Businesses of today are highly globalized in spirit and practice. There has been an explosive increase in both international trade and international investments, particularly foreign direct investments (FDI) especially over last two decades. The international business of manufacturing companies has changed from supplying international markets through exports to supplying international markets through local manufacturing. So, manufacturing has evolved from global marketing and sales into global manufacturing. As a result of globalization, the vast majority of manufacturing of large companies is carried out in value networks.
China could attract very huge foreign investments because of low labour and production costs, strong and growing domestic market, availability of good infrastructure, free trade and tax agreements, and more importantly high growth potential of economy. With the concentration of MNCs of different country origin, China has become the factory floor of the world with its global share of manufacturing at near 38%.
Over the last 30 years or so, many MNCs of different country origin have set up their businesses, particularly supply chain and manufacturing operations in China to cash in on its potential strengths, leading to over-concentration of their business stakes in China. Now, in the fast changing geo-political and technological environments these companies are giving serious thought over whether the attractions that made so much strategic business sense over last several years still do?
What is China-plus-one?
Coined some time in the last decade, the phrase ‘China-plus-one (C+1) denotes a strategy of businesses to reduce their business risks by diversifying their supply chain and manufacturing operations away from sole-sourced China procurement and production operations to other countries. The idea is to reduce the risk of over relying or over depending on a single country for sourcing and manufacturing.
The C+1 diversification strategy actually garnered global attention in the last decade in view of escalating labor and production costs and other factors in China. China’s aging workforce is also a factor to be reckoned with. Sony and a small number of other MNCs swiftly embraced the C+1 approach but many remained skeptical about its value. The same C+1 has seen a resurgence over the last 5-6 years.The US-China trade tensions fueled by the policies of the then US President, Donald Trump, and zero-covid policy of China mainly contributed to the resurgence of C+1 in recent years. The Covid-19 pandemic exposed vulnerablilities in global supply chains, especially those who relied on China alone. The rising labour and production costs, and various other issues including geopolitical movements in China have prompted the MNCs, especially those that produce goods in China for the rest of the world, to explore diversification possibilities. It does not mean that the MNCs are abandoning China entirely. The strategy is to downsize their presence in China, thereby reducing their risk exposure. That is, C+1 is more about directing most fresh investments to other countries. It may also be viewed as additionality beyond China. This may involve the sourcing of new suppliers in other countries, or working with existing Chinese suppliers to develop additional manufacturing capacity in other countries.
By establishing additional sourcing and manufacturing facilities outside China, companies find a way to reduce business risks and access new consumer markets.
The countries with competitive labour and production costs, improved infrastructure, and favourable trade frameworks are emerging as alternative business locations for MNCs. The spot light is on Vietnam, Indonesia, India, Thailand, Malaysia, and Mexico. The free trade agreement — Regional Comprehensive Economic Partnership (RCEP) is also an additional favourable factor for some counties to become manufacturing destinations.
What about India?
India is also considered to be an attractive choice for MNCs under China-plus-one in view of its large domestic market, abundant workforce, and favourable government policies.
The main strength of India is burgeoning consumer market. The population of the country over 1.4 billion, and working-age population reaching a peak of 69% by 2030 offer a big consumer market for many goods and services. Moreover, India offers a market of intellectual workforce, thanks to the world’s largest pool of STEM graduates. The Government is seeking to address the skill gap by launching a range of skill-development programs and vocational training centres under Skill India Mission. In its endeavor to attract MNCs in high technology arena, the Government of India has launched the India Semiconductor Mission which offers incentive schemes like providing 50% of a plant’s capital expenditure costs as a subsidy. In order to attract foreign investments, particularly FDIs, the Government of India has also eased many restrictions to foreign investments. India is also a member of Indo-Pacific Economic Framework. India is also a member of the US-led Minerals Security Partnership which aims to develop a robust supply chain of critical minerals. India hosts the world’s biggest cluster of Global Capability Centres (GCCs) and becoming a key market for deploying innovative solutions to multinational technology companies.
Despite several economic reforms, India tends to be viewed as a country with bureaucratic hurdles. The early mover advantage and technological advancements made by some of its Asian rivals are also undermining India’s competitiveness. For example, India is a late entrant into the manufacturing of high-tech products like chips, where the countries like Taiwan and South Korea have already established themselves as being early entrants. India still lags in global value chain participation and in per business environment rankings. Substantial improvement is required in ease of doing business, infrastructure development, and coverage of free trade agreements to enhance India’s attractiveness as a manufacturing destination.
In fine, over the past three decades, China has emerged as the formidable economic force in the world. Although India is lagging far behind China in many economic parameters, it has the potential to benefit significantly from the China-plus-one strategy.
Dr T Siddaiah
Professor of Management
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