Why companies are betting on China Plus One: Strategic diversification in a multipolar global economy

The China Risk: Why the old formula for success no longer works and what comes next

The era in which China was considered the undisputed workshop of the world is coming to an end. For decades, companies have optimized their supply chains for maximum efficiency and minimum costs, which almost inevitably led to a deep dependence on the Chinese market. But this strategy is increasingly proving risky. Geopolitical tensions, the trade war between the US and China, and the painful lessons of the COVID-19 pandemic have exposed the fragility of global supply chains. At the same time, the country's former cost advantage is dwindling due to steadily rising wages and stricter regulations.

In response to this new reality, the "China Plus One" strategy is no longer just an option, but a strategic necessity for globally operating companies. This does not involve a complete withdrawal from China, which often remains indispensable as a production location and sales market. Rather, it is a form of intelligent diversification: Companies maintain their established locations in the Middle Kingdom while simultaneously building new production capacities in other countries to spread risks and open up new markets.

This transformation marks a fundamental paradigm shift – away from pure cost optimization and toward greater resilience and risk management. Countries like Vietnam, India, and Mexico are moving into the spotlight, while tech giants like Apple, automotive suppliers like Bosch, and even German SMEs are redesigning their global value chains. This article analyzes the driving forces behind the China Plus One movement, highlights the opportunities and significant challenges in its implementation, and shows how this strategic realignment will have a lasting impact on the global economic order.

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After decades of focusing on China as their preferred manufacturing base, companies around the world are rethinking their supply chain and procurement strategies. The China Plus One strategy has evolved from a cautious diversification measure to a mission-critical necessity. This strategic realignment reflects not only changing geopolitical realities but also the recognition that excessive dependence on any single market poses fundamental business risks.

The relevance of this strategy becomes particularly clear when considering recent developments. The COVID-19 pandemic, the US-China trade war, and escalating geopolitical tensions have exposed vulnerabilities in global supply chains that had been optimized for decades but were not designed for resilience. At the same time, production costs in China are continuously rising, eroding the traditional cost advantage.

This article analyzes the complex factors driving companies to implement the China Plus One strategy, examines its practical implementation, and assesses its long-term impact on the global economic order. It demonstrates that this is not a simple relocation of production, but a fundamental redesign of global value chains that will have far-reaching consequences for companies, countries, and the international division of labor.

Historical context and development

The roots of the China Plus One strategy date back to the early 2000s, when Japan first recognized the risks of excessive dependence on China. During the 2002 SARS epidemic, Japanese companies experienced significant disruptions to their supply chains and began to consider alternative production locations. However, these initial approaches were sporadic and mainly limited to labor-intensive industries.

The official term "China Plus One" was only coined in 2013, at a time when production costs in China had already begun to rise significantly. The original motivation was primarily economic: companies were looking for more cost-effective alternatives without completely abandoning their established Chinese operations. This approach differed fundamentally from previous waves of offshoring because it relied on strategic diversification rather than complete relocation.

The turning point came with the escalation of trade tensions between the US and China starting in 2018. What began as a trade dispute developed into a comprehensive economic conflict with far-reaching consequences for the global division of labor. The imposition of tariffs of up to 25 percent on Chinese goods forced American companies to reassess their procurement strategies.

The COVID-19 pandemic dramatically amplified these trends. China's strict zero-COVID policy led to months of factory closures and port closures, severely disrupting global supply chains. The lockdowns in Shanghai and other industrial centers highlighted the vulnerability of companies that relied too heavily on a single production site. At the same time, the pandemic demonstrated the strategic importance of supply chain resilience over mere cost optimization.

Another decisive impetus for development came from geopolitical tensions in the technology sector. American export restrictions on semiconductors and other high-tech products to China highlighted that economic dependence is increasingly perceived as a security risk. This "securitization" of economic relationships meant that companies no longer had to evaluate their supply chains solely from the perspective of cost and efficiency, but also from the perspective of strategic autonomy.

Historical development shows that the China Plus One strategy has evolved from a reactive cost optimization measure to a proactive risk management strategy. What initially began as a pragmatic response to rising labor costs has evolved into a fundamental paradigm shift in global production organization that will have a lasting impact on the global economy.

Analysis of the core components

The China Plus One strategy is based on several interlocking components that together form a complex system of supply chain diversification. The first and most fundamental component is the geographical diversification of production locations. Companies deliberately establish multiple production bases to reduce their dependence on a single country. This diversification does not occur randomly, but rather follows strategic considerations regarding costs, quality, infrastructure, and political stability.

