China Plus X Strategy for Supply Chain Resilience

Unfortunately, ongoing geopolical instability and the shifting trade landscapes are now pushing businesses to re-evaluate China Plus One, hoping to bolster their supply chain resilience.

This article will delve into the inherent limitations of the China Plus One approach and explore the evolving "China Plus X" paradigm as a more robust and forward-thinking solution for supply chain diversification.

What is the China Plus One supply chain strategy?

The China Plus One strategy represents a deliberate move by businesses to minimize their supply chain dependency by establishing alternative sourcing or manufacturing locations outside of China. 

The core principle involves diversifying the countries from which companies procure parts, assemble goods, or manufacture their final products rather than relying solely on the China supply chain.

Initially, the China Plus One strategy was driven by a combination of factors. Companies aimed to achieve cost reductions by leveraging potentially lower labor costs in other Southeast Asian nations, mitigate risks associated with over-reliance on a single geographic area, and gain better market access to specific regions while still maintaining a significant operational footprint within the country itself.

The start of change

The global landscape has undergone significant transformations in recent years, prompting businesses to seriously reconsider their extensive concentration of supply chain activities within China.

• U.S.' Import Tariffs (2019): In 2019, then-US President Donald Trump imposed substantial customs duties on a wide range of Chinese products entering the United States. This sudden increase in costs forced many businesses to explore alternative sourcing options to remain competitive.
• COVID-19 Pandemic: The unprecedented COVID-19 pandemic and the subsequent three-year lockdowns imposed severe restrictions on global production, particularly impacting sectors like automobiles, computers, and other industries heavily reliant on semiconductors manufactured in the region. This highlighted the fragility of concentrated supply chain operations in China.
• Heightened Reciprocal and Retaliatory Tariffs (China vs. U.S., Canada, and EU): The ongoing trade disputes between China and major economies like the U.S., Canada, and the EU have resulted in tariffs of up to 100% on Chinese-made electric vehicles (EVs), EV batteries, solar panels, and semiconductors. These measures are largely intended to protect domestic production and address concerns about strategic intellectual property theft.
• Technology (Perceived as Potential Threat): The rapid advancement of Chinese technology, particularly in areas like 5G (involving companies like Huawei and ZTE) and social media platforms like TikTok, has raised security concerns in several countries, further prompting a reassessment of reliance on Chinese technological infrastructure and supply chain components.

U.S. Reciprocal tariffs and retaliatory tariffs

Reciprocal tariffs are duties imposed by one country in response to tariffs or other trade barriers enacted by another country. They are essentially a tit-for-tat measure aimed at creating a level playing field or pressuring the initiating country to remove its trade restrictions.

Retaliatory tariffs, on the other hand, are tariffs imposed by a country as punishment for specific trade actions or policies of another nation that are deemed unfair or harmful to its domestic economy. They are often more targeted and intended to inflict economic pain to compel a change in behavior.

Periods of heightened trade tensions and the imposition of significant tariffs on goods from key manufacturing regions have notably impacted global supply chains. For many Japanese businesses, this environment underscored the risks of over-concentration in sourcing and manufacturing. 

Consequently, the uncertainty surrounding tariff landscapes and potential trade restrictions accelerated consideration and adoption of supply chain diversification strategies², such as the China Plus One model. This strategic shift aims to mitigate exposure to regional disruptions and ensure more stable and resilient sourcing and shipping routes for Japan.

What are the Risks of the Chinese Supply Chain?

While China has long been a cornerstone of global manufacturing, relying heavily on a single country for your supply chain, even with a "Plus One" alternative, carries inherent risks that Japanese businesses must carefully consider.

• Concentration risk: Over-reliance on even a "China Plus One" model still exposes businesses to significant vulnerabilities. If the primary "Plus One" location faces its own challenges, such as natural disasters, political instability, or economic downturns, the intended risk mitigation is severely compromised. A concentrated supply chain, even with a slight diversification, doesn't offer true resilience against widespread disruptions.
• Geopolitical risks: The current global landscape is marked by increasing international trade tensions and political instability. Shifting regulations, trade wars, and evolving diplomatic relationships can unpredictably impact the Chinese supply chain, leading to tariffs, export restrictions, and significant disruptions that affect Japan’s international shipping operations.
• Supply chain disruptions: Beyond geopolitical factors, the Chinese supply chain remains susceptible to various disruptions. Pandemics, regional conflicts, and even logistical bottlenecks within China itself can halt production and delay shipments, impacting businesses relying on this concentrated model. The "Plus One" location may also be vulnerable to similar unforeseen events.
• Increasing labor costs: While initially attractive for cost reduction, labor costs in China have been steadily rising. This erodes the initial financial advantages of a singular or near-singular sourcing strategy, making the China Plus One strategy less compelling from a purely economic standpoint.

Emerging normal: China Plus X

Moving a step further from the limitations of a single alternative, the "China Plus X" paradigm offers a more comprehensive approach to supply chain diversification.

Recognizing the multifaceted risks associated with a concentrated chain, the need for true supply chain diversification has become paramount. The "China Plus X" strategy involves establishing sourcing, manufacturing, or assembly operations in multiple alternative locations – represented by "X" – rather than just one. This approach aims to spread risk across various geographies and build a far more resilient and adaptable supply chain for the future.

How to diversify your supply chain for a China Plus X approach

When considering a "China Plus X" strategy, Japanese businesses need to carefully evaluate several key determinants to make informed decisions about diversifying their supply chains. These factors will influence the suitability and long-term success of establishing operations in alternative locations.

