The description of China as ‘factory to the world’ may soon come to an end, as many other countries in Asia – and the rest of the world – are taking on the manufacturing that was once done in China. For years multinationals have pursued China+1, or China+2 strategies (where they source from one or two other countries aside from China) to diversify their operations. These strategies were put in the limelight during the disruption of the Covid pandemic, and now the long-term effects of such moves are becoming solidified – with a number of countries benefitting from the move away from China.
It wasn’t just the pandemic that prompted the shift – worsening US-China relations have been cited by many observers as a driver towards other countries. And the results of that became apparent in 2023 when Mexico overtook China as the largest trading partner of the United States. This has been put down to the impact of increased tariffs on Chinese imports to the US. One consequence of this, note Luis Torres and Aparna Jayashankar, in a paper for the Federal Reserve Bank of Dallas, is that there has been a steep rise in Chinese foreign direct investment in Mexico. Although the share of Chinese investment is very small, it has been rising quickly as Chinese companies seek to get closer to the US market and find a way of avoiding the ‘Made in China’ label.
There are several reasons why multinationals are moving their operations away from China. Aside from the rising trade tensions between China and the United States, the cost of production has risen as China has become a richer country, which has had a knock-on effect on labour costs. Meanwhile, the impact of the one-child policy in China also means that overall, the workforce is ageing.
For companies that need to nearshore to markets in North America, investing in Mexico makes sense. However, there are many others that are still targeting the Chinese consumer market and wish to continue with their manufacturing in Asia so they get the benefits of proximity to China.
Keeping production in Asia
Chng Boon Huei, CEO of Flexi Versa Group, an electronic manufacturing solutions (EMS) company, notes in a blog that China as the ‘world’s factory’ worked well for many multinationals, and developed markets like the US and Western Europe were keen to outsource production to China instead of doing it themselves. In recent years, however, that has started to change as the costs of doing this increased. And then there was the pandemic, which wreaked havoc on global supply chains and forced many to reconsider reliance on China. Chng writes that many are choosing a China+1 strategy to reduce dependence on a single market, but it still makes sense for them to stay in the region. “For many global brands China is now also a considerable, and growing, market for their products, so there’s a clear need to maintain some manufacturing in the region.”
China+1 strategies, or China+n (where ‘n’ is any number of additional countries that a multinational may choose as an alternative to China) have been in place for many years, but it was the shock of the pandemic that brought them into sharp focus. Sumanta Panigrahi, Head of Trade & Working Capital Solutions, Asia North, Treasury and Trade Solutions, Citi, comments that the supply chain disruptions from the pandemic were unprecedented and had a significant impact on the financial resilience of companies. This has led many corporates to reconsider their supply chains and have less concentration risk. “Coupled with increasingly stringent tariff regimes, geopolitical concerns, and disruptions to shipping lanes, the risks associated with having a concentrated supply strategy in China outweigh cost benefits. Supply chain diversification continues to be a board-driven, secular mitigation strategy being followed by companies,” he tells Treasury Today Asia.
China for China strategies
Now that the pandemic is in the rear-view mirror for most companies and countries, the diversification strategies that were put in place during that period remain and it is becoming clear which countries will stand to benefit from this macro shift over the long term. Some observers have commented that in addition to China+1, many corporates will continue to employ a ‘China for China’ strategy where they continue to maintain operations in the country to support the production of goods that are specifically for the Chinese consumer market. They also point out, that all things considered – such as the level of productivity and capacity of the infrastructure – China is still a very cost-effective place to maintain operations.
The ‘China for China’ approach, however, has been questioned by observers such as Alex Capri, Research Fellow at the Hinrich Foundation and Senior Lecturer at the National University of Singapore, who argues that the ‘China for China’ model is now coming to an end. Capri points to the complexities of local regulations for international companies, such as those regarding data security and data privacy, as well as increased competition from local Chinese companies which means that a ‘China for China’ strategy is no longer viable for some foreign corporates. In a whitepaper published in October 2023 on the topic, Capri writes, “In the 21st century, geopolitics and direct competition with Chinese partners, which by now have grown increasingly sophisticated by indigenising domestic innovation based on foreign know-how, have put the in-China-for-China model under severe strain or even killed it.”
