The China Plus One Sourcing Trend: An Evolving Strategy

Introduction

This article is part one of a two-part series exploring how the China Plus One sourcing trend has evolved during the 2020s, and how recent geopolitical developments have turned it into a strategic imperative.

In the mid-2010s, many large multinational companies began reassessing their sourcing strategies, especially their reliance on China, the so-called “world’s factory.” The landscape of global manufacturing, once dominated by China’s competitive labor costs and massive production capacity, started to show cracks as economic variables shifted.

Why China Began to Fall Out of Favor with Businesses

By the mid-2010s, China’s emergence as a global economic powerhouse brought with it rising costs. The very factors that had attracted companies to Chinese manufacturing became double-edged swords. Labor costs that had once been an attractive feature began to rise significantly, reflecting China’s growing affluence and its expanding middle class. With local manufacturers needing to raise prices, American and European businesses started venturing elsewhere. Prominent figures in supply chain management, such as UCLA’s Christopher Tang, highlighted this shift, stating that rising labor expenses prompted Western companies to adopt a “China Plus One” strategy, setting up operations in Southeast Asian nations like Vietnam and Indonesia.

Fast forward to the 2020s, and the China Plus One strategy transitioned into a broad-based feature of global procurement. This shift sparked questions: What catalyzed this change? How did China’s manufacturing dominance diminish so rapidly?

How the Pandemic Turbocharged the “China Plus One” Strategy

The COVID-19 pandemic proved pivotal, acting as a catalyst for the acceleration of the China Plus One strategy. Throughout 2020 and 2021, a range of crises disrupted global supply chains, from supply shortages to shipping delays and factory shutdowns. The economic repercussions were severe: economists estimate that the U.S. revenue loss from the pandemic could reach as high as $14 trillion. Although only a fraction of that figure can be attributed directly to supply chain issues, even a slight proportion amounts to tens of billions.

During this period of volatility, many corporations realized just how dependent they had become on Chinese manufacturing. China’s Zero-COVID policy resulted in widespread shortages, affecting major enterprises like Apple and numerous Western automotive companies. Restrictions on key manufacturing hubs and logistics slowdowns made it clear that supply chain disruptions in China echoed worldwide. This experience motivated companies to resolve: “never again.” They recognized the risks of over-reliance on a single country and committed to diversifying their supply chains to improve resilience and access alternatives when crises struck.

Statistical data corroborates this shift. Research from the Peterson Institute for International Economics (2024) reveals a notable decrease in U.S. reliance on China for imported manufactured goods, pivoting towards partners like Mexico, Canada, and Vietnam. Indeed, what once represented a stable relationship now showcases a marked and telling reversal.

The ASEAN Bloc and the China Challengers

Over the first half of the 2020s, Southeast Asian nations emerged as capable alternatives to Chinese manufacturing. The Association of Southeast Asian Nations (ASEAN)—comprising Indonesia, Vietnam, Thailand, Malaysia, the Philippines, Singapore, Cambodia, Myanmar, Laos, and Brunei—has assumed a central role in the diversification of sourcing away from China. Countries like Vietnam and Malaysia have expanded their manufacturing capabilities across various industries, ranging from automotive to semiconductors.

Take Malaysia, for example: over years of investment, it has developed a robust semiconductor manufacturing ecosystem, currently responsible for 13% of the global market for semiconductor assembly, testing, and packaging. As analysts at S&P Global emphasize, Southeast Asia’s growing role as a China Plus One destination signals a fundamental shift, marked by significant investments across multiple sectors including electronics and electric vehicles.

The “Shoring” Wave: Mexico, Canada, Vietnam & More

Momentum toward reshoring, nearshoring, and friendshoring has gained steam alongside the China Plus One trend. Companies reconsidered complex supply chains rooted thousands of miles away, opting for suppliers within closer geographical ranges to enhance oversight. This shift involves more than just a buzzword; research from The Reshoring Initiative indicates that in 2022 alone, 360,000 jobs were reshored to the U.S. or created via foreign direct investment—an increase of over 50% from the previous year.

Data also shows that the U.S. has fortified trade relationships with nations such as Mexico, Canada, and Taiwan. Notably, imports from Vietnam doubled between 2017 and 2022, establishing it as a reliable, cost-effective manufacturing alternative. While current U.S. trade policies may strain some of these relationships, the larger evolution of supply chains is a multi-year trend spanning across multiple presidential administrations, gazing favorably towards close U.S. allies and neighbors.

How the Trade Wars Raised the Stakes for Manufacturers

Increasing antagonism between the U.S. and China has further propelled the China Plus One strategy. Since 2020, technology restrictions imposed by the U.S. have affected crucial industries, including electronics, semiconductors, and rare earth minerals. Although President Biden’s administration has adopted a more measured approach than his predecessor, it has still enacted stringent barriers against China’s technology sector.

The timeline of the U.S.-China trade war illustrates this escalating competition. For instance, in October 2022, the U.S. implemented sweeping semiconductor export controls, adding numerous companies to its entity lists. In a reciprocal move, China has restricted the export of essential minerals like gallium and germanium.

These trade tensions have introduced risks associated with sourcing from China in several critical ways. Firstly, importing goods from China has become more expensive due to tariffs. Secondly, as the trade conflict escalates, the probability of additional export controls from China rises, potentially jeopardizing the continuity of American businesses heavily dependent on Chinese-manufactured goods. Furthermore, manufacturers face heightened risks as over 700 Chinese firms are currently under sanctions, raising concerns about sourcing reliability and continuity.

The geopolitical landscape, shaped by trade wars and national security concerns, underscores a pressing imperative for American companies: adopt the China Plus One strategy or risk falling prey to an increasingly volatile supply chain environment.

Part two of this in-depth exploration of the current state of China Plus One will be published Tuesday, March 18.

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