What and Why?

For the past three decades, Western businesses have heavily invested in China due to its low labor and manufacturing costs, as well as its growing consumer market. This has led to an over-reliance on China for their business interests, which can be risky given geopolitical tensions and unforeseen disruptions. China Plus One Strategy (C+1) is a supply chain strategy that encourages companies to diversify their supply chain and manufacturing activities away from China to mitigate risk. The strategy emerged in 2013 due to concerns about global dependency on China and has gained ground with trade tensions, COVID-19 disruptions, and rising labor costs.

This new strategy would allow businesses to continue to invest in China, while spreading their operations across multiple countries, which are considered the “Plus One”. By establishing additional sourcing and manufacturing locations outside of China, companies found a way to mitigate business risks, access new consumer markets, and explore other innovation and technology, all while keeping their operations cost-effective.

Pros:

• Risk Mitigation: Supply chain disruptions can be caused by a number of factors, from natural disasters to political tensions to global pandemics. This can be avoided if a company has a diversified supply chain making it highly adaptable.
• Cost Savings: Rising labor costs in China is one of the main reasons China Plus One emerged. It can also allow further cost savings in the form of favorable exchange rates, and tax incentives in different countries.
• New Markets: By choosing the right “Plus One” country, companies can tap into new markets. A better understanding of consumer behavior, trends, and demands in different parts of the world can lead to a more stable demand for a company.

Cons:

• Upfront Costs: Although labor costs might be reduced in the long term, there is a need to invest a lot of time and money in setting up new plants, establishing new supplier networks and ensuring that regulatory compliance is met.
• Quality Control: Ensuring consistent product quality demands meticulous monitoring, testing, and compliance efforts. Failure to implement quality control measures across your operations could lead to poor customer satisfaction and a bad brand reputation.
• Economic and Political Risks: Companies must assess the different economic and political risks of their “Plus One” countries, including currency fluctuations, labor strikes, regulatory changes, and geopolitical tensions to stay ahead of shifting political landscapes.

Countries such as India, Vietnam, Thailand, Malaysia, and Indonesia have majorly benefitted from this shift.

The Indian Effect:

With competitive wages and a vast pool of skilled labor, India can offer an attractive alternative to China for multinational corporations looking to reduce costs. The effect can be multiplied from the PLI (Production-Linked Incentive) initiative introduced by the government, which incentivizes local production and technology localization, boosting India’s own manufacturing capabilities. Some of the sectors that can reap the benefits are:

• Textiles: US has instated a ban on cotton produced in the Xingjiang region, the biggest cotton producing region in China. Textile industry is a significant contributor to the Indian GDP and considering factors like abundance of raw materials and presence across the entire value chain, it is a prime sector which can attract funds.
• Metals: India’s natural resources are well-positioned to meet the demands of the domestic and global metal industries. With China’s growing economy setting the stage for increased domestic steel demand, the world is likely to look towards India to fulfill its metal needs.
• Specialty Chemicals: Repeated disruptions in plant operations in China as a result of the government’s policy to discourage energy intensive and polluting industries, along with COVID-induced lockdowns, have accelerated the trend of buyers diversifying their sourcing. As per industry reports, this sector is poised for further expansion, with an anticipated CAGR of 11–12%.
• Pharmaceuticals: India’s $42 billion pharmaceutical industry is the world’s third-largest manufacturer of pharmaceuticals. Attractive investment perks, production-linked incentives, FDA-compliant facilities, and competitive wages give India an edge in the global pharma landscape as input cost inflations threaten to progressively erode China’s cost advantage.

Read Further:

• Current strategy state
• ASEAN as an alternative