China Plus One Strategy in Action: Benefits and Opportunities

 

What is China Plus One strategy?

In 2013, worries over the world's reliance on China gave rise to the China Plus One plan. By diversifying their production and supply chain operations outside of China, businesses can lower their risk and lessen their reliance on the country.

 

The term "China Plus One" describes a business approach used by organizations, particularly multinational firms, for diversifying their supply chain and manufacturing operations by incorporating a different manufacturing or sourcing location outside of China. Additionally, the company plans to diversify operations or divert capital into other developing nations like India, Thailand, Turkey, or Vietnam rather than concentrating solely on China.

 

Why are companies adopting the China Plus One strategy?

1. Geopolitical tensions such as the U.S.-China trade war can cause restrictions, bans, and tariff changes.

Continuous geopolitical disputes, such as the U.S.-China trade war, cause uncertainty for companies doing business in these areas. Businesses could experience abrupt changes to trade restrictions, tariffs, or even prohibitions on specific products. These uncertainties have the potential to impair profitability, raise expenses, and disrupt business operations, which is why businesses are looking for more stable conditions for their manufacturing operations.

 

2. Sudden policy change or ban on China

Abrupt policy changes, including trade restrictions or prohibitions on goods from particular nations, can be enacted by governments. The operations of businesses that rely on Chinese manufacturing could be significantly impacted if they are suddenly unable to import or export items. Companies can avoid being disproportionately impacted by such regulatory changes by diversifying their manufacturing across several nations.

 

3. Manufacturing in China is becoming less competitive due to rising labor costs

The cost advantage that formerly made China a desirable location for manufacturing declines as labor expenses and wages rise. This implies that because of increased costs, businesses may find it less profitable to manufacture items in China. It is more difficult for businesses to keep their competitive edge when labor costs are high because economies of scale, which benefit from cost reductions as production volumes increase, are less efficient.

 

4. Political Risks

The way that nations conduct business with China has been influenced by recent political events including the US-China trade war, unrest along the India-China border, and Chinese actions in the East China Sea. Additionally, an important factor is the general status of diplomatic ties between China and other nations. Strong diplomatic links can Trade with China may be restricted by political embargoes or sanctions imposed by nations or international organizations. These actions may cause supply chain interruptions and force businesses to look for new markets.

 

China Plus One's benefits for Indian sectors

1. Pharmaceuticals Industries

In terms of manufacturing volume, India's pharmaceutical sector, valued at Rs. 3.5 lakh crore, ranks third in the world. India's status as the "world's pharmacy" was emphasized in the fiscal year 2021–2022, when it provided about 70% of Who is vaccination requirements. The country offers a 33% lower production cost and has the most FDA-compliant pharmaceutical facilities outside of the US. With development potential projected to exceed Rs. 10 lakh crore by 2030, the Indian pharmaceutical industry is likely to grow rapidly and attract global investment.

 

2. IT Sector in India

An important factor in India's economic expansion has been the IT/ITeS sector. The country has established itself as a hub for outsourcing services and is home to several significant companies in this sector, such as Wipro, Infosys, and TCS. But historically, this sector's manufacturing has lagged behind China. As multinational corporations look to expand their supply chains, India has become a desirable location. India has already seen the establishment of manufacturing facilities by industry titans like Apple, Hyundai, and BMW, and the Make in India campaign has further enhanced the nation's appeal as an investment destination.

 

3. Metal Industries

India's natural resources are in a good position to satisfy the needs of the metal industries both at home and abroad. The globe will probably turn to India to meet its metal demands as China's expanding economy creates the conditions for a rise in domestic steel demand. For the specialty steel industry, India has launched a Production Linked Incentive scheme that is expected to draw in over INR 40,000 crore in investment over the course of the next five years. Furthermore, China's regulatory moves to remove export subsidies and impose export taxes on processed steel goods like hot-rolled coil make India an even more alluring option for international companies.

 

Examples of the China Plus One Strategy in Action

1. In September 2020, Japan is urging its businesses that have invested heavily in China to relocate their plants to nations such as Bangladesh, Vietnam, India, Indonesia, Malaysia, Thailand, and so on. The fact that Japan is providing financial support to these businesses by allocating approximately US$ 2.2 billion for this reason further demonstrates their seriousness in this area.

 

2. In October 2022, in an effort to preserve US technological dominance and allay security worries, the Biden administration implemented export restrictions to restrict China's access to cutting-edge US semiconductors and technologies. In 2023, these regulations were strengthened, focusing on sectors like sophisticated chips and supercomputer components.

 

3. In October 2022, Apple has relocated 11 factories from Taiwan to Vietnam; other key companies, including Foxconn, Luxshare, Pegatron, and Wistron, have also increased the size of their current production facilities in Vietnam. In August, Foxconn Corporation entered into an agreement with Saigon-Baciang Industrial Park Joint Stock Company (SBG) to lease an extra 50.5 hectares of land for the construction of a new plant, coinciding with the media's coverage of Apple's relocation to Vietnam. Approximately 30,000 jobs are anticipated to be created at Quang Chau Industrial Park following the opening of this business.

 

4. In April 2024, Dixon Technologies, an Indian firm, benefited from the Production-Linked Incentive (PLI) program at a time when the world was shifting its manufacturing away from China as a result of geopolitical concerns under the China+ policy.