With supply chains facing increasing complexities and risks, a “China Plus One” sourcing strategy has emerged as crucial for businesses operating on a worldwide scale.

This approach is intended to diversify manufacturing beyond China to reduce supply chain risks and adapt to changing market conditions. It gained traction around 2014-2015 due to rising labor costs in China, and accelerated during the peak of the COVID-19 pandemic.

Despite the ongoing success of the Chinese economy, the concept of China Plus One represents a strategic evolution, enabling businesses to maintain competitiveness and adaptability in an increasingly dynamic global market.

China has held a dominant position in global manufacturing for well over a decade. According to the United Nations Statistics Division, it accounted for 28.7% of global manufacturing output in 2019, surpassing the U.S. by more than 10%. This shift occurred in 2010, when China overtook the U.S. to become the world’s largest manufacturing economy. By 2019, the total value added by China’s manufacturing sector had hit nearly $4 trillion, contributing to almost 30% of the country’s total economic output.

Heavy reliance on China for manufacturing and sourcing, however, comes with inherent risks, including delays, quality control issues, increasing costs, economic tensions and geopolitical issues.

The U.S.-China trade war has underscored the dangers of over-reliance on China. Tariffs and trade tensions have prompted many businesses to reconsider their supply chain strategies and diversify their manufacturing locations. Between 2020 and 2022, China’s stringent zero-COVID policy resulted in factory shutdowns and disruptions in production. Moreover, the country’s escalating manufacturing costs, attributed to rising wages and an aging labor force, have pushed companies to seek alternative manufacturing locations.

Given China’s significant role in global manufacturing, it’s essential that businesses diversify sourcing and manufacturing to mitigate risks and ensure their supply chains stay resilient. 

Charting New Territories

When choosing manufacturing locations, companies and investors must consider several key factors. These include strategic geographical location, geopolitical relationships, economic and financial stability, political stability, favorable investment climate, market openness, trade liberalization, infrastructure quality and competitive labor capabilities.

The Association of Southeast Asian Nations (ASEAN), founded in 1967, today comprises Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Vietnam, Laos, Burma and Cambodia. Their proximity to China, economic ties with both the China and the U.S, and political stability make ASEAN an attractive China Plus One destination. Noteworthy investments in the region include chip-testing factories in Malaysia, electric vehicle supply chains in Indonesia, and electronics facilities in Vietnam. Members of ASEAN promote new investments through tax cuts, business-friendly policies, fiscal incentives and infrastructure development. 

Meanwhile, Mexico is also emerging as a key China Plus One market, offering competitive labor costs, low distribution expenses for North American brands, and streamlined logistics by avoiding Pacific Ocean routes. Mexican manufacturers have significantly enhanced their electronics and printed circuit board assembly (PCBA) manufacturing, with ample capacity for high-volume production. Additionally, Mexican facilities often provide a more accessible and familiar environment for U.S. companies.

Opportunities for Diversification

How, then, can manufacturers determine where location-based risks exist in their supply chains, so that they can mitigate them through China Plus One?

Lack of visibility into the supply chain remains a major challenge. According to a report by Gartner, only 6% of companies have achieved end-to-end supply chain visibility. 

However, it’s becoming much easier to monitor supply chains from end to end, with the help of tools that associate components with suppliers’ manufacturing locations, including fabs, factories, and sites for assembly, packaging and testing. These applications help to determine risks at the bill of materials, parts and manufacturing levels, by identifying instances where China is the sole supplier.

Also proving to be of value in identifying sourcing patterns are artificial intelligence and machine learning. They can analyze vast amounts of data to identify optimal sourcing locations, predict potential disruptions, and streamline operations. In the process, companies can make informed decisions, mitigate risks, and ensure the smooth operation of their supply chains in an increasingly complex global market.

By harnessing a data-driven approach to supply chain visibility, companies can gain better understanding of their sourcing landscape, identifying whether parts are being sourced from a single or multiple suppliers, and determining which manufacturers are geo-diversified. The result is more informed decision-making, and ensured continuity of the supply chain.

Tammy Max is director of technical content at Accuris.