China plus one: Can India catch up with dynamic Vietnam?

evergrande, China plus one, economy, Chinese economy
Companies hedge bets with Vietnam, India, and Mexico under China plus one policy as they seek to de-risk supply chains.

The ‘China plus one’ strategy is increasingly gaining traction among Western companies as they look to mitigate risk amid escalating geopolitical tensions, trade disputes, and supply chain vulnerabilities associated with over-reliance on China. This strategy involves maintaining operations in China while also expanding business activities to other countries. This approach seeks to leverage China’s established infrastructure and market while mitigating risks by diversifying geographically.

This strategy is the result of a broader rethinking among Western businesses and policymakers. Initially, the economic engagement with China was overwhelmingly positive, driven by the country’s cost-effective manufacturing, vast labour pool, and burgeoning consumer market. However, the landscape has shifted markedly due to several factors, including the US-China trade war, the global disruptions caused by the COVID-19 pandemic, and escalating geopolitical tensions over Taiwan and the South China Sea. These developments have underscored the risks of heavy dependence on a single country for manufacturing and supply chains, leading to a trend towards risk mitigation.

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The shift towards a de-risking strategy, as opposed to a complete decoupling, signifies a preference for a less confrontational and more balanced approach to managing relations with China. This strategy includes diversifying supply chains and investment locations to other countries, thereby reducing dependence on China while still leveraging its market for business growth. This allows companies to hedge against potential risks while maintaining access to one of the world’s largest consumer markets.

Beneficiaries of ‘China plus one’

Vietnam has notably emerged as a prime beneficiary of the ‘China plus one’ policy. The country has actively courted foreign direct investment (FDI), positioning itself as a compelling alternative for companies looking to diversify their manufacturing bases. Vietnam’s success in attracting investment can be attributed to its favourable business environment, competitive labour costs, and strategic efforts to integrate into global supply chains. Its significant gains in FDI, particularly from China and global companies seeking to hedge their bets, underscore its growing importance in the international business landscape.

India, despite facing regulatory and taxation challenges, is rapidly becoming a viable alternative to China, especially in sectors such as high-tech manufacturing and mobile phone production. The country’s large market potential, skilled workforce, and government initiatives aimed at boosting manufacturing are making it an increasingly attractive destination for companies looking to diversify their operations. India’s progress in sectors where it has historically lagged, such as mobile phone manufacturing, indicates its potential to become a key player in the global supply chain diversification strategy.

Mexico’s geographical proximity to the United States makes it an attractive option for North American companies seeking to reduce their dependence on Chinese manufacturing. The benefits of the USMCA (United States-Mexico-Canada Agreement), which provides tariff-free access to the US and Canadian markets, further enhance Mexico’s appeal as part of the ‘China plus one’ strategy. The agreement underscores the strategic advantage of nearshoring, allowing companies to maintain efficient supply chains while mitigating risks associated with geopolitical tensions and trade disputes.

Thailand and Indonesia are also emerging as significant players in the diversification efforts of Western companies. These Southeast Asian nations are attracting attention for their growing manufacturing capabilities, strategic location within the ASEAN region, and ongoing efforts to improve their respective business environments. Their roles in the ‘China plus one’ policy highlight the increasing importance of Southeast Asia as a hub for manufacturing and supply chain diversification.

The implementation of the ‘China plus one’ strategy, while offering a pragmatic way to balance risks and opportunities, is not without its challenges. Diversifying operations across multiple countries involves navigating complex logistical, regulatory, and financial landscapes. Moreover, replicating the comprehensive ecosystem of suppliers, infrastructure, and scale of manufacturing that China offers is a formidable task. Despite these challenges, the strategic imperative to mitigate risks associated with over-reliance on China is driving companies towards innovative solutions and new partnerships.

The ‘China plus one’ policy represents a strategic recalibration by Western companies in response to the evolving global economic and geopolitical context. By diversifying their manufacturing and supply chains, companies are seeking to strike a balance between leveraging the undeniable advantages of the Chinese market and mitigating the risks of dependency on it. This approach is fostering a new dynamic in global trade, with countries that provide conducive environments for business and manufacturing poised to benefit. As this strategy continues to unfold, it will undoubtedly shape the future of international business and trade.

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