The second core component encompasses market development and local market access. Many companies use the China Plus One strategy not only to minimize risk but also to develop new sales markets. By establishing production sites in countries such as Vietnam, India, or Mexico, they gain direct access to fast-growing consumer markets and can simultaneously benefit from favorable trade agreements.

A third key component is technological and industrial complementarity. Different countries offer different specializations and competencies. While China remains a leader in complex electronics manufacturing, other countries have established themselves in specific areas: Vietnam in the textile industry and simpler electronics manufacturing, India in the pharmaceutical industry and IT services, and Malaysia in semiconductor production.

The fourth component concerns supplier management and quality assurance. When implementing the China Plus One strategy, companies must establish new supplier networks while maintaining their quality standards. This requires significant investments in supplier development, certification processes, and quality control systems. At the same time, complex logistics networks must be coordinated to ensure the efficiency of distributed production.

The fifth core component encompasses risk management and compliance. Diversification brings with it new regulatory challenges, as companies must navigate different legal systems, tax regimes, and labor regulations. At the same time, they must assess political risks in the new target countries and develop appropriate hedging strategies.

A sixth key component is capital and resource allocation. The China Plus One strategy requires significant initial investments in new production facilities, infrastructure, and personnel. Companies must balance the higher initial costs with the long-term benefits of diversified production. This also includes investments in research and development at new locations to build local innovation capabilities.

The seventh component concerns organizational complexity and the management of distributed operations. Coordinating multiple production sites requires sophisticated management structures and communication systems. Companies must consider cultural differences, develop local management, and simultaneously enforce global standards and processes.

These core components do not operate in isolation but are closely intertwined. Their successful integration will significantly determine the success of the China Plus One strategy and its ability to ensure both cost-effectiveness and resilience.

Current situation and relevance

The current implementation of the China Plus One strategy is demonstrating remarkable acceleration and deepening. According to research by the consulting firm Bain, 75 percent of executives plan to accelerate nearshoring or reshoring activities in the next three years, yet only about 2 percent have already made significant progress. This discrepancy between intention and implementation highlights the complexity of the transformation process.

The geographical distribution of investments reveals clear preferences. Vietnam has established itself as the primary beneficiary of the China Plus One strategy, particularly in the electronics and textile industries. The country benefits from its geographical proximity to China, a low-cost labor force, and an increasingly developed infrastructure. India is gaining importance, particularly in the pharmaceutical industry, automotive manufacturing, and IT services, while Malaysia is expanding its position in semiconductor production.

Mexico's role as a nearshoring destination for the North American market has significantly increased due to the USMCA trade agreement. Companies are increasingly using Mexico as an alternative to Asian production sites to reduce transport costs and benefit from shorter delivery times. At the same time, Eastern European countries such as Poland, the Czech Republic, and Hungary are emerging as attractive alternatives for German and European companies.

The industry distribution of China Plus One activities reflects the different risk profiles and requirements of different industries. The electronics industry, led by companies such as Apple, Samsung, and Foxconn, was a pioneer in diversification. Apple now produces iPhones worth over $7 billion in India, while Google has relocated parts of its Pixel smartphone production to Vietnam. Microsoft now also has Xbox consoles, which were previously manufactured exclusively in China, produced in Vietnam.

The automotive industry is taking a more differentiated approach. German manufacturers such as BMW, Mercedes, and Volkswagen have not reduced their dependence on China, but have actually increased it, as China is strategically important both as a production location and as a sales market. Volkswagen invested $700 million in the Chinese electric car manufacturer XPeng to jointly develop electric vehicles. This strategy demonstrates that China Plus One does not automatically mean a reduction in China activities, but rather strategic diversification while simultaneously deepening relations with China.

The textile industry has experienced the most extensive shift. Brands like Nike, Adidas, and others have shifted significant portions of their production to Vietnam, Bangladesh, and other Southeast Asian countries. This shift was driven by both cost factors and the diversification of supply risks.

A particularly interesting aspect of the current situation is the development of regional production networks. Instead of simply relocating production sites, companies are increasingly establishing integrated regional value chains. This allows them to combine the advantages of different countries: complex components continue to be produced in China, while final assembly takes place in other countries to take advantage of tariff advantages or mitigate political risks.