The post-pandemic landscape
As these various strategies are employed and post-pandemic landscape takes shape, there are a number of key markets in Asia that stand to benefit from this shift. India, in particular, has emerged as a key beneficiary. Typically, developing economies follow a trajectory of manufacturing and as they increase their GDP [gross domestic product] the economy evolves to other areas such as services, technology or knowledge-based industries. For many years it seemed as if India had skipped the manufacturing stage and opted to pursue the service industry as well as specialising in information technology (IT) instead. A focus on manufacturing, however, seems to be gaining renewed attention in India. At a Milken Institute event in May 2023, Pravin Agarwala, Co-Founder and Group CEO of BetterPlace, a Indian company that provides human resources software, said, “When you’re thinking about India as an opportunity, think not only from the IT point of view which is the driving force of course, but think from a manufacturing point of view as well, because that’s where the second-largest driving force is going to be.”
As well as India, ASEAN [the Association of Southeast Asian Nations] region also stands to benefit from the China+1 strategies as many corporates wish to continue with operations in the region that are still close to China. Mayank Gupta, Head of Trade and Working Capital Solutions, Asia South, Treasury and Trade Solutions, Citi, comments: “We see significant investments into India and ASEAN markets across textiles, semiconductors, automobiles and components, and electronics manufacturing services. As an example, the Apple ecosystem, which was previously largely China-based, has largely been replicated in India.”
Gupta also says, “In Asia, India has been a key beneficiary of diversification strategies, along with markets like Vietnam and Malaysia in ASEAN. In some cases, supporting factors for beneficiary markets include proactive government policies and incentives, the availability of skilled manpower and infrastructure, and the ease of doing business.”
We see significant investments into India and ASEAN markets across textiles, semiconductors, automobiles and components, and electronics manufacturing services.
Mayank Gupta, Head of Trade and Working Capital Solutions, Asia South, Treasury and Trade Solutions, Citi
‘Make in India movement’
India has been driving a ‘Make in India’ push for a number of years, since Prime Minister Narendra Modi launched a campaign in 2014. The prime minister’s office states that policymakers have debated for years how to make India a global manufacturing hub and Modi spurred the initiative to facilitate investment, foster innovation, enhance skill development, protect intellecutal property and build best in class manufacturing infrastructure. Now the effects of such a campaign are taking root and India has been described by many observers as having a great opportunity to seize the manufacturing that would otherwise have been done in China. Ajay Banga, the former CEO of Mastercard and now the President of the World Bank, commented in July 2023 on how India had a window of opportunity with the China+1 strategies of companies. “I think India’s opportunity currently is to cash in on the ‘China plus one’ opportunity,” he was quoted as saying by Reuters.
This echoes the sentiments of Amit Baraskar, Vice President and Head – Treasury, Thomas Cook (India) Limited, which were expressed recently in a Corporate View profile for Treasury Today Asia. He explained that the economic environment is improving in India and the country is back on course – after the pandemic – to reach Prime Minister Modi’s target of becoming a US$5trn economy. Baraskar also commented that India is targeting becoming the third-largest economy in the world by 2028. “Slowly and steadily, India is becoming a world leader,” he told Treasury Today Asia.
The attention on India has also been highlighted in press coverage of key announcements by major manufacturers. For example, Foxconn, the Taiwanese electronics manufacturer which is a major supplier to Apple, as well as Pegatron (another Taiwanese Apple supplier) have stated they intend to move their manufacturing to India. Pegatron, for example, has been steadily increasing its production outside of China and is expected to focus on India and Vietnam as key locations in the future. Pegatron has increased its presence in other countries in recent years – expanding in Indonesia in 2020, Vietnam in 2021 and Mexico and India the year after, according to news reports.