1. Transportation

Efficient transportation networks are a cornerstone of a resilient "Plus X" strategy. The availability and quality of ports, roads, and railways in potential alternative countries directly impact the ease and cost of moving goods and materials. Analyzing the infrastructure's capacity and connectivity is crucial for ensuring smooth logistics operations.

Transportation costs and transit times have a significant impact on overall supply chain efficiency. Higher transportation costs can erode the cost advantages of relocating production, while longer transit times can affect lead times and customer satisfaction. A thorough evaluation of these factors is essential when considering alternative "X" locations.

2. Cost

Understanding the various cost components in potential "Plus X" locations is vital for assessing the financial viability of supply chain diversification.

• Labor Costs: A key driver for the "China Plus One" strategy was often lower labor costs. When considering "Plus X," a detailed comparison of labor costs in various alternative locations is necessary to identify truly competitive options.
• Manufacturing Costs: Beyond labor, the overall cost of manufacturing, including raw materials, energy prices, and overhead expenses, will significantly influence the attractiveness of different "X" countries. A comprehensive analysis of these factors is crucial.
• Tariffs and Taxes: The impact of tariffs and taxes on the total cost of production needs careful evaluation. Bilateral trade agreements, import/export duties, and local tax regulations in potential "X" locations can significantly affect the bottom line.

3. Country infrastructure

The overall infrastructure of a potential "Plus X" country will significantly impact the feasibility and efficiency of establishing and operating supply chain elements.

• Physical Infrastructure: Assessing the quality and capacity of essential physical infrastructure, such as roads, ports, railways, and utilities (electricity, water), is critical for ensuring the smooth movement of goods and the reliable operation of facilities.
• Digital Infrastructure: In today's interconnected world, the availability of reliable internet and telecommunications infrastructure is essential for managing supply chains, facilitating communication, and supporting data-driven operations in alternative locations.
• Industrial Parks and Zones: The presence of well-developed industrial parks and zones can offer significant advantages, providing ready-to-use manufacturing facilities, streamlined regulatory processes, and access to necessary utilities and services.

4. People

The caliber of the workforce in prospective "Plus X" countries stands as a pivotal element for enduring success.

Proficient workers and specialized technical skills will directly shape the quality of manufacturing and the operational efficiency of alternative sites. Evaluating the local talent pool and anticipating any requirements for training and upskilling is therefore essential.

Legal frameworks governing labor in potential "Plus X" nations can substantially influence business operations. Comprehending local employment statutes, employee rights, and social security obligations is key to ensuring regulatory compliance and effective cost management.

Ultimately, navigating the nuances of cultural differences and business etiquette between Japan and potential "Plus X" partners is crucial for fostering strong working relationships, facilitating clear communication, and ensuring seamless collaboration.

5. Regulatory environment

The regulatory environment of potential "Plus X" countries will significantly influence the ease of doing business and the overall risk associated with supply chain diversification.

• Trade Policies: Analyzing the trade policies and regulations of potential "Plus X" locations, including import/export procedures, customs regulations, and participation in free trade agreements, is crucial for understanding market access and potential trade barriers.
• Investment Policies: Evaluating the attractiveness of investment policies and incentives offered by potential "Plus X" countries can influence the cost and ease of establishing operations. Factors such as tax breaks, subsidies, and investment protection agreements should be considered.
• Intellectual Property Protection: The strength of intellectual property protection laws and enforcement mechanisms in potential "Plus X" locations is a critical concern for Japanese businesses, especially those dealing with proprietary technologies or designs.

Choosing the right “Plus X” partner

Selecting the right multiple alternative countries for your "China Plus X" strategy requires a comprehensive evaluation of various factors to ensure long-term resilience and operational efficiency.

• Geopolitical Stability: Assess the political and economic stability of potential alternative countries to minimize risks associated with policy changes or conflicts.
• Trade Agreements: Evaluate existing trade agreements between Japan and potential alternatives to understand tariff implications and market access.
• Industry Specialization: Consider countries with established expertise and infrastructure in your specific industry to leverage existing capabilities.
• Scalability and Growth Potential: Analyze the potential for future growth and scalability in alternative locations to accommodate your long-term business needs.
• Cultural and Linguistic Compatibility: Evaluate cultural differences and language barriers to plan for effective communication and collaboration.

Exploring potential regions, Southeast Asia offers a compelling mix of cost competitiveness and developing infrastructure. Countries like Vietnam, Indonesia, and Thailand have attracted significant manufacturing investment. South Asia, particularly India, presents a large potential market and a growing manufacturing sector. Mexico offers proximity to the North American market, while certain Eastern European nations provide access to the EU. Each region presents its own set of strengths and weaknesses in terms of cost, infrastructure, and regulatory environment.

Embracing supply chain diversification with DHL Express

The "China Plus X" strategy represents a significant evolution in supply chain diversification, moving beyond a singular alternative to build true resilience in a complex global landscape. 

While China will likely remain a crucial part of many global supply chain strategies, the need to spread risk across multiple geographies is increasingly apparent. 

Japanese businesses that proactively re-evaluate their supply chain management and explore diversified alternatives will be better positioned to navigate future uncertainties and achieve sustainable growth.

DHL Express understands the complexities of establishing and managing diversified international shipping operations in Japan. Speak to DHL's logistics experts today to leverage our global network, expertise in supply chain diversification, and comprehensive shipping solutions to implement your "China Plus X" strategy effectively.