China Plus One: A Guide to Diversifying Supply Chains

China Plus One is a supply chain strategy where a business diversifies its sourcing or manufacturing operations by adding at least one other country alongside its existing base in China. China Plus One is sometimes referred to as China + 1 or China Plus N, with N representing any number of alternative locations. 

Countries in Southeast Asia like Vietnam, Thailand, and Malaysia are often popular choices for those adopting a China Plus One strategy.

In a world where uncertainty is the only certainty, relying on a single country for sourcing or manufacturing leaves businesses vulnerable to forces they cannot control. This has been highlighted in recent years by supply chain disruptions caused by events such as COVID-19 pandemic and the blockage of the Suez Canal. 

The China Plus One strategy helps businesses to build resiliency into their supply chain, enabling them to better adapt and respond to unexpected events or geopolitical shifts. 

China’s large and cost-effective labor force have been key to its strength as a global manufacturing hub. However, average salaries have more than doubled over the last decade, impacting  China’s traditional cost advantage and leading some businesses to consider the China Plus One Strategy.

While the pandemic put pressure on businesses to diversify their supply chain, a shifting international trade landscape have intensified the need for diversification and led businesses to adopt the China Plus One Strategy. 

For example, to navigate U.S. tariff changes and remain cost competitive when selling into the U.S., some businesses have shifted some of their manufacturing and sourcing to Southeast Asia. 

Overall, recent history has shown that reliance on a single country for manufacturing and sourcing carries inherent risk. The China Plus One strategy is one way to mitigate that risk and increase business resilience.

China Plus One comes with a number of benefits and risks. Businesses must carefully weigh up the pros and cons to determine if it is an effective strategy for their business. 

The decision to adopt a China Plus One strategy should factor in the pros and cons as well as the business’s profile and goals. For example, if the business has a large customer base in Southeast Asia, it may make sense to add a manufacturing base in the region. 

The China Plus One strategy works best when a business’s manufacturing process can be easily duplicated across two locations without compromising quality. Conversely, if the manufacturing process requires highly specialized skills, the cost of establishing a new manufacturing base and maintaining quality control could be too high. 

For sourcing, the China Plus One strategy is effective for businesses with critical reliance on goods for which price stability and supply are paramount. For example, businesses sourcing raw textiles or electronic components from China can increase their resilience to price increases or supply shortages by having a secondary supplier in a 'Plus One' country, such as Vietnam or Thailand.

The purpose of the China Plus One strategy is to diversify a business’s supply chain. So, it is not about exiting China but about creating sourcing and manufacturing capabilities in at least one other country. 

Adopting the China Plus One strategy often begins with a dual setup. Businesses maintain a presence in China and continue leveraging benefits such as specialized labor while establishing a manufacturing or sourcing hub elsewhere. 

Businesses can take different approaches when adding new hubs. They may choose to manufacture the same products within each country or split production in various ways. For example, they may rely on the new hub for manufacturing specific components and re-direct resources in China to focus on quality control and final assembly. Alternatively, they may have each hub manufacture products sold into the local market to enable savings on shipping and transportation.     

The dual setup allows businesses to benefit from the advantages of each location while building a more resilient, flexible supply chain.

Logistics companies provide a critical link between manufacturing hubs and distribution channels. For this reason, picking the right logistics partner is essential for a smooth transition to a China Plus One.

To ensure a seamless flow of goods and facilitate processes like customs clearance, businesses should look for partners who can offer the following: 

• An extensive network including reliable capacity in both China and the ‘Plus One’ country

• Technology and resources to navigate complex customs requirements and regulations in new markets 

• Digital tools and integration capabilities to simplify processes such as shipping 

• Tracking and transparency of shipments 

• Local expertise and on the ground support 

Businesses can also benefit from working with a single vendor or even a single point of contact. This can not only streamline processes and communication but potentially provide access to volume discounts or other economies of scale.

To select the best ‘Plus One’ location businesses should assess each option based on their specific needs and key criteria such as:  

✔  Cost: Labor, production, and logistics costs should all be considered to ensure the new location offers a cost advantage.    

✔  Workforce and culture:​ Availability of skilled and trainable labor should be investigated along with cultural nuances that may shape daily ways of working. These could include practices such as the midday rest taken by many Vietnamese workers. ​

✔  Infrastructure: The availability and quality of roads and transport networks and utilities are essential for reliable operations.  These should be investigated along with the capacity of ports and airports to handle shipping requirements. 

✔  Stability:  Political and economic stability as well as factors such as frequency of adverse weather events or natural disasters should be considered. 