The COVID-19 pandemic has further increased the urgency of the China-plus-one strategy. Companies that were already diversified were better able to offset production disruptions than those that relied exclusively on China. This has led to a reassessment of the cost-risk trade-off, placing greater emphasis on resilience than pure cost optimization.

Case studies and practical examples

The practical implementation of the China Plus One strategy can be particularly well illustrated by concrete company examples. These case studies demonstrate both the successes and the challenges of implementing diversified production strategies.

The technology giant Apple is a paradigmatic example of gradual diversification. The company, which traditionally relied almost exclusively on its main supplier, Foxconn in China, has systematically built up alternative production capacities in recent years. iPhone production in India reached a value of over $7 billion as early as 2022. This shift did not occur abruptly, but rather as a controlled process, with Apple initially producing older iPhone models in India before also manufacturing newer generations there. At the same time, the company relocated parts of its iPad production to Vietnam, while continuing to manufacture highly complex components in China. This phased approach enabled Apple to minimize learning curves while maintaining quality standards.

Foxconn itself, as the world's largest electronics manufacturer, is demonstrating a particularly ambitious China-Plus-One strategy. The company has invested heavily in new production sites in Vietnam, India, and Mexico to decouple itself from the conflict between the US and China. Interestingly, it is strategically realigning itself from a pure iPhone contract manufacturer to a diversified technology service provider that is increasingly focusing on AI servers and cloud infrastructure. This transformation demonstrates how China-Plus-One strategies can also drive business model innovation.

The German automotive industry presents a more complex picture. Volkswagen is pursuing a dual strategy: While it has intensified its investments in China—including its $700 million investment in XPeng Motors—it is simultaneously diversifying its global production. This reflects the recognition that China remains indispensable both as a production location and as a sales market, while other markets require additional capacity. BMW and Mercedes are pursuing similar strategies, with their dependence on China accounting for 32 to 36 percent of global sales.

Bosch, the world's largest automotive supplier, is demonstrating a forward-looking approach to its China Plus One strategy. The company has invested one billion dollars in a research and development center in China while simultaneously expanding its presence in India. Bosch CEO Stefan Hartung predicts that Chinese automakers will increasingly build production capacity in Europe in the coming years, reversing traditional East-West investment flows.

A particularly telling example from the consumer goods industry is L'Oreal, which invested $50 million in its Jakarta factory. This investment demonstrates how companies are using the China Plus One strategy to simultaneously reduce production costs and develop local markets. Indonesia offers both low-cost production and access to a rapidly growing consumer market of 270 million people.

The Viessmann Group, a German heating technology manufacturer, illustrates the challenges faced by medium-sized companies in implementing the China Plus One strategy. The company used its established position in China as a springboard to enter the Southeast Asian market and opened a factory in Vietnam. This strategy enabled Viessmann to benefit from the organizational infrastructure in China while simultaneously entering new markets and diversifying political risks.

Intel presents an example of "local for local" strategies as a variant of the China Plus One approach. The chip company is building new factories in the US, Germany, and Poland to supply customers in these regions more directly. This strategy not only reduces transportation costs and times but also addresses growing political demands for strategic autonomy in critical technologies.

General Motors is underscoring the importance of its China Plus One strategy for electromobility. The company is investing over $7 billion in four plants in Michigan to secure strategic battery production for electric trucks in the US. This investment reflects the recognition that control over key electromobility technologies is strategically more important than mere cost optimization.

These case studies demonstrate that successful China Plus One strategies share several common characteristics: a gradual, controlled implementation approach, the combination of risk diversification with market development, significant investments in local competencies, and adaptation to specific industry requirements. At the same time, they highlight that China Plus One does not necessarily mean a reduction in China activities, but often represents a strategic addition.

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Challenges and critical review

Implementing the China Plus One strategy is fraught with significant challenges that are often underestimated. One of the most fundamental difficulties lies in the complexity of establishing new supplier networks. Companies must not only identify suitable producers in alternative locations but also establish comprehensive quality assurance systems. This process can take years and requires significant investments in supplier development and certification.

The infrastructure challenges in many alternative locations pose another significant hurdle. While China has built a highly developed logistics and manufacturing infrastructure over decades, many alternative countries do not yet have comparable capacities. This applies not only to ports and transport routes, but also to the availability of skilled labor, technical services, and supporting industries.

