading production across multiple locations, companies can reduce the impact of localised disruptions and maintain continuity in their operations.
Potential benefits of a diversified manufacturing approach
The China+1 strategy offers several potential benefits for companies looking to strengthen their manufacturing operations.
Improved cost competitiveness
While initial investments in new manufacturing facilities may be significant, the long-term cost savings can be substantial. By leveraging cost-effective labour markets and optimising supply chain logistics, companies can achieve better cost structures and improve their competitiveness.
Broadened access to new markets
Establishing manufacturing facilities in multiple countries allows companies to enter new markets and cater to local consumer preferences. This can increase sales and market share in regions with high growth potential. Additionally, local production can help companies comply with regional regulations and reduce logistical costs associated with exporting goods from China.
Reinforced supply chain agility
A diversified supply chain is more resilient and adaptable. Companies can optimise their production processes by allocating different manufacturing stages to locations that offer specific advantages. For instance, labour-intensive processes can be situated in countries with lower labour costs, while high-tech production can remain in regions with advanced technological capabilities.
Strengthened risk management strategies
Diversifying manufacturing operations enables companies to manage risks more effectively. Firms can better navigate geopolitical uncertainties, regulatory changes and natural disasters by distributing their operations and investments across multiple locations. This risk mitigation is especially crucial in today’s volatile global environment.
Impact on specific industries
The China+1 strategy does not impact all industries equally; its effects differ depending on the sector. The following sections examine how this strategy impacts the electronics, textiles and automotive industries.
Electronics industry
The electronics industry, which relies on complex supply chains and just-in-time manufacturing, has been significantly impacted by the China+1 strategy. Companies like Apple have started diversifying their production by relocating manufacturing processes to countries like Vietnam and India. Vietnam has become a hub for electronics manufacturing due to its skilled workforce, favourable investment climate and proximity to existing supply chains in Asia.
Textiles industry
The textiles and apparel industry has also embraced the China+1 strategy. Rising labour costs in China have driven companies to explore alternative manufacturing locations such as Cambodia, India and Bangladesh. These countries offer competitive labour costs and have established themselves as significant players in the global textile market.
Automotive industry
With its complex and highly integrated supply chains, the automotive industry has also seen a shift towards diversification. Companies like Toyota have increased their investments in Southeast Asia, particularly Thailand and Indonesia. These regions offer strategic advantages, including access to growing markets, competitive labour costs and established automotive ecosystems. By diversifying their manufacturing bases, automotive companies can reduce risks and ensure continuity in production.
Alternative countries to consider for the China+1 strategy
For the China+1 strategy, companies could consider looking into the following countries:
- Vietnam
- India
- Cambodia
- Bangladesh
- Thailand
- Indonesia
- Malaysia
- Philippines
Apple: Real-world example of successful implementation
Apple is actively reducing its dependency on China by gradually moving its device assembly operations to factories in India and Vietnam. Currently, Apple produces around 90% of its devices, including iPhones, iPads and MacBooks, in China. However, recent geopolitical shifts, along with China’s policies and the pandemic’s impact, have driven Apple to diversify its supply chains across other countries to mitigate risks associated with heavy reliance on China.
Production shifts and future plans
According to a JPMorgan analysis, Apple’s China-based production is expected to decrease from 95% to about 75% by 2025. As part of this strategy, Apple plans to relocate a portion of its manufacturing to Vietnam by 2025, including:
- 20% of iPad production
- 5% of MacBooks
- 20% of Apple Watch
- 65% of AirPods.
Key contract manufacturers like Foxconn, Pegatron, Luxshare and Wistron have expanded their production capacities in Vietnam to support Apple’s shift from China. For instance, Foxconn Corporation has acquired 50.5 hectares of land to construct a new factory in Saigon, Vietnam, highlighting its commitment to diversifying its manufacturing footprint.
Conclusion
The China+1 strategy represents a pivotal shift in the global manufacturing. Driven by rising costs, trade tensions and supply chain disruptions, companies are increasingly diversifying their manufacturing operations beyond China’s borders. This approach offers numerous benefits, including improved risk management, broader market access, supply chain resilience and cost savings. While the impact of the China+1 strategy varies across different industries, several large companies have demonstrated its feasibility and success.
As the global economic environment continues to evolve, the China+1 strategy is likely to play an increasingly important role in shaping the future of manufacturing. Companies implementing this strategy will be better positioned to navigate uncertainties, capitalise on new opportunities and maintain their competitive edge in a rapidly changing world.
How Acclime can help with manufacturing diversification
Acclime offers complete support in navigating new markets and managing business set-up assistance. From establishing operations to optimising supply chain logistics, our team of experts can assist with everything from complying with local regulations to securing the necessary business licences.
By partnering with us, companies can confidently diversify their manufacturing operations, reducing dependency on a single location and enhancing their global reach.
Contact us to learn how we can support your expansion into new markets and ensure smooth, compliant operations across multiple regions.
Contact our teams for expert support and further information about corporate governance in China to ensure you are compliant in the market.
Maxime Van ‘t Klooster, Partner, m.vantklooster@acclime.com
Celia Cui, Manager of CoSec Services, c.cui@acclime.com
Christophe Marquis, Director, Shanghai, c.marquis@acclime.com
