The China Plus One strategy became a hot topic of discussion once again as the Covid-19 pandemic engulfed the globe. The reason for this was a massive shift in the role of China’s manufacturing industry in the global export value chain.
With supply chain diversification at this level, it can be an excellent opportunity for Indian players to recapture a significant chunk of the international pie.
Let us first dive into what triggered this change in the Chinese manufacturing sector, thus adding fuel to the China Plus One strategy.
Why Are Companies Leaving China?
The most important reason that is driving the companies away from China is the implementation of the Personal Information Protection Law that came into effect in November 2021
For companies that do business with China, this legislation increases compliance costs while creating an environment of uncertainty. Furthermore, those flouting it will be liable to penalties for up to US$7.8 million, or 5% of their annual revenue.
Chinese regulators are cracking down on these technology giants, driving them towards considering the China Plus One strategy.
What is China Plus One Strategy?
Businesses from the western world have always found the low production and labor costs very attractive in mainland China. Along with affordable manufacturing came access to a large domestic consumer market. These were the primary reasons that have driven companies to invest in China for the last two decades.
The adverse impact of this voluminous demand has increased operational costs for manufacturers in China. The benefit of low prices and consumer demand no longer existed compared to what countries in the ASEAN region could offer these companies.
The China Plus One strategy, on the other hand, is a business strategy that deters companies from investing in China. The goal here is to diversify the supply chain across different, more favorable manufacturing geographies around the globe.
Companies looking to diversify are looking for stability – a stable economy, a stable government, and consistent consumer demand that countries like India, Vietnam, Indonesia, Malaysia, Thailand, the Philippines, and Bangladesh have to offer.
Needless to say, the China Plus One strategy comes with its own challenges. Corporations will be subject to navigating new laws, new markets, and streamlining the business over multiple locations. However, the advent of Covid-19 and the China-US trade war expedited the rise of the China Plus One strategy over the last two years.
How Can India Benefit from the China Plus One Strategy?
Companies globally are looking to de-risk their supply chain. Therefore, the China Plus One strategy can open many doors for Indian manufacturers, primarily in the auto and auto components, engineering-related products, and chemical sectors.
India offers the cost advantage and benefits from a lower-cost sourcing point which global companies will not be able to overlook altogether.
The way for India to capitalize on the China Plus One strategy is to learn what China did right and do it better. This includes focusing on low operational costs, maintaining quality standards, timely delivery, and establishing reliability as a global manufacturing partner.
Indian companies looking to increase their footprint in the global supply chain will have to relook at their models of capacity utilization. The idea is to bifurcate resources where domestic demand should not be combined with meeting international needs. Both are different business opportunities and must be treated accordingly.
Going forward, this will allow Indian companies to scale and invest in exclusive capacity to give their customers confidence by manufacturing in volumes enabling them to gain credibility in the international supply chain ecosystem.
The government of India is also supporting the China Plus One strategy by improving the ease of doing business. This has incentivized new undertakings with lower tax liabilities for companies.
What Opportunities Have Emerged for India?
With the China Plus One strategy already playing out, India has benefited somewhat from this opportunity. Experts believe that within the manufacturing sector, any area that offers scale can be an opportunity for India.
For instance, China has always been the dominant leader globally across several industries, such as home textiles and cotton apparel. However, with the shift in production strategy and inadequate supply of cotton year, Chinese manufacturers are concentrating more on man-made fibers. This led to a rise in demand from Indian players, which could lead to an additional CAPEX of Rs 120 billion in the next decade for India.
Another opportunity emerged when Chinese majors began to shift from APIs toward formulations. However, this impeded Indian companies, especially during COVID times, as India could replace imported players with the government’s encouraging gestures.
Footwear is another industry that has gained as most South Asian and Chinese competitors lost traction because of low-value addition and wage pressures.
Despite the challenges, India is an attractive option for companies adopting the China Plus One strategy. Strategic location, a large domestic market, skilled labor, and low labor costs are key factors that will help corporations decide where to take their business.
Why did western companies start pulling out of China?
China has made a strategic shift from the production of low-value goods to high-value goods. This triggered global technology companies to either downsize their operations or completely pull out from mainland China.
Why did the China Plus One strategy find renewed vigor among corporations?
China’s strict data privacy law outlined that companies would be legally bound to abide by the data collection and storage terms, thus limiting control over sensitive information that is incremental to business success.
How has the government encouraged international companies to bring their business to India?
Bilateral and multilateral free trade agreements have been signed or are in the negotiating stage by the central government with 40+ countries. This will enable companies from these geographies to avoid the high-tariff trade barrier set up in India when doing business. This is encouraging more global companies to consider India as an alternative to China.