✔  Quality and safety: Potential suppliers and partners should be assessed for quality control, safety standards, and adherence to regulations and ethical labor practices.

Trade agreements can have a significant impact on cost and compliance and can therefore be a deal-breaker when it comes to choosing a 'Plus One' location. For example, Free Trade Agreements (FTAs) like the Regional Comprehensive Economic Partnership (RCEP) lower tariffs and facilitate freer movement of goods within the region, making member countries ideal for those embracing a China Plus One strategy.    

Businesses in the EU can take advantage of bilateral FTAs with Singapore and Vietnam. Meanwhile, negotiations are ongoing for individual FTAs between the EU and Thailand, the Philippines, and Malaysia.

Adopting a China Plus One strategy and establishing a hub in a new country brings new challenges that could slow down the supply chain and increase costs if not well managed. Reliable partners are crucial to navigating hurdles such as local regulations and logistics. 

The move from a single, mature manufacturing or supply base in China to a dual-hub model introduces several key challenges. 

• Infrastructure: Some ‘Plus One’ countries have less developed roads, ports, airports, and rail networks compared to China. This can slow down transport and shipping and affect supply chain reliability.   

• Freight capacity and transit times: Emerging manufacturing hubs may have lower freight capacity, leading to competition for space and longer transit times for goods. 

• Complexity of managing multi-country supply chains: Coordinating production, maintaining consistent quality, and managing inventory across two or more hubs requires robust processes and systems. 

• Customs clearance and local regulations: Navigating customs requirements and compliance hurdles in a new country is complex and can lead to shipment holds and costly delays if not well managed. 

A reliable logistics partner is a key factor for success with the China Plus One strategy, especially for a small business who may lack resources on the ground. A strong shipping partner with an extensive network can offer reliable freight capacity as well as tools and expertise to navigate customs clearance and required documentation. 

Partnering with a ​3PL logistics provider can further complement a China Plus One strategy by executing inventory management, fulfillment, shipping, and reverse logistics within China and ‘Plus One’ locations. The right 3PL logistics partner can also help businesses maintain visibility and a level of control over their supply chain while giving them more time to focus on core activities like product development and sales. 

Selecting the right "Plus One" location means identifying a hub whose unique strengths align with a business's specific industry and goals. India and Southeast Asia offer a range of attractive options, with specialists in various sectors. 

Any business’s China Plus One strategy should be tailored to their industry’s specific needs, including regulation and requirements for specialized skills.  Here’s a snapshot of considerations for key industries. 

China’s strength as a manufacturing hub for electronics and consumer goods partially stem from the availability of highly skilled labor and an extensive supplier ecosystem, including raw material suppliers, component manufacturers, and advanced logistics networks. 

To compete, countries like Vietnam and India are actively upskilling their workforces. They are also actively building high-tech zones and offering incentives to attract high-value assembly operations. Apple is one electronics company leading the way in shifting some manufacturing to these countries to diversify their supply chain.

China offers many advantages for textile manufacturers, including an end-to-end textile supply chain with raw materials, dyeing facilities, trim suppliers, and assembly. Still, many textile manufacturers have been early adopters of the China Plus One strategy driven by the need for lower cost labor. In fact, China’s share of global apparel production has been sliding over the past 15 years.

Industries like the automotive and aerospace sectors must prioritize regulatory compliance when making decisions about where to base manufacturing. They also require access to highly skilled engineers and technicians. 

Thailand and Vietnam are among the preferred ‘Plus One’ locations in these industries, with Vietnam the fifth fastest growing aviation market in the world. 

The pharmaceutical sector in particular has recognized the need to diversify supply chains, and India has become the world’s largest supplier of generic medicines.  

However, the overall adoption of the China Plus One strategy in healthcare is still evolving as businesses weigh up the risks and benefits and navigate issues such as compliance. 

China Plus One has evolved from a defensive option into a strategic necessity for businesses wanting to build more resilient supply chains. The opportunities it provides are immense but success depends on careful planning and evaluation based on business needs and goals.

Key takeaways: 

• China Plus One is not just a cost-saving measure but a smart strategy to build resilience

• A dual setup allows businesses to benefit from the reliable infrastructure and skilled labor offered by China while creating new hubs for growth and flexibility 

• ‘Plus One’ locations should be carefully assessed based on factors such as infrastructure, regulation, availability of skilled labor, and trade incentives 

• The right logistics partner is key navigating processes like customs clearance and maintaining a resilient supply chain 

Ready to diversify your supply chain? Explore the advantages offered by different countries in Southeast Asia and beyond.