Why companies are focusing 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 factory of the world is drawing to a close. For decades, companies have streamlined their supply chains for maximum efficiency and minimum cost, almost inevitably leading to a deep dependence on the Chinese market. But this strategy is proving increasingly risky. Geopolitical tensions, the US-China trade war, 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 establishing itself not merely as an option, but as a strategic necessity for globally operating companies. This does not entail a complete withdrawal from China, which often remains indispensable as a production location and sales market. Rather, it is a matter of intelligent diversification: companies maintain their established locations in China while simultaneously building new production capacities in other countries to spread risks and tap into new markets.

This transformation marks a fundamental paradigm shift – away from pure cost optimization and towards 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 of 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 a preferred manufacturing location, companies worldwide are rethinking their supply chain and procurement strategies. The China-Plus-One strategy has evolved from a cautious diversification measure to a business-critical necessity. This strategic realignment reflects not only the changed geopolitical realities but also the recognition that excessive dependence on individual markets 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 heightened geopolitical tensions have exposed weaknesses in global supply chains that, while optimized for decades, were not designed for resilience. At the same time, production costs in China are rising steadily, eroding the traditional cost advantage.

This article analyzes the multifaceted factors that motivate companies to implement the China Plus One strategy, examines its practical implementation, and assesses its long-term impact on the global economic order. It becomes clear that this is not simply a 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 reach back to the early 2000s, when Japan first recognized the risks of over-reliance on China. As early as the SARS epidemic in 2002, Japanese companies experienced significant disruptions to their supply chains and began considering alternative production locations. However, these initial efforts were sporadic and primarily limited to labor-intensive industries.

The official term "China Plus One" strategy was coined only in 2013, at a time when production costs in China had already begun to rise significantly. The initial motivation was primarily economic: companies were seeking more cost-effective alternatives without completely abandoning their established Chinese operations. This approach differed fundamentally from previous offshoring waves, as it focused 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 policy 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 shutdowns, 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 crucial impetus for development came from geopolitical tensions in the technology sector. American export restrictions on semiconductors and other high technologies to China highlighted that economic dependencies are increasingly perceived as a security risk. This "securitization" of economic relationships meant that companies had to evaluate their supply chains not only from cost and efficiency perspectives, but also from the standpoint of strategic autonomy.

Historical developments show 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 developed into a fundamental paradigm shift in global production organization that will have a lasting impact on the world economy.

Analysis of the core components

The China Plus One strategy is based on several interconnected 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 is not random but follows strategic considerations regarding costs, quality, infrastructure, and political stability.

The second key 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 like Vietnam, India, or Mexico, they gain direct access to rapidly growing consumer markets and can simultaneously benefit from favorable trade agreements.

A third essential component is technological and industrial complementarity. Different countries offer different specializations and expertise. 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. Companies implementing the China Plus One strategy must establish new supplier networks while simultaneously maintaining their quality standards. This requires significant investment 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 new regulatory challenges, as companies must navigate different legal systems, tax regimes, and labor regulations. Simultaneously, 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 weigh the higher initial costs against 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 interlinked. Their successful integration is a key factor in determining the success of the China Plus One strategy and its ability to ensure both cost efficiency and resilience.

Current situation and relevance

The current implementation of the China Plus One strategy is showing a 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 increasingly developed infrastructure. India is gaining importance, especially 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 been significantly strengthened by the USMCA trade agreement. Companies are increasingly using Mexico as an alternative to Asian production locations to reduce transportation costs and benefit from shorter delivery times. At the same time, Eastern European countries such as Poland, the Czech Republic, and Hungary are developing into attractive alternatives for German and European companies.

The industry distribution of China Plus One activities reflects the different risk profiles and requirements of various industries. The electronics industry, led by companies like Apple, Samsung, and Foxconn, pioneered diversification. Apple now produces over $7 billion worth of iPhones in India, while Google has shifted parts of its Pixel smartphone production to Vietnam. Microsoft is now also manufacturing Xbox consoles, previously produced exclusively in China, in Vietnam.

The automotive industry is taking a more nuanced approach. German manufacturers like BMW, Mercedes, and Volkswagen have not reduced their dependence on China, but rather increased it, as China is of strategic importance both as a production location and 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 a strategic diversification coupled with a deepening of relationships with China.

The textile industry has undergone the most extensive relocation. Brands such as Nike, Adidas, and others have shifted significant portions of their production to Vietnam, Bangladesh, and other Southeast Asian countries. This shift has been 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 benefits 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 compensate for production disruptions than those that relied solely on China. This has led to a reassessment of the cost-risk balance, where resilience is given greater importance than pure cost optimization.

Case studies and practical examples

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

The technology company Apple represents 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 already reached a value of over $7 billion in 2022. This shift was not abrupt, but rather a controlled process in which Apple initially had older iPhone models produced in India before manufacturing newer generations there as well. In parallel, the company moved parts of its iPad production to Vietnam, while highly complex components continue to be manufactured in China. This phased approach enabled Apple to minimize learning curves while maintaining high quality standards.

