Does China Plus One Actually Work?

Estimated reading time: 2 minutes

Editor’s note: This is the first of a two-part series. Part one focuses on China.

We all know of the current geopolitical challenges between the U.S. and China, which have motivated companies to investigate shifting supply chains to other countries, including Vietnam, Thailand, Mexico, India, and Malaysia while continuing to source mainly from China. This strategy is being referred to as China Plus One. In this two-part article, I will summarize the current economic trends in China, and look at the trends in wider Southeast Asia.

Why China Plus One?
To understand China Plus One, we must start with the Entity List, which is a trade restriction list published by the U.S. Department of Commerce's Bureau of Industry and Security (BIS). It consists of certain foreign persons, entities, or governments that are subject to specific license requirements for the export, re-export, and/or transfer (in-country) of specified items. Approximately 600 Chinese entities are on that list (Huawei is one well-known example).

When an entity appears on the Entity List, U.S. companies must stop doing business with that entity immediately. Yet, one won’t know in advance which companies might get added or when. Since many Chinese state-owned companies are, by default, also engaged in some kind of military business, maintaining compliance is often quite difficult. Rather than going through a lengthy license application process which may result in a refusal, many OEMs and some of their direct suppliers, such as EMS companies, are looking to de-risk their business by diversifying their supply chain to include some non-China suppliers.

In addition, the supply chain issues during COVID-19 restrictions affected manufacturers and consumers worldwide—from the non-availability of loaded container ships out of China due to lockdowns (Shanghai, Ningbo-Zhoushan, and Shenzhen are three of the world’s top four container ports), to the overcrowding of container ships mainly outside of the Port of Los Angeles, where both chassis and truck drivers were in short supply at the port and empty containers could not get shipped back to China in a timely fashion.

In March 2021, the Ever Given, a container ship that ran aground in the Suez Canal, blocked the canal for six days. The canal is believed to handle about 10% of global commercial maritime traffic, linking Asia's factories to European customers. It is also a major conduit for oil.

All these events led to the emergence of China Plus One. While the reasons for de-risking the supply chain are understandable, this is not an easy task for several reasons, including the size of the sourcing company. The bigger the company, the bigger their leverage to take a new supplier on board or convince an existing supplier to build a factory outside of China.

In theory, everything sounds relatively easy: “Just find another supplier outside of China.” The reality looks completely different because the entire logistics process, including costs, must be considered.

To read this entire article, which appeared in the November 2024 issue of PCB007 Magazine, click here.