After the outbreak of the covid-19 pandemic, the whole world went on lockdown starting with China which is the workshop of the whole world. This disrupted the global supply chain as sourcing products from China became more and more difficult. This has changed the outlook of many countries and companies toward their existing supply chain as a result the adoption of China plus one strategy accelerated.
What is China +1 strategy?
Why companies are doing that?
Cost Advantage: When industrialization kicked off in China, labor cost was very low. As a result, China appeared as a fruitful destination for global companies to manufacture their products. The advantage of dirt-cheap labor China provided initially has rapidly faded away. The average manufacturing wages jumped to 92459 CNY equivalent to $13348 in 2021 from 30700 CNY which is equivalent to $4432 in 2011. This wage increase which tripled over a span of 11 years has forced companies to look for options elsewhere. Labor-intensive manufacturing like garments and footwear were the earliest to shift out of China. The incredible bull run in the textile sectors of countries like Vietnam and Bangladesh is largely the result of textile manufacturers moving out of China to take advantage of cheap labor.
Zero COVID Policy: China also attempted on zero covid policy which is an attempt of the government to stop the mass spread of the virus. To achieve this goal, the country has taken some strict measures in the form of a targeted strict lockdown followed by mass testing. Entire cities and regions across the country were put on lockdown. Passengers from the financial hub Shanghai to Beijing failed to reach their destination on a high-speed train. In the middle of the journey, officials wearing protective clothing boarded the train and announced over megaphones that everyone must get off because one of the passengers was linked to a covid outbreak. Even a deadly earthquake that killed 65 people in the first week of September was not able to soften the government’s stand on the harsh policy to eradicate Covid. This policy was damaging to the global supply chain.
US-China cold war: The US and China, the two largest economies in the world, engaged in a trade war in 2018 after exchanging rounds of slapping import duties against one another for the dominant force on the earth. Rising tensions between us and China have started a wave of factories moving out of China. China is losing its status as the go-to hi-tech electronics manufacturer of the world as big tech companies have started to look for other destinations. Apple, Amazon, and Google all started manufacturing in India and Vietnam because of the rising geopolitical tensions regarding Taiwan. Evaluating the risk of China-Taiwan tensions Quad Group consisting of the US, India, Japan, and Australia adopted a plan to minimize the reliance on Taiwan and China for the global needs of semiconductors. According to Statista China and Taiwan holds 74% of the global semiconductor market valued at $ USD 529.5 Billion.
All those reasons together escalated the wave of factories moving out of China.