China Plus Two Strategy

In the wake of increasing geopolitical tensions, trade uncertainties, and the COVID-19 pandemic's impact on global supply chains, businesses worldwide have been re-evaluating their dependency on a single country for manufacturing. This shift has given rise to the "China Plus One" strategy, which involves diversifying manufacturing operations by adding another country outside of China to the supply chain mix. However, as businesses become more cautious and strategic, a new variation is emerging: the China Plus Two strategy.

The China Plus Two Strategy:

The China Plus Two strategy is an extension of the China Plus One model. While the latter focuses on diversifying supply chains by establishing operations in an additional country, the former takes it a step further by adding a second alternative country. This approach not only reduces the risk of over-reliance on China but also spreads risk across multiple locations, enhancing supply chain resilience.

Several factors have accelerated the adoption of the China Plus Two strategy:

1. Geopolitical Risks: Escalating trade tensions, particularly between the U.S. and China, have made companies wary of depending too heavily on China for manufacturing. By diversifying across multiple countries, companies can mitigate the impact of tariffs, trade restrictions, and diplomatic conflicts.

2. Supply Chain Disruptions: The COVID-19 pandemic exposed vulnerabilities in global supply chains, with many businesses facing significant disruptions due to factory shutdowns and logistics challenges. The China Plus Two strategy provides a buffer against such disruptions by ensuring that production is not concentrated in one or two locations.

3. Rising Labor Costs in China: Over the past decade, labor costs in China have steadily increased, prompting companies to look for more cost-effective manufacturing options in other countries. By diversifying into two additional countries, businesses can take advantage of lower labor costs and maintain competitive pricing.

4. Demand for Sustainability: Increasingly, consumers and stakeholders are demanding that companies adopt more sustainable and ethical practices. By diversifying their supply chains, companies can choose countries with stronger labor and environmental regulations, thereby aligning with global sustainability goals.

Companies adopting the China Plus Two strategy often look towards Southeast Asia, South Asia, and Latin America as viable alternatives. Some of the popular destinations include:

1. Vietnam: With its proximity to China, favorable trade agreements, and relatively low labor costs, Vietnam has become a preferred destination for companies looking to diversify their manufacturing operations.

2. India: India offers a large labor pool, competitive labor costs, and a growing infrastructure, making it an attractive option for companies looking to establish a significant manufacturing presence.

3. Mexico: For companies targeting the North American market, Mexico presents an ideal location due to its proximity to the United States, competitive labor costs, and robust trade agreements like the USMCA.

4. Thailand and Indonesia: Both countries offer strategic locations, growing infrastructure, and a favorable business environment, making them strong candidates for companies seeking to implement the China Plus Two strategy.

"China plus two" is a strategy that involves companies shifting their focus to products with higher value addition and manufacturing in countries other than China. The strategy is intended to reduce the risks associated with relying too heavily on a single country, such as supply chain disruptions and geopolitical tensions. It can also help companies improve compliance management, access markets, and gain access to technology and expertise.?

Canada announced Monday it is launching a 100% tariff on imports of Chinese-made electric vehicles, matching U.S. tariffs imposed over what Western governments say are China’s subsidies that give its industry an unfair advantage. The announcement came after encouragement by U.S. national security advisor Jake Sullivan during a meeting with Canadian Prime Minister Justin Trudeau and Cabinet ministers Sunday. Sullivan is making his first visit to Beijing on Tuesday. Trudeau said Canada also will impose a 25% tariff on Chinese steel and aluminum. ?

One of the Chinese-made EVs imported into Canada is from Tesla , made at the company’s Shanghai factory, though the U.S. company could avoid the tariff by switching to supplying Canada from factories in the U.S. or Germany. Chinese brands are not yet a player in Canada. However, Chinese EV giant 比亚迪 established a Canadian corporate entity last spring and has indicated it intends to try and enter the Canadian market as early as next year.

These incidents of raising tariffs indicates the scope of China plus one and China plus two and Indian manufacturers needs to work on this opportunity.

Wants to read more on China Plus One then read out this article: China Plus One Strategy and how India will benefit from it.