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China plus one strategy explained for manufacturers

A china plus one strategy means keeping your China operations and adding a second country for part of your production or sourcing. The goal is simple: no single country should be able to stop your supply. It is not the same as leaving China.

Why firms are adding a second country now

Two pressures have pushed this idea into board meetings in 2020. The first is trade tension. The United States has put tariffs on Chinese goods in several rounds, starting with lists worth $34 billion and $16 billion, and then a list worth $200 billion. A fourth list took effect in September 2019 at 15 percent, and on 14 February 2020 its rate was cut to 7.5 percent. Rates and lists have changed more than once, so buyers cannot plan on one fixed number.

The second pressure is COVID-19. Factory closures and shipping delays this year showed how much a single source can hurt. Japan has put money behind the idea. Its emergency budget includes 23.5 billion yen to help firms move or spread production to other countries, with ASEAN a stated focus, and 220 billion yen to support output at home of goods that are heavily imported.

Sources: Office of the United States Trade Representative, Section 301 tariff actions; Federal Register notice of 22 January 2020 on the List 4A rate cut; Bangkok Post report of 4 May 2020 on Japan's stimulus.

What the survey data says so far

Surveys show a gradual shift, not a stampede. JETRO's survey of Japanese firms, released on 27 February 2020, counted 159 production bases that were moved, partly moved, or planned for a move because of trade protectionism. China was the starting point in 69.2 percent of those cases. ASEAN was a destination in 61.0 percent.

The biggest single route was China to Vietnam, at 24.5 percent of cases. China to Thailand was second at 14.5 percent. Even so, 48.1 percent of firms with overseas bases that planned to expand still named China. Most firms are adding options, not leaving.

Source: JETRO news release, 27 February 2020, on its 2019 survey of the international operations of Japanese firms.

What to compare before you pick a country

Do not choose a country because a competitor did. Score each option on the same short list.

  • Total landed cost. Include labour, freight, duties, and the cost of parts you still ship in from China.
  • Supplier depth. Check whether local firms can supply the parts you need, or whether you will import them anyway.
  • Market access. Look at the trade agreements that apply to your buyers and the duty on your product code.
  • Infrastructure and lead time. Ports, power, and road links decide how fast an order arrives.
  • Workforce and rules. Ask about skills, turnover, and licensing time.

In the same JETRO survey, 86.1 percent of firms doing or considering business in Vietnam cited its market size and growth as an advantage. Treat that as one input, not a verdict. Your own product and buyers matter more.

Start small and test

You do not need to move a whole plant. Many firms begin with one product line, or one part, in a second country. Ask a local contract maker for a trial batch. Compare quality, price, and delivery against your China line for two or three orders.

Keep your China supplier informed. A calm, planned split often keeps your pricing strong there. Some firms also move work in stages, so they never have a gap in supply. Set a clear target, such as 20 or 30 percent of volume outside China within two years, and review it each quarter.

Common mistakes

The first mistake is moving only the final assembly. If every part still comes from China, the risk has not changed. Map your supply chain down to the parts that matter most.

The second mistake is counting only wages. A cheaper wage can be wiped out by slow ports or by parts that cross borders twice. The third is moving too fast. Government help, such as Japan's subsidies, can cover part of the cost, but it will not fix a weak business case. Check the terms and the application dates before you plan around any grant.

Sources: JETRO news release, 27 February 2020; Bangkok Post report of 4 May 2020 on Japan's stimulus programme.

Next steps this month

List your top ten parts by spend. Mark where each one is made. Pick one that carries the most risk, and request quotes from two suppliers outside China. That small step gives you real numbers to bring to your next planning meeting.

Sources

USTR, Section 301 Investigations, tariff actions (ustr.gov). Federal Register, "Notice of Modification of Section 301 Action: China's Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation," 85 FR 3741, 22 January 2020. JETRO, news release of 27 February 2020 (jetro.go.jp/en/news/releases/2020/e2740919f204387f.html). Bangkok Post via VCCI, "Japan to help shift output to ASEAN from China," 4 May 2020 (en.aecvcci.vn).