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China+1: Realigning global supply chains

by Editor

The challenges of recent years have prompted organizations to put their supply chains to the test and strive to minimize dependencies on established production sites. For example, many companies are currently using a China+1 strategy to expand their supplier network and relocate production or branches to new locations with attractive conditions. We discuss which countries are becoming promising alternatives in the context of diversification efforts, as well as the factors that play a role in the China+1 strategy and the tasks that go hand in hand with it.

  1. Reasons for the implementation of China+1
  2. Selection of alternative production sites
  3. China+1 strategy in practice
  4. Mastering challenges with strong partners
  5. Realignment of the supply chain as an ongoing process

Reasons for the implementation of China+1

The challenges of recent years have led multinational companies to increasingly rely on broadening their manufacturing and supply chain footprint and limiting their business risks. With the China+1 strategy, they are able to reduce their dependence on China as the world’s largest manufacturing base. The main focus lies on diversification. Responsible parties seek alternative locations for production and expand supply chain activities to include at least one other supplier in another country. Expanding the supplier base can improve risk management and reduce the risk of potential local production disruptions. At the same time, by gaining access to new markets, companies become less dependent on price increases based on Chinese trade policies or currency issues.

The relevance of China+1 is increasing: Studies show that many companies are turning to multisourcing or dual sourcing as a countermeasure to disruptions in the supply chain. This development is due to the fact that political and economic framework conditions can change rapidly. In addition, technological innovations also play a key role in a possible realignment of the supply chain: For example, the progress of automation and robotics in manufacturing and thus efficiency increases as well as cost reductions can have a decisive influence on the choice of location.

Vietnam, India, Bangladesh? Selection of alternative production sites

If companies want to successfully implement a China+1 strategy, they should consider the advantages and disadvantages of a potential location in advance. In this way, they can ensure that the efficiency and quality of previous processes are maintained even in the event of a possible transfer to another country. Factors such as trade barriers, labor costs, infrastructure, political stability and market access provide information on whether a (partial) relocation of the production site is both feasible and profitable. Countries currently considered as promising “Plus1” locations include Vietnam, India, Bangladesh or Mexico:

Vietnam: As an emerging country with a fast-growing economy, Vietnam’s importance for global supply chains is increasing.  Geographic proximity to China, targeted investments in the development of an ecosystem for science, technology and innovation, and a low labor cost level, especially compared to China, make the Southeast Asian country increasingly attractive for foreign companies. In addition, double taxation avoidance agreements are in place with more than 80 countries and territories worldwide.

India: The country has a growing, business-friendly economy with a large market for local manufacturing and services. India has a well-educated workforce and labor costs are lower than in China, which can also lead to lower production costs. The government encourages the expansion of manufacturing facilities and provides incentives and support for local investment. India, as well, benefits from its proximity to China.

Bangladesh: With an equally favorable geographic location with proximity to India, China and other Southeast Asian countries, low labor costs and a fast-growing economy, Bangladesh can be an attractive “Plus 1” for companies looking to diversify their supply chain. The government has taken various measures to encourage foreign investment and improve the business environment in the country. These measures include, for example, customs duty exemptions or tax breaks.

Mexico: Mexico benefits from its proximity to the U.S., the world’s largest sales market – hence, goods movements  can be handled efficiently. The country has a growing economy, free trade agreements with numerous countries and political stability – factors that offer companies improved market access and attractive business opportunities.

Europe: The relocation of production back to the European continent is also playing an increasing role in the relocation and realignment of supply chains. Eastern European countries such as Poland, in particular, offer favorable conditions compared to many Western European locations. An exception is Portugal, which has also proven to be a competitive location with a good infrastructure and a stable political situation. Portugal represents an important logistics hub for trade flows between Europe, Africa and America. However, labor and production costs in Portugal are also well above the level of the Asian China+1 alternatives.

When selecting alternative production sites, sustainability factors must also be taken into account. These include, for example, how environmentally friendly the production processes are, whether social standards are met and products are manufactured under ethically acceptable conditions, or whether sustainable resource use is practiced in the country.

China+1 strategy in practice

If companies want to implement the China+1 strategy, they should proceed in a planned manner: The detailed analysis and evaluation of the potential production location is an important first step. This should take into account labor costs, infrastructure, logistical factors, cultural differences and language barriers, as well as the political and economic situation. Risk management also plays an important role in implementing the strategy.

In order to create a solid basis for decision-making and to assess profitability, a detailed analysis of the costs incurred for financing and investing in the new location should also be conducted. The same applies to questions regarding legal and compliance guidelines – the latter should be clarified before entering the market. Likewise, strategic supplier management proves to be a decisive factor for the success of a company’s own China+1 strategy. Other important steps for the successful relocation of production sites include effective contract management, employee training, and building relationships with government agencies and stakeholders.

Mastering challenges with strong partners

Whether in India, Bangladesh or Vietnam, when changes occur in the supply chain, it is often advisable to work with experienced service providers and experts on site at all stages of the process. To overcome challenges and ensure the smooth handling of goods movements, foreign companies can rely on logistics service providers such as Hermes International and SEKO. As part of a strategic cooperation, the two companies jointly offer their customers comprehensive expertise in the international movement of goods as well as in-depth regional know-how.Similar partnerships exist for India and Bangladesh.

Realignment of the supply chain as an ongoing process

The China+1 approach offers companies the opportunity to resolve dependencies and strengthen their supply chains against changes and unforeseen events in the global market. However, supply chain diversification is unlikely to displace China as the world’s largest manufacturing base. Rather, companies are implementing a China+1 strategy to make their supply chains more resilient and flexible with investments in other manufacturing locations. In this context, supply chain realignment is not a one-time process, but much rather an ongoing task: global market regulations and risks can change constantly and sometimes suddenly. To remain agile, work and manage efficiently, and respond quickly to new requirements, companies should therefore focus on transparency and regularly review and adjust their supply chains.

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