What is the China-plus-one strategy?

Coined way back in 2013, it is a global business strategy. China-Plus-One, or just Plus One refers to a strategy in which companies avoid investing only in China and diversify their businesses to alternative destinations.

Where did the need for it arise from? For the last 30 years, Western companies have invested heavily in China, attracted by its low labour and production costs, as well as the considerable and growing size of its domestic consumer market. Leading to an overconcentration of their business interests in China.

In late July, a grouping of 18 economies, including India, the US, and the European Union, unveiled a roadmap for establishing collective supply chains that would be resilient in the long term. The roadmap also included steps to counter supply chain dependencies and vulnerabilities.  This can be seen as a part of the overall China-plus-one strategy.

Officials and companies in Japan and the United States had begun mulling a diversification strategy away from China as early as 2008. However, it was only towards the end of the last decade, when US-China trade tensions were at their peak, that China-plus-one gained steam as an alternative strategy for MNCs. The driving factors range from China's cost advantage diminishing in recent years to growing geopolitical distrust between China and the West.

Other business challenges have also emerged. For example, foreign technology companies have been exiting or downsizing their presence in mainland China because a strict data privacy law that specifies how they collect and store data has been brought in. China's Personal Information Protection Law came into effect in November last year. Among other requirements, companies must now get permission to send personal user information abroad. The new regulation has raised compliance costs and created uncertainty. Also, companies that break the restrictions will face hefty fines.

And then the Covid-19, which continues to make its presence felt. China’s continuing Zero-Covid Policy meant that there was industrial and supply chain disruption. Then there was the associated container shortage. All of a sudden, lead times went up and the global supply chain's reliability took a hit. As a result, the US and Europe, with their sourcing dependence on China, were forced to look at other locations for both reliable supplies of components and materials and production cost advantages.    

Beijing’s Zero-Covid policy, the resultant supply chain disruptions, and high lead times from China ended up giving a fillip to the China-Plus-One strategy for many global firms.  

Clear winners of the China-plus-one model have been the EU, Mexico, Taiwan, and Vietnam, across sectors such as machinery, automobiles, and transport and electrical equipment. According to experts, apart from marginal gains in the machinery sector, India, however, did not significantly benefit from this trade diversion.

But why? India’s declining participation in global value chains has been one of the reasons. Its trade policy has been more protectionist than the other developing countries and has not been driven by the objective of integrating with global value chains. India has also been hesitant in forging preferential trade agreements. It shied away from regional trading arrangements. Clearly, India must reorient its trade policy to take advantage of the increasingly popular China-plus-one strategy.