The Key Role of Third-Party Management to Unlock China Plus One Success

By prioritizing effective management of third-party relationships, companies can unlock the full potential of the China Plus One strategy.

Adobe Stock 359253675 (2)

The China Plus One strategy has become a prominent trend in the manufacturing industry. As companies seek to diversify their production bases and mitigate risks associated with sole reliance on China, they are increasingly looking to establish manufacturing operations in additional countries. This shift has now made companies more invested in looking at building stronger relationships with third-party manufacturers in these new locations.

China makes up almost 30% of the total global output for manufacturing. This leadership they hold over the industry accounted for nearly $4 trillion of the country’s overall economic output in 2019. With low costs, a large workforce, and strong production quality, China has continued to hold a 10% lead on the United States.

The China Plus One strategy emerged in the early 2010s as a response to a confluence of factors that challenged the dominance of China in global manufacturing. Rising labor costs in China, particularly in coastal areas where most manufacturing was concentrated, began to erode the cost advantage that had initially attracted companies. Additionally, intellectual property (IP) concerns and a lack of transparency in Chinese business practices raised anxieties for some foreign manufacturers. Geopolitical tensions, most notably the trade war between the US and China that began in 2018, further amplified these concerns.

This led to more companies beginning to explore alternative production locations in Southeast Asia and other regions. Initially this shift was gradual, but it gained momentum as the benefits of diversification became increasingly apparent. The growing disruptions caused by the COVID-19 pandemic accelerated the challenges and companies that successfully implemented a China Plus One strategy were better prepared to navigate through the disruptions.

While the China Plus One strategy offers a compelling path to diversification, it's not without challenges.  A key hurdle lies in securing reliable third-party manufacturers. Identifying qualified partners with the right capacity and quality standards in a new region requires thorough research.  Building strong communication and trust with these partners takes time and effort, especially when navigating cultural differences and language barriers.

Maintaining consistent quality control across a new supply chain is another potential obstacle.  Establishing clear quality standards and conducting regular inspections are crucial. Additionally, intellectual property (IP) protection becomes more complex. Understanding local IP laws and implementing safeguards is essential to securing your sensitive information.

Beyond these internal hurdles, navigating the external environment of a new region presents its own set of challenges.  Understanding customs regulations, import duties, and logistics networks can be complex and add cost to your operations. Finally, depending on the chosen location, production costs might be higher due to factors like import tariffs and potentially less competitive labor rates compared to China. A comprehensive cost analysis is vital before embarking on a China Plus One strategy.

The Rise of Third-Party Manufacturers in China Plus One

Venturing towards the China Plus One path can lead organizations to face complex decision-making processes. Geopolitical stability and a welcoming investment climate are also crucial considerations. Beyond just cost, factors like geographic proximity to target markets, political stability, and infrastructure quality all play a crucial role in decision making. Two regions that are increasingly attractive options are the Association of Southeast Asian Nations (ASEAN) and Mexico.

Both ASEAN, a ten-member economic bloc, and Mexico boast strategic locations. ASEAN offers access to a vast and growing consumer base near China, while Mexico sits at the crossroads of North and South America. Both regions have made significant strides in recent years, creating a more predictable and business-friendly environment.

Comprised of ten member states, ASEAN boasts a strategic location near China and has strong economic ties with both the U.S. and China. This advantageous positioning, coupled with growing regional stability, makes it an attractive option for companies implementing a China Plus One strategy. Additionally, ASEAN member states are actively promoting new investments through fiscal incentives, infrastructure development, and streamlined business regulations. Recent noteworthy investments in the region include chip-testing facilities in Malaysia, electric vehicle supply chain development in Indonesia, and electronics production expansions in Vietnam.

Mexico presents a unique bridge to the Americas and offers a lucrative value proposition for companies seeking to diversify their production bases. Its proximity to the U.S. market translates to lower distribution costs and streamlined logistics compared to Pacific Ocean routes. Mexican manufacturers have also made significant strides in enhancing their electronics and PCBA manufacturing capabilities, offering high-volume production capacity. And finally, the cultural and linguistic proximity of Mexico provides a familiar and accessible environment for U.S. companies seeking to establish new production partnerships.

Future-Proofing Your Supply Chain

Strong third-party relationships are the cornerstone of a successful China Plus One strategy. By carefully selecting partners, fostering open communication, implementing robust quality control, and establishing clear risk management protocols, companies can leverage the benefits of diversification while mitigating potential challenges. Effective collaboration and transparency across the supply chain are essential for identifying and proactively addressing issues, ensuring consistent quality, and maintaining business continuity when supply chain events occur.

As the manufacturing landscape continues to evolve, effective third-party relationship management will remain a critical differentiator for companies navigating a complex global market. By prioritizing effective management of third-party relationships, companies can unlock the full potential of the China Plus One strategy.

Strong partnerships not only ensure smooth production processes and quality control but also foster innovation and long-term success in an increasingly complex global manufacturing landscape. As the industry evolves, companies that prioritize building trust and collaboration with their third-party partners will be well-positioned to thrive in the years to come.