Some news reports point to the potential of India and how it may be able to replace China as ‘factory to the world’. Apple has made several announcements about its iPhones and manufacturing in India – for example, some of the production of the iPhone 14 shifted there in 2022. And in December 2023 it was reported that Apple stated its preference for batteries for the iPhone 16 to come from Indian suppliers.
The rise of the ‘ASEAN-six’
Meanwhile, elsewhere in Asia, some key markets in ASEAN have also emerged as key beneficiaries of multinationals’ shift to China+n strategies. In July 2023, Agnieszka Maciejewska, Associate Director, Models and Scenarios, Global Intelligence and Analytics, and Anton Alifandi, Associate Director, Country Risk, at S&P Global Market Intelligence, wrote about the risk outlook for companies that are moving production to these markets. Initially, they state, corporates moved to China+1 to pursue lower costs but now the motivation is more about diversification and protecting themselves against the negative impact of worsening US-China trade relations. “South-East Asia’s proximity to mainland China, its economic partnerships with the US and mainland China, and relative political stability – Thailand being a notable exception – make the region a preferred China Plus One destination,” they write.
The ‘ASEAN-six’ economies – Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam – are emerging as economies that are trading well with both China and the US. They are also part of the Indo-Pacific Economic Framework for Prosperity (IPEF) that aims to facilitate trade with the US and encourage US foreign direct investment. “ASEAN countries view their participation in the IPEF as a way to be included in the broader US strategy to minimise its dependence on mainland China,” Maciejewska and Alifandi write. And they add, “The ASEAN-six countries are generally neutral toward US-mainland China strategic rivalry and instead seek to maximise economic relations with both countries.”
These ASEAN countries are a key part of corporates’ China+1 strategy, and the US has encouraged the expansion of its multinationals into the region. ASEAN’s trade with China is now greater than that with the US. If ASEAN economies start to lean towards the US in favour of China, however, this could have an impact on their trading relationship with China. Jeffrey Reeve, Associate Professor with the US Naval War College at the Naval Postgraduate School in Monterey, California, writes in a piece for Global Asia in September 2023: “Washington’s support for private sector activity in South-East Asia is particularly noteworthy because all the main C+1 [China+1] recipient states – Indonesia, Malaysia, Thailand and Vietnam – are first-tier strategic priority states for the US in the Asia Pacific. While these countries may welcome closer security ties with the US, they are equally aware that such ties could complicate their relations with China.”
The Tiger Cubs
Chng of Flexi Versa Group, comments that there has been a resurgence of the ‘Tiger Cub’ economies – Malaysia, Thailand and Vietnam – which have been benefitting from China+1. As the CEO of an electronic manufacturing company that is based in Malaysia, he has seen this first-hand.
For corporates that opt for the Tiger Cub economies, they are able to effectively diversify away from their dependence on China and they also get the security and the benefits of continuing to manufacture in Asia. He argues the Tiger Cubs have much to offer. “They do not attract the political interest of the rest of the world, and hence are less likely to suffer shifts in tariffs or even trade sanctions. They benefit from their proximity to China and can leverage much of the supply chain used by Chinese manufacturers. They do not have the volatile labour rates of many regions of China,” he writes.
The impact on Chinese corporates
It’s not just foreign – or non-Chinese – multinationals that need to consider their reliance on China; it’s also Chinese corporates that have diversified. This is the case with the increased foreign direct investment in markets like Mexico that overcome the negative impact of tariffs on Chinese imports into the US, for example. As well as Mexico, Chinese companies have also been expanding their operations elsewhere in Asia – much in the same way as other corporates – to markets like India and ASEAN. This was highlighted with companies like Chinese battery maker Desay that have recently expanded to India.
Panigrahi at Citi comments, “Chinese corporates are also diversifying their supply chains with investments in capacity outside of China. Dependencies and efficiencies have been established over decades between multinationals and Chinese suppliers and they continue to be valuable. Hence, the strategy is focused on diversification for resilience rather than completely moving away from China.”
