Which Asian Nations Can Benefit From the ‘China Plus One’ Strategy? – The Diplomat
The China-U.S. trade war and the COVID-19 pandemic laid bare the need for companies to diversify supply chains outside of China. This has given rise to the “China plus one” strategy, in which multinational firms are moving to other countries, in addition to China. Some Asian countries have put forward plans to attract overseas investment as companies look for another center of production or distribution. These include Thailand, Malaysia, and Vietnam, which have introduced preferential policies for overseas firms investing in the country.
Thailand has made strides in improving its ease of doing business, streamlining the process for obtaining construction permits and improving minority investor protection. FDI applications rose 80 percent in Thailand 80 percent year-on-year in the first quarter of 2021. While the medical sector attracted the most FDI projects, foreign direct investment has also been increasing in the manufacturing industries, such as the metals and machinery sectors. Thailand’s Eastern Economic Corridor, including the provinces of Chonburi, Rayong, and Chachoengsao, received the most FDI applications, 39 percent more than those filed in the first quarter of 2020.
Malaysia has also received an increasing amount of foreign direct investment, in part because the country has a strong legal system and high telecommunications and internet capabilities. Foreign direct investments flowing into the country grew 383.4 percent year-on-year, going into the manufacturing, services, and primary sectors. Much of the investment has been directed to Penang, which is known for providing high-tech manufacturing. Going forward, Malaysia’s Digital Blueprint Program is projected to further improve FDI flows into the development of software and hardware digital infrastructure.
Vietnam is near China and has been a key part of the “China plus one” strategy, not only for Western firms but for Chinese firms as well. While Vietnam’s infrastructure is far behind that of China, Vietnam’s 2030 master plan for transport infrastructure aims to construct 5,000 kilometers of expressways, a deep-water port, high-speed rail routes, and the completion of Long Thanh International Airport near Ho Chi Minh City. This is much needed, as Vietnam’s ports have strained to keep pace with increasing demand for manufacturing and export. Some Chinese firms have chosen to relocate to Vietnam in order to avoid tariffs imposed by the United States throughout the trade war. These include HL Corp, a bike parts maker; Shenzhen H&T Intelligent Controls, a company that specializes in intelligent controllers; and TCL Technology, an electronics producer.
However, China is still pulling in a significant amount of foreign direct investment and creating attractive manufacturing regions in order to foment ongoing growth in this area. FDI into China in the first quarter of 2021 amounted to $46.38 billion, which was a 39.9 percent increase year-on-year, and a 24.8 percent increase compared to 2019. Much of the FDI went into inland China, and into service and high-tech industries.
China’s focus on building enticing manufacturing regions is a major reason for ongoing flow of foreign investment. One of the largest ongoing projects is the Guangdong-Hong Kong-Macao Greater Bay Area, an internationally oriented city cluster driving innovation and market reforms. The area is intended to be a globally competitive mega-region by 2035.
FDI flows into China may increase further. Some analysts have predicted that manufacturing operations may move back to China or suspend moves away from China due to COVID-19 outbreaks in Vietnam and India. Zhiwei Zhang, chief economist at Pinpoint Asset Management, stated that “if [the] supply chain [in India and Vietnam] is disrupted for a long time, we could see [the current month-over-month] 20 percent, 30 percent export growth [in China] to continue into next year.”
For now, the “China plus one” strategy is working for some companies. One key determinant of how sustainable the trend will be is how quickly infrastructure can be built to accommodate more firms moving into other nations. However, companies that do choose to diversify into Southeast Asian nations will continue to be able to take advantage of the varied and easily accessible suppliers from other Asian nations. In addition, the recently signed Regional Comprehensive Economic Partnership (RCEP) will allow firms with supply chains distributed among several Asian nations to take advantage of common rules of origin for the entire bloc. This will allow RCEP countries to use only a single certificate of origin.
As a result, the “China plus one” strategy, with firms venturing into other Asian nations, has become a popular trend that is likely to continue over the long run, even if some firms focus production more on China in the short run. In particular, Thailand, Malaysia, and Vietnam will continue to appeal to multinational firms, especially as these countries continue to build up infrastructure and production capacity.