The “China Plus One” Strategy: Diversifying Manufacturing to Stay Competitive

In the ever-evolving global manufacturing landscape, businesses are increasingly adopting the “China Plus One”strategy to reduce risk, maintain flexibility, and ensure resilience in their supply chains. This approach is designed to help companies diversify their manufacturing operations by establishing production facilities outside of China, often in nearby countries. But why is this strategy becoming so crucial, and how can your business execute it effectively?

In this blog, we’ll explore the benefits, challenges, and practical steps for implementing the China Plus One strategy, allowing your business to stay competitive and prepared for unforeseen disruptions.

Why Diversify Away from China?

For decades, China has been the global manufacturing powerhouse due to its cost efficiency, large labor pool, and established infrastructure. However, with the changing political climate, trade tariffs, and the recent disruptions in global supply chains (exacerbated by the COVID-19 pandemic), many businesses are reassessing their reliance on China as their sole manufacturing partner.

Key factors driving the China Plus One strategy:

1. Geopolitical Instability – Trade wars, particularly the U.S.-China trade war, have led to tariffs that have increased costs for businesses heavily reliant on Chinese manufacturing.
2. Tariffs and Regulatory Hurdles – The Section 301 tariffs on Chinese goods have increased manufacturing costs, making China less attractive for certain types of production.
3. Supply Chain Disruptions – Events like the pandemic, natural disasters, and labor shortages have shown how dependent many companies are on China, exposing weaknesses in their supply chains.
4. Cost Considerations – As China’s labor costs rise, other regions may offer cheaper or more competitive manufacturing options.

By diversifying your manufacturing base, you can mitigate these risks, making your operations more resilient and adaptable to external changes.

Where Should You Look Beyond China?

While China remains a significant player in global manufacturing, businesses that adopt the China Plus One strategy typically look to countries with a combination of lower tariffs, better trade agreements, or lower labor costs. Here are a few alternatives:

1. India

• Advantages: Large, skilled workforce, growing manufacturing capabilities, and favorable trade agreements with Western nations.
• Challenges: Infrastructure challenges and supply chain inefficiencies can sometimes make India a less predictable option compared to China.

2. Vietnam

• Advantages: Competitive labor costs, proximity to China, growing manufacturing base, and favorable free trade agreements, particularly with the EU and the U.S.
• Challenges: Smaller supply chain networks, limited experience in some advanced manufacturing sectors.

3. Mexico

• Advantages: Proximity to the U.S., NAFTA/USMCA trade agreements, lower labor costs, and quick turnaround times due to nearshoring.
• Challenges: Limited scalability for large-scale operations in certain industries.

4. Bangladesh and Indonesia

• Advantages: Low labor costs, growing textile industries, and favorable trade policies.
• Challenges: Regulatory environments may be less predictable, and infrastructure can be lacking in certain areas.

Steps to Implement the China Plus One Strategy

Adopting a successful China Plus One strategy requires careful planning, selection of manufacturing partners, and a deep understanding of global trade dynamics. Below are the key steps to help you diversify your manufacturing supply chain:

1. Assess Your Manufacturing Needs

Before you begin exploring new manufacturing locations, evaluate your current production needs:

• What products are you manufacturing, and which are most affected by tariffs or other disruptions?
• What are the logistical requirements (e.g., proximity to suppliers, infrastructure)?
• What’s the cost sensitivity of your product, and how much flexibility do you need in your supply chain?

2. Identify Alternative Locations

Once you have a clear picture of your needs, start researching alternative manufacturing locations. Consider the following:

• Tariffs & Duties: Which countries have favorable trade agreements and reduced tariffs?
• Labor Costs: What is the labor cost difference between China and alternative countries?
• Infrastructure: Does the location have the necessary logistics, transportation, and supply chain infrastructure to support your needs?
• Lead Times: How much longer will it take to ship goods from an alternative location compared to China?

3. Build Relationships with Suppliers in New Locations

Building relationships with suppliers in new regions is key to ensuring successful diversification. Here’s how:

• Visit Factories: Take the time to visit new factories and meet suppliers in person.
• Start Small: Begin with a pilot project to assess the capabilities of the new supplier and avoid overwhelming them.
• Leverage Technology: Use digital platforms to track production and ensure real-time visibility into your supply chain.

4. Evaluate Compliance & Certifications

Manufacturing in different regions means you need to ensure that your suppliers comply with international quality standards, labor regulations, and environmental policies.

• Certifications: Make sure your new suppliers are certified in key areas such as quality control, safety standards, and environmental sustainability.
• Regular Audits: Establish a routine of periodic audits to ensure ongoing compliance with these standards.

5. Build a Flexible and Scalable Supply Chain

As you transition to a China Plus One strategy, focus on building a more flexible and scalable supply chain:

• Multiple Suppliers: Avoid relying on a single supplier in the new region; having multiple suppliers helps you mitigate risk.
• Technology Integration: Utilize ERP systems to track shipments, orders, and inventory to ensure seamless operations.
• Risk Management: Develop contingency plans for potential disruptions and diversify across more than one new manufacturing location to minimize reliance on any one region.

Benefits of the China Plus One Strategy

• Reduced Risk: Diversifying your supply chain across regions can help protect your business from geopolitical risks, tariff hikes, or natural disasters.
• Cost Savings: By seeking alternative locations, you can identify regions with lower labor costs or better trade agreements, ultimately reducing production costs.
• Improved Flexibility: Having multiple manufacturing locations allows for greater flexibility in adjusting to market demands and production needs.

Challenges to Consider

• Initial Investment: Shifting production to new locations may require an initial investment in infrastructure, logistics, and relationship-building.
• Cultural & Regulatory Differences: Each country has its own regulatory landscape, labor laws, and business practices, which may require adjustments in how you operate.
• Logistics Complexity: Managing supply chains across multiple countries adds a layer of complexity, which requires careful planning and strong communication with new suppliers.

Conclusion

Adopting the China Plus One strategy allows businesses to stay competitive in the face of geopolitical and economic challenges. By diversifying manufacturing locations, you can mitigate risks, reduce tariffs, and enhance your supply chain’s flexibility. With careful planning and execution, this strategy can set your business up for long-term success.

At Sourcify, we specialize in helping businesses navigate the complexities of global manufacturing. Whether you’re looking to expand your supplier base or optimize your existing operations, we can guide you through every step of the process. Contact us today to learn how we can support your business in implementing a successful China Plus One strategy.