As trade tensions escalate, and China experiences rising labor costs and demographic changes, a growing number of companies are diversifying their China-based operations by relocating to other countries, particularly in sensitive sectors. Nevertheless, China remains an attractive destination, boasting comprehensive supply chains, advanced infrastructure, a wealth of talent, and access to one of the world’s largest consumer markets.
Hence, companies with a presence in China are not necessarily abandoning the market entirely. Instead, many are opting to complement their Chinese operations with inputs sourced from production facilities in countries like Vietnam and Indonesia, in a bid to diversify and mitigate trade and supply chain risks. This model is widely known as “China+1.”
Countries positioned to benefit from this trend typically offer low-cost operations and labor while boasting relatively developed infrastructure and integrated supply chains within the region. Prominent candidates for companies aiming to maintain an Asian presence include Malaysia, Vietnam, Indonesia, and India.
Reshoring to Countries in ASEAN
Among the ASEAN countries, the ten Southeast Asian nations stand to gain significantly from friendshoring or the China+1 strategy. They have the advantage of providing a cost-effective environment and participating in multiple multilateral trade agreements that facilitate the movement of goods.
Notably, the China-ASEAN Free Trade Agreement eliminates tariffs on most goods traded between China and ASEAN nations. Furthermore, the Regional Comprehensive Economic Partnership (RCEP) aims to progressively eliminate tariffs on 90 percent of goods traded among its member countries over the next two decades. This treaty involves 14 active member countries, including the ten ASEAN nations, plus China, South Korea, Japan, Australia, and New Zealand.
The RCEP is expected to encourage more investment through the China+1 strategy, particularly in lower-cost ASEAN countries like Malaysia, Indonesia, and Vietnam, which are ideal for labor-intensive processes such as garment manufacturing. By leveraging these regional trade agreements, companies can continue sourcing materials and components from China efficiently and access a broader range of markets.
Focus on Key Destinations
When examining potential destinations for friendshoring, Indonesia, Malaysia, and Vietnam emerge as strong candidates among the ASEAN member states. They offer significant advantages, including large populations, developed industries, robust supply chains, high growth potential, and positive relations with the US and Europe.
Indonesia: With its massive population and rapid economic growth, Indonesia is poised to become one of the world’s largest economies. The government has actively improved the business environment for foreign investors, establishing special economic zones that provide favorable conditions for various industries.
Malaysia: Situated as a gateway to regional markets, Malaysia’s strategic location facilitates efficient distribution networks. It boasts well-established infrastructure, a skilled workforce, and stable political conditions. Malaysia’s strong ties with the US and Europe make it an attractive destination for investors.
Vietnam: Recognized for its cost-effective labor and proximity to China, Vietnam has become a top choice for diversifying from China. It offers established manufacturing capabilities, a competitive labor market, and a robust supply chain. The EU-Vietnam Free Trade Agreement further enhances its appeal.
India: India is primed to benefit from reshoring trends, given its vast domestic market and growing consumer base. The country is already attracting foreign manufacturers, particularly in electronics. Favorable economic reforms, skilled labor, and improved ease of doing business create a conducive investment environment.
Japan and South Korea: While relatively expensive, Japan and South Korea excel in high-value production and technological innovation. Their advanced capabilities, skilled workforces, and strong ties with Western countries make them attractive for reshoring high-value goods and services.
Realities of Reducing China Reliance
While friendshoring gains attention, the extent of this trend and its impact on reducing reliance on China should be considered. Given China’s dominant role in global supply chains, diversifying operations to other countries may not immediately reduce dependence on Chinese inputs and suppliers. Companies reshoring to other Asian nations are likely to maintain ties with China for materials and components. China’s strategies in shifting towards high-end manufacturing and services also indicate its continued competitiveness.
In conclusion, friendshoring and the China+1 strategy offer valuable alternatives for businesses seeking resilience in their global operations. While they may not entirely reduce reliance on China, they provide a means to diversify supply chains and mitigate risks in an ever-changing global landscape. As the world adapts to evolving economic dynamics, the role of China in the global supply chain will continue to evolve, impacting businesses worldwide.