Man walking across the street may suffer the China + One Strategy

The “China + One Strategy” has transformed the landscape of international investments, directly impacting the global economy and redefining trade relations in the region. At the end of the last century and the beginning of the present one, China has been a kind of promised land where its excellent infrastructures, supply chain networks, and low wages have stimulated investments; the opening of subsidiaries or branches; or merger and acquisition operations. However, the situation seems to have changed dramatically as a result of various factors, in some cases of a political nature, resulting from geopolitical tensions between China and the United States in the Pacific Ocean, or territorial disputes between China and Japan, or between China and the Philippines in the South China Sea; in other cases, of a commercial nature, arising from the reciprocal imposition of tariffs between the United States and China; and in others, of internal nature, stemming from the Chinese demographic crisis, increasing labor costs, or pandemic management.

This has led some media outlets to wonder, as The Economist recently did, “Who’s in control? Why investors are losing faith in Xi Jinping?”, to acknowledge that “China is becoming more suspicious of foreign business” and to suggest that “Regaining investors’ trust requires a rethink of the state’s role in the economy”. In this context, it is not surprising that the same media outlet has admitted, after mentioning that last year the China-CSI 300 Index in Shanghai fell by 22%, and the Hang Seng Index in Hong Kong by 30%, that “Foreign investors have fallen out of love with China”, or that “Optimism about China Inc is an increasingly distant memory”. This kind of analysis, increasingly recurrent, coincides with what has been called the “China + One Strategy”, whose most visible manifestations are, on the one hand, “decoupling”; and on the other hand, “friendshoring” (externalization of production in friendly countries).

A strategy that an increasing number of foreign companies – mainly Western ones – have begun to implement due to the uncertainty currently prevailing in the Chinese market, by relocating manufacturing centers to certain Southeast Asian countries. Among them, some like Vietnam, taking advantage of the diversification trend of the “China + One Strategy”, have focused on information technology (IT) development and electronic manufacturing; others like Malaysia have focused on textile, electrical, and electronic industry; or like Thailand on electronic and automotive industries; and finally, Indonesia on information and communication industry. Thus, in this scenario, these countries (“the tiger cub economies”) exploit this strategy by complementing manufacturing operations in China with production units in their own markets.

At this point, there are already numerous testimonies of this strategy, as evidenced by Apple’s transfer of device assembly processes to Vietnam, ultimately reducing the percentage of Apple products made in China from 95% to 75% by 2025; L’Oréal’s production relocation to Indonesia with a $50 million investment in a new plant; Intel or Infineon Technologies’ relocation with assembly ($7 billion) and production units ($2 billion) in Malaysia (Penang and Kulim respectively). This highlights the important role of these markets, enhanced by cheaper labor, attractive tax exemptions, competitive logistics, further boosted by the opportunities offered by multilateral frameworks such as the ASEAN Economic Community and the Regional Comprehensive Economic Partnership.

Although the “China + One Strategy” has been gradually consolidating over time, there have been those who have doubted this consolidation, highlighting, with or without foundation, problems with quality controls, production programs, or design protection in these Southeast Asian markets. However, China, aware of this consolidation attempt, has tried to control it, as confirmed by in the textile sector, acknowledging that a third of Chinese manufacturing companies have transferred their production wholly or partially to these markets, in line with the Chinese government’s policy to change its growth model or rather to join a trend that not only seems inevitable but can also contribute, albeit indirectly, to increasing Chinese influence in the region as another example of its rising soft power.

Antonio Viñal
AVCO Legal