Why the China + 1 Strategy Is the New Business Imperative

For several decades, China has been the factory of the world. It has the largest labor pool, very cheap manufacturing costs, and solid infrastructure to ship products around the world. Therefore, it was the first choice for companies around the world who wanted to cut costs and produce goods. However, there is a change happening in the world. Companies and countries are now taking different approaches to manufacturing in China, such as the China + 1 strategy.

The China + 1 strategy does not mean that companies are leaving China altogether. It means that they are adding to their existing operations in China with operations in one or more other countries outside of China. The purpose is to diversify risk, build supply chain resilience, and remain competitive in an unpredictable global economic landscape. 

What is the China + 1 Strategy? 

The China + 1 strategy is a business or geopolitical strategy in which a company has a significant presence in China but begins to establish operations in at least one more country in specific geolocation. The “plus one” could be Vietnam, India, Indonesia, Thailand, or possibly even Mexico, any location offers a combination of economic, logistical, and political benefits.

When companies diversify, they reduce over-reliance on a single country and insulate themselves from the negative impact of events such as: 

•  Tariffs and trade wars 
•  Pandemic or health crises 
•  Labor shortages 
•  Changes in government policy 
•  Natural disasters

Diversifying operations ensures that if one area has a hiccup, the company can continue to produce.

Why Did This Trend Accelerate?

While many factors have pushed companies to go to China + 1, here are three key events and trends to take note of:

1. Rising Labor and Manufacturing Costs in China

The economic boom in China has been fantastic—but it’s also come with challenges. Rising wages and increasing costs from environmental regulations meant that previously favorable production costs in China are eroding. In those instances, companies now had to consider a cost-effective option especially as it pertained to labor-intensive industries like textiles and electronics.

2. U.S.-China Trade War

The trade war that started in 2018 and led to tariffs on hundreds of billions of dollars in goods, presented increased costs and uncertainty to companies who relied on China. The trade war was a kind of wake-up call, proving the risks of having all of your production eggs in one basket.

3. COVID-19 Pandemic

The pandemic exposed vulnerabilities in global supply chains. For example, Lockdowns in China caused material shortages and significant delays in getting raw, finished goods. At this point, it became clear that while one country might get back to producing, there was no guarantee that all other countries would as well! Ultimately, it emphasized the importance of spreading risk through diversification.

4. Geopolitical Tensions

Outside of the United States, countries have raised awareness of China’s influence in politics, cybersecurity, and human rights. Countries are encouraging local companies to investigate other alternatives based on strategic independence and also ethical grounds.

Who is implementing the China + 1 Policy?

• The strategy cuts across industries and geographical boundaries.
• Tech Giants such as Apple and Samsung are ramping up their investments in India and Vietnam.
• Automotive Companies are building new plants in Mexico and Southeast Asia.
• Retailers such as Nike and Adidas have intensified sourcing from both Indonesia and Cambodia.
• Governments of the EU, US, Japan, and Australia are providing incentives for companies to either restructure or reshore.

India has been a clear “plus one,” due to its local labour pool, burgeoning middle class, and government incentives like “Make in India.” Vietnam has also emerged as a manufacturing hub, particularly for electronics and garments due to its political stability and close proximity to China.

Key Advantages of the China + 1 Strategy

• Risk Mitigation – Embracing the supply-chain diversification, companies are better able to manage geopolitical risks and operational complexities.
• Cost Optimization – In some contexts, labour expenditures in countries like Vietnam, Bangladesh, or Mexico are much lower than China.
• Faster Time-to-Market – Setting up production closer to consumers (i.e. production in Mexico for North America) decreases delivery times and shipping costs.
• Incentives from Host Countries – Countries looking to attract foreign direct investment will often offer incentives, such as tax incentives, land incentives, or regulatory incentives.
• Innovation Diversity – When a factory is set up in many different markets, it must innovate based on the local customer needs, thus giving unique differentiation from other products and increasing competiveness.

Challenges and Considerations

China + 1 has upside, but challenges remain.

• Logistics – China’s supply chain and manufacturing ecosystems are well understood and trained, very few location can replicate what China does. Setting up in other countries will likely require technology and training investment to develop systems and to develop human capital.
• Regulation – There are unique legislative and organizational practices in each country, considering legislation in a new country takes time and money to learn about and implement.
• Quality Assurance – It will take time to establish the quality assurance measures of a new location, existing production runs will typically have issues until the team is trained and the supply chain is established.
• Cultural Differences – The variation in how to communicate, how to management and how labor acts at these locations are often drastically different and impact productivity.

What Does This Mean for China?

It’s also a fact that China will remain an integral part of the global economy. China has an un-matched supply chain network, an un-matched engineering and talent pool, and a consumer market that is un-matched.

Rather than being replaced, China is becoming one pillar of a more distributed, resilient global network. Its place in global supply chains may transition from that of a low-cost manufacturing locale at the center of the world’s commerce to that of an advanced manufacturing, innovation, and consumption hub. 

The Future: Toward a Multipolar Supply Chain World

The China + 1 approach is also a fundamental reinvention of how we think about supply chains in the twenty-first century. In a world of uncertainty and change, resilience and flexibility are becoming as important as cost efficiency. 

For companies, this includes a commitment to mapping its supply chain in full, diversifying suppliers, and using technology to improve visibility and agility. For countries, this means building good business ecosystems, advancing logistics, and ensuring political stability. 

In the end, the new future of global manufacturing may not reside in one particular nation, but a multipolar, distributed network of countries, each playing their own roles in a more balanced, sustainable, and resilient supply chain. 

Conclusion

The China + 1 model does not mean we are abandoning China; it means we are developing a more flexible, secure, and competitive global footprint. As the global economy shifts and develops, the China + 1 model will provide a pathway to thriving in a world where resilience is the new competitive advantage.