China Plus One is Getting Real

In 2014-2015, China Plus One was all the rage, and everyone (including us) was talking about the risks of companies putting all their eggs in one “China basket.” It was determined a China Plus One strategy was the way to counter those risks. This strategy involved companies having some/most of their products made in China, but having some other portion of their products made elsewhere. I’m thinking a consulting firm like McKinsey or Boston Consulting came up with this plan, but I don’t know if that was in fact the case.

Around that same time, many of our clients discussed the pros and cons of a China Plus One strategy with us. I do not remember how many such clients discussed such a strategy with us, but for the sake of analysis here, let’s say it was 100. And of that 100, I estimate about 50 actually conducted serious research regarding doing this. Of this 50, I estimate the following occurred:

1. Thirty-Five decided not to do anything at all. These companies determined that the out of pocket costs and/or the higher production costs elsewhere did not warrant moving any of production outside China.

2. Eight realized they would be better off having all their products made elsewhere. I recall some clothing companies and housewares companies moved all their production to Vietnam. One company moved all its shoe production to Angola and another moved all of the production for some of its houseware products to Ukraine.

3. Seven companies split their production between China and another country. I recall Thailand, Mexico and Vietnam as countries to which I know some production was moved. In these cases, less than all production was moved for one or more of the following reasons:

    • Not wanting to move all production without more on the ground testing of the new country/supplier.
    • Not wanting to move all production because the costs in the new country were higher.
    • Not wanting to move all production because they wanted their production diversified.

I do not know the current status of all of the above companies, but I do know some of those that partially diversified out of China eventually returned all their production to China, and some of those that started out by partially diversifying their production out of China eventually moved all their production out of China.

What I also remember is that most of the companies that moved production out of China initially had problems with their new suppliers in their new country and I would find myself reminding them that they had experienced similar problems when they first went into China.

To sum it up, China Plus One was a mixed bag. With hindsight, my conclusion — and it does not take deep analysis to say this — is that the success of this strategy depended mostly on the company moving from China, the product moving from China, and the quality of the supplier in the country to which the move was made.

I am writing about China Plus One today because that strategy is back and back big right now, though it is commonly being called, “diversifying away from China,” “decoupling from China” (yes, we have clients who call it this), or “getting the hell out of China as best we can.”

Once again, diversification away from China is taking many forms. In Sony separates production of cameras for China and non-China markets, Nikkei writes how Sony moved its production of all cameras it sells in Japan, the United States and Europe from China to Thailand, as “part of growing efforts by manufacturers to protect supply chains by reducing their Chinese dependence.” Sony’s China plant will continue producing cameras,but those cameras will be strictly for China’s domestic market.

In tracing Sony’s decision to move production out of China, Nikkei mentions how Sony first shifted its manufacturing of cameras bound for the United States after “tensions heightened between Washington and Beijing,” and then shifted the rest later.

Nikkei also notes how other Japanese companies are moving production out of China, including Canon, which moved a chunk of its camera production from China back to Japan, and Daikin Industries which will soon be making air conditioners “without having to rely on Chinese-made parts”

Similarly, in Taiwan’s Foxconn and others accelerate investment in Mexico, Reuters writes of how Foxconn “and other Taiwanese tech suppliers are increasing their production capacity in Mexico to meet a growing demand for electric vehicles (EVs) and servers to be made in North America.”

Our law firm has been seeing similar plans and actual production movements with our clients — especially since Russia invaded Ukraine. In just the last year, our international manufacturing lawyers have helped companies with moving some or all of their production from China to Mexico, Thailand, India, Indonesia, the Philipines, Korea, Taiwan, Colombia, and Peru, among others.

The desire of companies to move out of China is both stronger and more urgent today than back in 2014-2015, but the percentages of companies that actually make such a move are not that different from back then. The big issue for those who choose not to move their production from China elsewhere is that even if they do move production from China, they will be getting so many component parts from China that the move just doesn’t make sense. A high level supply chain executive at Fortune 20 company recently told me of how despite the media always touting his company having moved large swaths of its production out of China, the bulk of the products it is making outside China are still made up mostly of Made in China parts.

And yet, I expect the need for Chinese parts in foreign countries will gradually dissipate.

As more companies move their production out of China, more component parts manufacturers are and will continue to move their production out of China as well. This will cause more companies to move out of China, which in a virtuous circle will cause more component parts manufacturers to move out of China as well. This is already happening in some industries, but slowly. I am also seeing a massive increase in Chinese component manufacturers moving their production to places like Vietnam and Mexico. This is good to the extent it will increase the options for companies looking to move out of China, but this is bad to the extent that it greatly increases the complexity of figuring out the origin/tariffs/duties of any particular product. See US-China Tariffs: What You Can do NOW.

Is that phone charger made with 50 component parts in Mexico actually made in Mexico for UCMCA or US tariff purposes? What if 22 of its component parts come directly from China, 12 come from Chinese manufacturers in Mexico, and the rest from Mexican or U.S. manufacturers? Are the Chinese manufacturers in Mexico really making the component parts in Mexico, or are they just shipping those parts to Mexico from China?Is the phone charger substantially transformed in Mexico? See Avoiding Tariffs on China Products: Substantial Transformation is Key.

May you live in interesting times.