Paradoxically, recent research shows that many of the preferred China Plus One destinations themselves carry significant risks. One study found that 65 percent of international trade is covered by locations that score poorly in risk analysis evaluations. Countries such as Turkey, Mexico, the Philippines, and India, considered primary beneficiaries of the China Plus One strategy, all have significant exposure to various risk categories. This raises the question of whether companies are simply trading one set of risks for another.

The cost structure presents another critical challenge. While direct labor costs are often lower in alternative locations, total operating costs can increase significantly due to infrastructure deficiencies, lower productivity, and higher transaction costs. While labor costs in China average $7.10 per hour compared to $2.50 in India and Vietnam, this difference is often offset by productivity-related factors.

The regulatory complexity of diversified operations presents companies with significant compliance challenges. Each new location brings with it specific legal requirements, tax regimes, and labor regulations. This requires not only significant legal expertise but also sophisticated management systems for coordinating diverse regulatory environments.

An often overlooked aspect is cultural and organizational complexity. Coordinating production sites in different countries with different business cultures, work practices, and communication styles requires considerable management capacity. Many companies underestimate the cost and time required to establish effective international management structures.

Technological integration presents another challenge. Coordinating complex production processes across multiple locations requires sophisticated IT systems and data integration. Many alternative locations do not yet have the technological infrastructure required for modern, integrated production networks.

The sustainability of the current China-plus-one trends is also questionable. Rising wages and living standards in current alternative locations could lead to them losing their cost advantages in the medium term. Vietnam, for example, is already experiencing significant wage increases, which could impair its competitiveness compared to other locations.

The geopolitical risks that originally led to the China Plus One strategy can also extend to alternative locations. Trade conflicts, political instability, and changing international relations can create new risks that negate the benefits of diversification.

The issue of labor standards and social responsibility also deserves critical consideration. Many alternative locations have less developed occupational health and safety regulations and social security systems than China. This can pose ethical dilemmas for companies and create reputational risks, especially when they are under pressure to cut costs.

The environmental impacts of the China Plus One strategy are also concerning. The fragmentation of production across multiple sites could lead to increased transport emissions and less efficient resource use. This conflicts with increasing sustainability requirements and could create regulatory challenges, particularly in the context of the European Carbon Border Adjustment Mechanism.

These challenges demonstrate that the China Plus One strategy is not a simple solution to the complexities of global supply chains. Rather, it requires sophisticated planning, significant investments, and a nuanced understanding of the risks and opportunities of different markets.

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Future developments and forecasts

The future of the China Plus One strategy will be significantly shaped by several converging trends that will create both opportunities and new challenges. The geopolitical landscape is evolving toward a multipolar world order in which economic blocs are increasingly organized along political alliances.

The development of the friendshoring concept will significantly influence the China Plus One strategy. Friendshoring refers to the deliberate shifting of trade relations to politically and culturally like-minded partners. While this approach was popular under the Biden administration, a more transactional approach is emerging under the Trump administration, which is also putting strain on traditional alliances. This instability in political priorities makes long-term strategic planning significantly more difficult for companies.

Technological evolution will have fundamental implications for the implementation of the China Plus One strategy. Artificial intelligence, blockchain technology, and the Internet of Things are enabling increasingly sophisticated supply chain management systems that will significantly simplify the coordination of distributed production networks. These technologies can provide real-time visibility, predictive analytics, and automated optimization, making the complexity of diversified supply chains more manageable.

Digital twins will play a key role in simulating and optimizing complex production networks. These virtual replicas of physical processes enable companies to test different scenarios and proactively assess risks before making costly production relocations.

The development of regional trading blocs will influence the geographical focus of China Plus One strategies. The Gulf Cooperation Council is emerging as a new trading bloc, attracting foreign investment through friendshoring initiatives and special economic zones. At the same time, ASEAN countries are strengthening their position as an integrated economic area, creating new opportunities for complex regional value chains.

Forecasts for global trade point to significant volatility. Analysts expect global trade growth to slow from 2 percent in 2025 to just 0.6 percent in 2026, primarily due to the delayed effects of the trade war. This development will force companies to calibrate their China-plus-one strategies even more carefully and potentially pursue less aggressive diversification plans.

The probability of further tariff spirals is estimated at 45 percent, which could plunge global trade into recession. Should the US impose additional tariffs through Section 232 measures, lift product exemptions, or end the current tariff truce with China, the incentives for China-plus-one strategies would increase dramatically.

