Despite the China Plus One Strategy, Chinese Manufacturers Will Strengthen the Country’s Manufacturing Markets with Increased Adoption of New Technologies

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By James Prestwood | 3Q 2024 | IN-7426

While China Plus One (C+1) is driving significant manufacturing growth in regional manufacturing markets, particularly Association of Southeast Asian Nations (ASEAN) countries, the change in market dynamics will push Chinese manufacturing toward higher value-added production, necessitating the adoption of more comprehensive digital technologies, presenting an excellent opportunity for technology vendors looking to grow their Asia-Pacific customer base.

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What Is China Plus One?


The China Plus One (C+1) strategy is a supply chain management plan that aims to reduce companies’ dependency on China for components and final production. Manufacturers started to consider alternatives to China in the mid-2010s; however, following COVID-19 (with China’s Zero-Covid policy being highly damaging due to intermittent factory shutdowns), increasing labor costs in China (now, in many cases, higher than other competitor manufacturing countries, such as Mexico), and continued geopolitical challenges between the West and China (in the form of tariffs increasing costs and supply chain disruptions through export restrictions), such a strategy has become even more attractive, not only to U.S. and European manufacturers, but also to Chinese ones as well (with a significant number of factories in the Southeast Asian region now being Chinese owned, notably in Northern Vietnam). Many manufacturers that solely focused on the domestic Chinese market for both production and sales are looking outward to overseas opportunities. While other regions have benefited from the growth of this policy, including Latin America and parts of eastern Europe, the Association of Southeast Asian Nations (ASEAN) countries stand the most to gain from this diversification in manufacturing supply chains.

Why the ASEAN Region?


The ASEAN region has several key factors that enable it to be such an effective landing point for new manufacturing production:

  • Regional Proximity: ASEAN countries have convenient sea transportation to China and other global markets through Malacca, Singapore, and the Lombok Straits. The South China Sea also represents a significant trading route; however, it is increasingly becoming a geopolitically contested maritime area due to contestation between China, Taiwan, and the Philippines. Vietnam, Laos, and Thailand also have effective terrestrial transportation to China.
  • Neutrality between the United States and China: Malaysia, Thailand, Singapore, Vietnam, Indonesia, and the Philippines all maintain strategic neutrality between China and the United States, and consistently engage in the promotion of foreign direct investment from both trading partners.
  • Low Labor Costs: With China’s growing middle class, its competitive edge on cheap manufacturing labor is waning, while many ASEAN countries increasingly offer large and young workforces engaged with the manufacturing industry.
  • Serving Chinese Domestic Demand: The size of the Chinese market as an export partner fuels the demand required to enable increased regionally based manufacturing, supported by the China-ASEAN free trade agreements, similar to the U.S. market’s creation of demand for Mexican manufacturing industries.

ASEAN countries’ growth in low-cost manufacturing, most notably computer and electronic products (see ABI Research’s Smart Manufacturing in Southeast Asia market data (MD-ONRS-101)) will primarily drive the adoption of less robust digital transformation initiatives, primarily adopting “low-hanging fruit” solutions such as digital work instructions to support lower-skilled workers and multi-language workforces.

China's Manufacturing Market Will Adapt to C+1, Speeding Digital Transformation and Providing Opportunity for Technology Vendors


Chinese manufacturers will serve to reap significant benefits from the move of low-cost manufacturing over to nearby countries. With the middle class representing a greater percentage of China’s population, maintaining its competitive edge in low value-added manufacturing will only continue to become more challenging. To keep pushing the advancement of its manufacturing economy (26% of the country’s Gross Domestic Product (GDP) in 2023 according to the World Bank), China will need to consistently develop higher value-added production processes and adopt a greater range of Industry 4.0 technologies.

The investment in more impactful manufacturing technologies will only become more apparent, with the country’s government-supported 5G foundation serving to support End-to-End (E2E) digital solutions across design, production, and quality processes. Manufacturing Execution System (MES), Quality Management System (QMS), and Product Lifecycle Management (PLM) software will all likely see significant uptake, alongside machine vision and Artificial Intelligence (AI)-based maintenance and quality solutions. With China’s education system heavily promoting Science, Technology, Engineering, and Mathematics (STEM) subjects, this will only serve to encourage Chinese manufacturers to adopt new technologies to attract this new generation of workers, a similar practice employed by Western companies, despite China’s manufacturing unemployment market position not being as dire as in the United States.

Technology vendors looking to drive success in Chinese markets need to establish strong partnerships with provincial authorities, particularly in Shenzhen, Guangzhou, and Wuhan. Furthermore, vendors will likely have to adjust Go-to-Market (GTM) expectations and strategies for the Chinese market, and it is key to not assume that these will translate consistently from Western markets. For example, Chinese manufacturers often have different expectations around Return on Investment (ROI) within their procurement strategies than Western counterparts. Comprehensively engaging with regional government needs in key manufacturing provinces, alongside building partnerships with local system integrators, will aid technology vendors in clearly understanding the digital maturity of Chinese manufacturers and ensure strong value proposition. Finally, technology vendors must aim to maximize face-to-face interactions with potential customers, as digital marketing and communication carries far less weight in this market. Companies looking to build traction in China should prioritize exhibiting at local events and hosting executive seminars with comprehensive, and most importantly, local, customer references.

While the Chinese government looks to ease foreign companies’ ability to operate in the country such as allowing for easier cross-border data flows and greater protection for Intellectual Property Rights (IPR), foreign technology vendors will have to face challenges with increasingly stiff domestic competition in all factors when trying to build successful customer bases in China. In many cases, the Chinese government is encouraging domestic companies to use Chinese products, with a prime example being the use of domestically manufactured semiconductor chips. With the government’s heavy presence and support for the manufacturing sector, such policies are likely to impact choices of both hardware and software. Furthermore, foreign technology vendors will open themselves up to additional risks such as potential loss of Intellectual Property (IP) and cybersecurity challenges.

The balance of opportunity between ASEAN countries and China will remain a key element for technology vendors to watch as they develop strategies for addressing the Asia-Pacific market. Despite robust growth in ASEAN manufacturing combined with ease of doing business, the Chinese market remains the undisputable world industrial heavyweight, with comprehensive government support in the form of subsidies, easily accessible credit, and other supportive policies, all creating a far greater Total Addressable Market (TAM) for technology vendors willing to invest in operations there.