For the better part of a decade, the dominant supply chain strategy among multinationals centred on reducing dependence on China. Pandemic disruptions, rising labour costs and geopolitical uncertainty drove companies to diversify, with the China+1 model emerging as the prevailing approach. Under this model, businesses retained core China operations while building secondary capacity in Southeast Asia, with Vietnam, Malaysia and Thailand attracting significant investment.
In 2026, that logic is being fundamentally reassessed. Rather than withdrawing from China, many global companies are reinforcing their presence. China has evolved from the world’s assembly floor into the central hub for advanced manufacturing, R&D and product development. This article examines the data behind that shift, the weakening economic case for Southeast Asian alternatives and the policy changes driving renewed foreign investment into China.
Why 2026 marks a structural turning point
In Q1 2026, foreign direct investment (FDI) into China’s high-tech sectors rose 30.7% year-on-year to CNY 102.73 billion, accounting for more than 41% of total inflows, while investment in R&D and design services surged 127.8%. China has been the world’s largest manufacturer for 16 consecutive years, producing nearly 30% of global manufacturing output, with manufacturing value added reaching CNY 34.7 trillion in 2025.
The assumptions behind the shift away from China have not held. The traditional flying geese model suggested that rising costs would push lower-value manufacturing to neighbouring economies, but this transition has been limited. Instead, China has transformed into what analysts describe as a “goose swarm”, maintaining dominance across commodity manufacturing and high-tech industries. Enabled by industrial scale, advanced automation and sustained policy backing, Chinese firms now compete across the full value chain, from textiles and basic components to electric vehicles, advanced batteries and semiconductors. This has created a competitive paradox where highly automated production delivers superior quality at a cost base that frequently undercuts less-developed alternatives.
The weakening case for Southeast Asian alternatives
The risk-diversification rationale behind China+1 remains valid in principle, but the underlying economics have shifted materially.
US trade policy has extended protectionism well beyond China’s borders. Under the Reciprocal Trade Framework, new tariff revisions have imposed baseline duties on electronics, metals and mixed-material components from Southeast Asia. Malaysia, Thailand and Indonesia now face US tariffs of 19%, while Vietnam faces 20%, in some cases exceeding those applied to Chinese exports. Strict anti-circumvention rules mean that moving final assembly to Southeast Asia no longer guarantees preferential market access.
The structural dependency on Chinese inputs reinforces the problem. Vietnam imports at least half of its raw manufacturing materials from China, while Cambodia relies on China for roughly 60% of its garment inputs. China’s trade surplus with the ASEAN reached a record USD 276 billion in 2025. For many manufacturers, offshoring to Southeast Asia has simply added a processing step in the middle of a supply chain that still begins in China, one that now carries its own tariff exposure and higher operational costs.
China’s policy environment reinforcing the shift
China’s regulatory framework is actively supporting this realignment. The 2025 Encouraged Industry Catalogue, effective February 2026, has been expanded to 1,679 entries, directing foreign investment toward semiconductors, generative AI, robotics and biotechnology. Qualifying enterprises access a 15% corporate income tax rate in designated regions, customs duty exemptions on equipment and industrial land priced at up to 30% below standard rates.
The Negative List has been reduced from 117 to 106 restricted items, removing long-standing ownership caps in cloud computing, biotechnology and healthcare. Shanghai’s pilot free-trade zone now permits wholly foreign-owned hospitals and financial institutions. These measures lower barriers for foreign operators while competing directly for manufacturing capital currently exposed to tariff instability elsewhere in the region.
Rethinking supply chain strategy for your business
Supply chain design in 2026 is less about minimising labour costs and more about optimising quality, resilience and regulatory efficiency in combination. China’s position on those measures has strengthened rather than weakened.
Businesses reviewing their regional footprint in this environment face a complex set of regulatory, tax and operational variables. Getting the structure right from the outset makes a significant impact on long-term performance and risk exposure. Speak to our China team to understand how these shifts affect your supply chain strategy.