Demographic trends in China will impact the country's attractiveness as a manufacturing location in the long term. Population decline and an aging population are already leading to labor shortages and rising labor costs. This will structurally reinforce the trend toward diversification, regardless of geopolitical developments.

Sustainability is becoming an increasingly important driver of China Plus One strategies. The European Carbon Border Adjustment Mechanism and similar initiatives will force companies to pay greater attention to the environmental impacts of their supply chains. This could lead to a preference for locations with clean energy and efficient transport links.

The development of alternative locations will accelerate. Countries like Vietnam, India, and Mexico are investing heavily in infrastructure and education to increase their attractiveness to international companies. At the same time, new destinations are emerging: Africa could gain importance in the medium term as a cost-effective alternative for labor-intensive production.

The integration of climate risks into location assessments will increase. Extreme weather events, water scarcity, and other climate-related risks will become important factors in the selection of alternative production sites. This could lead to a reassessment of many currently favored China Plus One destinations.

Automation will reduce the importance of labor costs as the main driver of production relocation. Increasingly automated factories could lead to a partial relocation of production to developed countries, where higher wages are offset by higher productivity and proximity to markets.

In the long term, there are signs of a trend toward more regionalized production networks, in which China will continue to play an important but no longer dominant role. The China-plus-one strategy will likely evolve into a "China-plus-many" approach, in which companies utilize diverse production sites to both optimize costs and minimize risks.

China Plus One: 5 reasons why companies are now rethinking

The China Plus One strategy has evolved from a niche risk management measure into a fundamental paradigm shift in global production organization. The analysis shows that this development is not solely due to short-term geopolitical tensions, but rather reflects structural changes in the global economy that will persist in the long term.

A historical perspective reveals that the strategy emerged in response to multiple, reinforcing factors: rising production costs in China, geopolitical tensions, supply chain disruptions caused by the COVID-19 pandemic, and the increasing securitization of economic relationships. These factors work synergistically, creating structural incentives for the diversification of production locations that persist beyond economic fluctuations.

The core components of the China Plus One strategy demonstrate that it is more than simple geographical diversification. Successful implementation requires sophisticated approaches that integrate geographical diversification, market development, technological complementarity, supplier management, risk management, capital allocation, and organizational coordination. This complexity also explains why, despite broad support for the concept, few companies have made significant progress to date.

Practical examples from various industries illustrate the diversity of implementation approaches. While technology companies like Apple and Foxconn are pursuing aggressive diversification strategies, automakers like Volkswagen and BMW demonstrate that China Plus One doesn't necessarily mean a reduction in China activities, but often represents a strategic addition. This differentiation by industry and business model is likely to intensify in the future.

This critical analysis reveals significant challenges that are often underestimated. Infrastructure deficits, regulatory complexity, quality assurance issues, and the paradoxical fact that many alternative locations themselves pose significant risks demonstrate that China Plus One is not a simple solution. Companies often trade a set of known risks for new, less understood ones.

Future forecasts indicate an acceleration and deepening of these trends. Technological innovations will simplify the coordination of distributed production networks, while escalating geopolitical tensions and structural changes in China will strengthen incentives for diversification. At the same time, sustainability requirements and climate risks will become new evaluation criteria for location decisions.

The China Plus One strategy ultimately represents a fundamental shift from an efficiency-oriented to a resilience-oriented approach in global supply chain management. This shift reflects a broader realization that optimizing individual metrics such as cost or speed without considering systemic risks leads to fragile and ultimately inefficient systems.

For companies, this means that China Plus One strategies must be understood not as one-time adjustment measures, but as continuous strategic processes. Successfully navigating an increasingly fragmented and volatile global economy requires adaptive capabilities, sophisticated risk management systems, and a willingness to make significant investments in organizational complexity.

The macroeconomic implications are far-reaching. The China Plus One strategy contributes to the emergence of a multipolar economic order in which no single nation assumes the dominant production role. This could lead to more resilient, but also more complex and potentially less efficient, global value chains in the long term.

The strategic significance of the China Plus One movement lies not only in its immediate impact on manufacturing locations, but also in its role as a catalyst for a fundamental redesign of the global economic architecture. It marks the transition from the globalization of the late 20th century to a new phase of international economic integration, which must strike a new balance between efficiency and resilience, economic and political considerations, and global reach and regional roots.

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