Foxconn, the world's largest electronics manufacturer, is demonstrating a particularly ambitious China Plus One strategy. The company has invested heavily in new manufacturing facilities in Vietnam, India, and Mexico to decouple itself from the conflict between the US and China. Of particular interest is its strategic realignment from a pure iPhone contract manufacturer to a diversified technology service provider that increasingly relies on AI servers and cloud infrastructure. This transformation shows 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 the company has intensified its investments in China – including the $700 million investment in XPeng Motors – it is simultaneously diversifying its global production. This reflects the recognition that China remains indispensable as both a production location and a sales market, while other markets require additional capacity. BMW and Mercedes are pursuing similar strategies, with their reliance 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 the 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 up production capacity in Europe in the coming years, representing a reversal of traditional East-West investment flows.

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

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

Intel presents an example of a "Local for Local" strategy as a variation of the China-Plus-One approach. The chipmaker 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 increasing political demands for strategic autonomy in critical technologies.

General Motors underscores the importance of its China Plus One strategy for electric mobility. 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 understanding that control over key electric mobility technologies is strategically more important than mere cost optimization.

These case studies demonstrate that successful China-Plus-One strategies share several common characteristics: a phased, controlled implementation approach, the combination of risk diversification with market development, significant investment in local expertise, and adaptation to specific industry requirements. At the same time, they illustrate that China-Plus-One does not necessarily imply a reduction in China activities, but often represents a strategic complement.

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Challenges and critical review

Implementing the China Plus One strategy presents significant challenges that are often underestimated. One of the most fundamental difficulties lies in the complexity of building 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 substantial investment in supplier development and certification.

Infrastructure challenges in many alternative locations represent another significant hurdle. While China has built a highly developed logistics and production infrastructure over decades, many alternative countries still lack 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 pose significant risks. One study found that 65 percent of international trade is handled by locations that perform poorly in risk analysis evaluations. Countries such as Turkey, Mexico, the Philippines, and India, considered the main beneficiaries of the China-Plus-One strategy, all have substantial exposure to various risk categories. This raises the question of whether companies are simply swapping 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. Although 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 necessitates not only substantial legal expertise but also sophisticated management systems to coordinate different regulatory environments.

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

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

The sustainability of the current China-plus-one trends is also questionable. Rising wages and living standards in the current alternative locations could cause them to lose their cost advantages in the medium term. Vietnam, for example, is already experiencing significant wage increases that 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 needs to be considered critically. Many alternative locations have less developed occupational safety regulations and social security systems than China. This can present companies with ethical dilemmas 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. Fragmenting production across multiple sites can lead to increased transport emissions and less efficient resource use. This contradicts 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 investment, 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 towards 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 shift of trade relations to politically and culturally like-minded partners. While the approach was popular under the Biden administration, the Trump administration has favored a more transactional approach, which is also straining traditional alliances. This instability in political priorities considerably complicates long-term strategic planning for companies.

Technological evolution will have a fundamental impact on 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 offer real-time transparency, predictive analytics, and automated optimization, thereby 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 representations of physical processes enable companies to test different scenarios and proactively assess risks before undertaking costly production relocations.

The development of regional trade blocs will influence the geographic focus of China Plus One strategies. The Gulf Cooperation Council is evolving into a new trade bloc, attracting foreign investment through friendshoring initiatives and special economic zones. Simultaneously, ASEAN countries are strengthening 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 escalation is estimated at 45 percent, which could plunge global trade into a recession. Should the US impose additional tariffs through Section 232 measures, revoke product exemptions, or end the current trade truce with China, the incentives for China-Plus-One strategies would increase dramatically.

Demographic trends in China will influence the country's attractiveness as a production location in the long term. Population decline and an aging society are already leading to labor shortages and rising labor costs. This will structurally reinforce the trend toward diversification, even independently 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 give greater consideration to the environmental impact 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 site assessments will increase. Extreme weather events, water scarcity, and other climate-related risks will become important factors in the selection of alternative production locations. 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 reshoring of production to developed countries, where higher wages are offset by higher productivity and proximity to markets.

In the long term, a trend towards more regionalized production networks is emerging, 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, where companies utilize diverse production sites to optimize costs and minimize risks.

China Plus One: 5 reasons why companies are now rethinking their strategies

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

Historical analysis reveals that the strategy emerged as a 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 act synergistically, creating structural incentives for diversifying production locations that persist beyond cyclical fluctuations.

The core components of the China Plus One strategy demonstrate that it is more than simple geographic diversification. Successful implementation requires sophisticated approaches that integrate geographic 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, only a few companies have made significant progress to date.

The practical examples from various industries illustrate the diversity of implementation approaches. While technology companies like Apple and Foxconn pursue aggressive diversification strategies, automotive manufacturers like Volkswagen and BMW demonstrate that "China Plus One" does not necessarily mean a reduction in China activities, but often represents a strategic complement. This differentiation across industries and business models is likely to intensify in the future.

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

Future forecasts indicate an acceleration and intensification of these trends. Technological innovations will simplify the coordination of distributed production networks, while escalating geopolitical tensions and structural changes in China will increase 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-off adjustments, 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 invest significantly 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. In the long term, this could lead to more resilient, but also more complex and potentially less efficient global value chains.

The strategic importance of the China Plus One movement lies not only in its immediate impact on production 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, one that must strike a new balance between efficiency and resilience, economic and political considerations, and global reach and regional roots.

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