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Over the past two decades, Chinese manufacturing has dominated the world, and the country has about 30% of the world’s manufacturing capacity. However, rising geopolitical uncertainties and a host of other factors have led to international companies coming up with the ‘China Plus One’ strategy to diversify manufacturing outside of China to other Asian countries.
Several Asian countries are trying to attract foreign investment through a range of preferential policies and incentives. The ‘China Plus One’ strategy is not new, it was already in place before the pandemic as the US-China trade war had eroded the optimism of investing in China. CME Group in a report said that optimism in the Chinese economy fell from 81% in 2017 to 59% in 2020.
Why China Plus One?
Manufacturing in China was attractive as the country had extremely cheap labour, optimized shipping lanes as well as strong government support. However, this situation has changed over time as labour costs increased manifold, stringent business practices came into play and compliance costs have soared. Additionally, the trade war with the US and resulting tariffs have led to an exodus of foreign manufacturing firms, and further aggravated by Covid-19 which led to a rise in costs.
A survey done by the EU Chamber of Commerce earlier this year found that 23% of the responding firms are considering moving current or future operations out of China due to its strict zero-Covid policy.
Additionally, the zero-Covid policy is weighing on the efficiency of supply chains, with raw materials not being sourced fast enough leading to delayed production timelines, and causing losses for companies. For overseas manufacturers, supply chain issues are probably the biggest factor as they try to mitigate risks during these times of crisis.
Where are manufacturers going?
Meanwhile, manufacturing activity is picking up pace in Southeast Asia. The region offers a lucrative destination for companies to outsource production.
“To promote new investments, ASEAN is streamlining the negative investment list, increasing the ease of doing business, implementing tax cuts, offering fiscal incentives for special economic zones/industrial parks, and boosting infrastructure spending,” said Eastspring Investments in a recent outlook report.
Asia has been a popular destination for foreign investment, and a report by the UN Conference on Trade and Development reported that FDI flows to developing countries rose by 19% to $619 bn in 2021.
Thailand has streamlined the process of obtaining construction permits and is improving its ease of doing business. FDI applications in Thailand rose 59% in 2021, higher than anticipated. For 2022, the country’s Board of Investment expects total investment pledges to match that of the previous year or even improve if the Covid-19 situation improves. Thailand’s exports to the US have risen at an annualized rate of 4.68% as of 2020, and the country has a trade surplus with the US. Main export items include electronics and auto parts.
Malaysia is another country which has received increased amounts of FDI and is among the most popular destination for foreign investors owing to its developed telecommunications networks. Malaysia saw record inflows of foreign money in 2021 of RM48.1 bn ($10.9 bn), the highest since 2016. The manufacturing sector attracted 61.4% of the total investment figure.
The biggest beneficiary of the ‘China Plus One’ strategy has been Vietnam, thanks to its cheap labour and strategic location for shipping. In 2020, the manufacturing and processing sector attracted 58.2% of the total FDI in the country. Back in March, the country’s exports rose to $34.7 bn, up 48.2% month-on-month and 14.8% year-on-year, while China’s top industrial hub Shenzhen saw its export fall by 14% to $18.3 bn year-on-year for the same period. The United States is the biggest export destination for products made in Vietnam, followed by China, Japan, South Korea and Hong Kong.
For the April-June quarter, Vietnam reported GDP growth of 7.72% as exports to the US remained on the higher side and the economy reopened after the Covid shock. The country’s exports to the US increased 22.5% during the first six months of 2022.
India is trying to attract foreign investments by offering production-linked incentives to companies setting up manufacturing bases in the country. “There’s a lot of manufacturing activity which is shifting to India. It started with chemicals and it’s expanding to some of the pharmaceutical supply chain, especially the starting materials, which are called APIs (active pharmaceutical ingredients),” says Peeyush Mittal, Portfolio Manager at Matthews Asia.
Meanwhile, Indonesia is trying to attract companies leaving China by setting up industrial parks in Java.
Who is leaving China?
Nike has been persecuted in China for speaking out against the mistreatment of Uyghur Muslims, and the brand is shifting production facilities to Southeast Asia and Africa. Apple is expanding its manufacturing bases to India, Vietnam, Thailand and Indonesia. Apple suppliers Foxconn and Pegatron are moving 30% of iPhone production out of China and are a part of the production-linked incentive scheme offered by the Indian government.
Samsung, the world’s biggest smartphone maker, has completely shut down smartphone production in China in 2019 and is moving its PC manufacturing operations to Vietnam. The company’s TV factory in China was also shut down in late 2020. Like Samsung, South Korea’s LG Electronics shifted production of refrigerators bound to the US back to its home country in a bid to avoid tariffs.
Some other brands reducing their China exposure include Adidas, Puma, AirBnB, Zoom, Hasbro, Sharp, Dell, HP, and Microsoft, among several others.
Australia-based logistics provider Toll Group in an article notes that new manufacturing centres in Southeast Asian countries are gaining momentum. Vietnam is seeing increased activity in footwear, apparel and retail, Indonesia has an industrial boom, tech manufacturing has picked up pace in Malaysia, while Thailand is seeing investments in electronics and automotive.
“Whether Vietnam will ‘replace’ China as a manufacturing option remains to be seen,” said Matthijs van den Broek, of the Dutch Business Association Vietnam (DBAV) tells Deutsche Welle. “But as an extended or additional investment location, in addition to China, or as part of a wider China-plus-One strategy, is definitely gaining ground.”
“China is too big and too advanced to not make any part of an Asian strategy,” van den Broek adds. “Vietnam is not yet on par with China as far as education level, skilled labour and infrastructure, and logistics are concerned.”
