China Plus One Strategy

Introduction

In recent years, the world has witnessed a shift in the global economic landscape due to geopolitical and trade tensions between major nations. This has led to a surge in the adoption of the "China Plus One" strategy by multinational corporations, which seeks to reduce their dependence on China by diversifying their investments to other nations. India, with its robust manufacturing sector and favourable government policies, has emerged as a significant beneficiary of this strategy. 

In this blog, we will delve into the sectors in India that are poised for significant growth under the China Plus One strategy and how the country is positioned to become a preferred investment destination for global companies.
 

What Is The China Plus One Strategy?

The "China Plus One" strategy is a business approach that encourages companies to diversify their operations by expanding outside of China while still maintaining a presence in the country. For the past three decades, Western businesses have heavily invested in China due to its low labour and manufacturing costs, as well as its growing consumer market. However, this has led to an over-reliance on China for their business interests, which can be risky given geopolitical tensions and unforeseen disruptions.

The concept of "China Plus One" was first introduced in 2013 as a response to these risks. This strategy involves investing in additional countries to mitigate risk and diversify supply chains. By doing so, companies can reduce their dependence on China while still taking advantage of its benefits.

While the "China Plus One" strategy has gained traction in recent years, it is not a new concept. Companies have long recognized the importance of diversification to mitigate risk and safeguard their business interests. However, the rise of China as a manufacturing powerhouse and consumer market has led to a concentration of business interests in the country, which has increased the urgency for diversification.
 

What led to the formation of China Plus One Strategy?

The formation of the "China Plus One" strategy can be attributed to a variety of geopolitical and economic factors, with the most recent being the trade tensions between China and US during the Trump administration. With his "Make America Great Again" mantra, Trump implemented a tariff system that made it difficult for Chinese goods to enter the US, leading to a shift in attitudes towards China.

However, officials and businesses in Japan and the US had already been considering diversifying away from China since 2008. The strategy didn't gain momentum until the end of the previous decade when the mistrust between China and the West reached a new high. This, coupled with the rising labour costs in China due to its economic development and structural reforms, led to a decline in China's cost advantage.

Furthermore, political unrest in China, including issues such as Hong Kong's independence movement, anti-Japanese protests, and skirmishes in the South China Sea, has also contributed to the formation of the "China Plus One" strategy. Trump's anti-China initiatives during his presidency, such as reducing the trade power of Chinese giants like Huawei, further fueled companies to disinvest from China and diversify into other growing markets.

In addition to these factors, labour costs have also played a major role in the formation of the strategy. With minimum wages in Chinese regions increasing by over 30% from 2010 to 2016, markets like Vietnam, Indonesia, and India with lower minimum wages have presented attractive opportunities for businesses seeking to control their expenses amidst the global economic downturn.
 

How can India benefit from China Plus One strategy?

The "China Plus One" strategy presents a significant opportunity for India to enhance its manufacturing capabilities and attract more foreign investment. With China's rising labour costs and the geopolitical tensions with the West, multinational corporations are looking to reduce their reliance on China and diversify their supply chains. India, with its large population and strategic location, can benefit from this shift.

One major advantage that India has is its cost advantage in manufacturing. With competitive wages and a vast pool of skilled labour, India can offer an attractive alternative to China for multinational corporations looking to reduce costs. India can also benefit from the PLI (Production-Linked Incentive) initiative introduced by the government, which incentivizes local production and technology localization, boosting India's own manufacturing capabilities.

Moreover, India has already made significant progress in enhancing corporate accessibility, making it easier for businesses to operate in the country. However, Indian businesses must recognize what worked well for China and work to replicate those successes while also addressing any challenges they may face, such as supply chain disruptions and general uncertainty.            

Indian sectors that will benefit from China Plus One

China Plus One strategy has created a significant opportunity for India to attract foreign investment and become a preferred destination for manufacturing. India's strengths in various sectors have made it an attractive location for foreign businesses looking to diversify their supply chains. Here are three sectors that could benefit from the China Plus One strategy:

1.    IT/ITeS

India's IT/ITeS industry has been a driving force for the country's economic growth. The nation has positioned itself as a center for outsourcing services and is home to numerous major players in this industry, including TCS, Infosys, and Wipro. However, the manufacturing side of this sector has traditionally lagged behind China. As global businesses seek to diversify their supply chains, India has emerged as an attractive destination. Giants such as Apple, Hyundai, and BMW have already set up manufacturing units in India, and the Make in India initiative has further promoted the country as an investment destination.

2.    Pharmaceuticals

India's pharmaceutical industry, worth Rs. 3.5 lakh crore, is ranked third globally in terms of volume production. India's reputation as the "world's pharmacy" was highlighted when it supplied nearly 70% of WHO's vaccine needs in the fiscal year 2021-22. The nation boasts the most FDA-compliant pharmaceutical facilities outside of the United States and offers a 33% lower manufacturing cost. The Indian pharmaceutical sector is anticipated to expand significantly, with growth potential expected to reach Rs. 10 lakh crore by 2030, making it an attractive sector for foreign investment.

3.    Metals

India's natural resources are well-positioned to meet the demands of the domestic and global metal industries. With China's growing economy setting the stage for increased domestic steel demand, the world is likely to look towards India to fulfil its metal needs. India has initiated a Production Linked Incentive program for the specialty steel sector, estimated to attract more than INR 40,000 crore of investment within the next five years. Moreover, policy initiatives taken by China to withdraw export rebates and introduce export duties on processed steel products such as hot-rolled coil make India an even more attractive alternative for foreign businesses.
 

Conclusion

The China Plus One strategy presents an opportunity for India to become a preferred destination for foreign investment. With strengths in IT/ITeS, pharmaceuticals, and metals, India is well-positioned to attract foreign companies looking to de-risk their supply chains and reduce their dependence on China. However, Indian businesses and the government must continue to work towards creating an investor-friendly environment, resolving supply chain challenges, and boosting domestic production to fully capitalise on this opportunity.