China Plus One: Strategy or Theory

The goal of this post is to start a discussion on how and why to diversify away from China. Does a China plus one strategy make sense and if so, why?

Earlier this week, I wrote an article, China Plus One: How Vietnam’s Riots Help American Businesses, the theme of which is that Vietnam — despite its recent riots ( which I got to see live) — is still a great country for those looking to diversify from China:

Many American companies doing business in China have what is commonly referred to as a “China plus one strategy.” Such companies will have the bulk of their Asian operations in China, but will also be active in at least one other Asian country to hold down costs or reduce over-dependence on China. The increasing cost of labor (and other inputs) in China has accelerated the number of companies considering this strategy.

If you do a Google search for “China plus one,” Vietnam is listed one, two and three as the “plus one” that specifically mentions another country. It is also the country my law firm’s clients most often mention when considering where to go outside China.

Why do I see Vietnam as the ideal plus one country?

It is a safe (for Americans anyway) and beautiful country. It has great food (sorry, but that matters to me). It is a relatively inexpensive place to live well and its wages are low. Its people generally like Americans, and English is by far the leading foreign language in its schools. Vietnam (not China) is a member of ASEAN and Vietnam (not China) will be a member of the Trans-Pacific Partnership. All these things are plusses for business.

Its main minuses are that its electrical and transportation are relatively undeveloped and it is certainly no less corrupt than China.

I went on to talk about how the recent riots in Vietnam, though troubling and obviously not good for Chinese businesses, are, if anything, an opportunity for Western companies there.

I received a many emails in response to that post, ranging from those that accused me of insensitivity to those which made great points about what it takes to diversify production from China to a place like Vietnam.

One email raised some great points about the differing ways companies should diversify, depending on their size. Here are excerpts from that email:

I was at ________[massive company] at the time of the floods in Thailand and though we thought we had all our production bases covered, that disaster taught me that we didn’t. You can never over-plan for disaster.

Big companies are good at planning for big disasters but like everyone they forget how good things can go bad in an instant. The Chinese companies that have shut down in Vietnam had no idea what was coming. Vietnam is a stable country and they thought they would be fine. I doubt that they had any plans for dealing with what hit them.

Big companies get protection by having factories in multiple countries. When I was with _________ [massive company], that is what we did and it was easy because we had so much money. We would set up factories in different countries for redundancy.

Now that I am at a much smaller company, we cannot afford to use multiple factories or we will lose out on our economies of scale. What we do instead is spend to line up alternatives without using those alternatives yet. It takes us months to find the right source and by having them already in place we save that time. I realize this isn’t perfect, but it is better than just waiting around for a disaster and it costs us very little.

The other email bemoaned how difficult it is to secure manufacturing from countries other than China, due to what we typically call a lack of “information infrastructure”:

I am always reading about the need to diversify production but for a small company like mine, that is easier said than done. We do our manufacturing in Shenzhen and getting started there was easy. We interviewed 4-5 sourcing consultants, then hired one. All of the companies we interviewed had worked with similar products and all of them had been helping companies with China sourcing for many years. It took us almost no time to get going in Shenzhen and everything was easy.

A few years ago when we started getting concerned about China prices we started looking at Vietnam and India and we never got anywhere with either country because we just never felt comfortable with what we were doing and seeing. Neither of those countries are anywhere close to China in terms of helping foreign companies figure out what they need to do to succeed. I just don’t think most smaller companies even have the ability to leave China. You should address this issue sometime.

Like I said, both emails make valid points.

Diversifying to a country like Vietnam is difficult for large companies and even harder for small ones. For some companies, the risks will all but demand they diversify. For other companies, the costs will outweigh the risks and it will not be worth it. About all I can say is that companies of all sizes should at least consider the costs and the benefits of diversifying, with diversifying maybe meaning little more than lining up a back-up supplier if everything goes to hell with the existing one.

My law firm has done a lot of work with both Vietnam and India and I cannot dispute that getting started in both Vietnam and India is more difficult and hence riskier than getting started in China, and this is true of not just manufacturing. The number of good consultants and lawyers and accountants and engineers, etc., is far fewer and far more difficult to find in Vietnam and even in India than in China.