China Plus One

China Plus One (also known as C+1) is a global business strategy where companies diversify their manufacturing and Supply Chain operations by adding a production base in at least one other country besides China. The goal isn't necessarily to abandon China, which remains a colossal manufacturing hub and consumer market, but to mitigate the risks of being solely dependent on a single country. This trend has been fueled by a cocktail of factors, including rising labor and Operating Costs in China, the U.S.-China Trade War that introduced hefty Tariffs, and growing concerns over Geopolitical Risk. The final, powerful push came from the COVID-19 Pandemic, which brutally exposed the fragility of single-source supply chains when lockdowns in one country brought global production to a screeching halt. For companies, C+1 is a form of insurance; for investors, it’s a major global trend creating new risks and opportunities.

The shift towards a China Plus One strategy is a rational response to a changing world. It's a classic case of not putting all your eggs in one basket, driven by both economic and political pressures.

Imagine a company that makes 100% of its products in a single factory. A fire, a flood, or a local labor strike at that one factory could wipe out its entire production capacity overnight. Now, scale that idea up to the size of a country. For decades, companies happily concentrated their manufacturing in China to benefit from its efficiency and scale. However, this created immense concentration risk. Events like the pandemic demonstrated that a single point of failure—in this case, one country's public health crisis—can paralyze global corporations. Diversification of the manufacturing base is a powerful tool to build resilience against unforeseen disruptions, whether they be pandemics, natural disasters, or political turmoil.

The landscape of global trade is no longer as smooth as it once was. The U.S.-China trade tensions, resulting in tit-for-tat tariffs, made sourcing exclusively from China significantly more expensive for many companies selling into the American market. Beyond tariffs, the general rise in geopolitical friction has made boards of directors nervous about long-term stability. At the same time, China’s economic success has led to higher wages and stricter environmental regulations, eroding the cost advantage it once held for certain types of manufacturing. For many businesses, it simply makes financial sense to find alternative, lower-cost locations for at least a portion of their production.

As companies look to diversify, a handful of countries have emerged as the primary beneficiaries of the China Plus One trend. Each offers a unique value proposition, attracting different types of industries.

• Vietnam: A star performer, attracting significant Foreign Direct Investment (FDI), especially in electronics (like Apple's suppliers), textiles, and footwear. Its proximity to China allows for easier integration with existing supply chains.
• India: With its massive population, a growing domestic market, and government initiatives like “Make in India,” the country is a strong contender for everything from smartphone assembly to pharmaceuticals.
• Mexico: A prime candidate for “nearshoring” by North American companies. Its shared border with the U.S. drastically cuts down on shipping times and costs, making it ideal for the automotive and electronics industries.
• Southeast Asia (e.g., Thailand, Malaysia, Indonesia): This region offers a diverse range of options. Thailand is a powerhouse in automotive and electronics, Malaysia specializes in semiconductors and electrical components, and Indonesia provides a large labor pool and abundant natural resources.

For a value investor, macro trends like China Plus One are not for chasing hype but for uncovering specific, tangible opportunities. The key is to look past the narrative and focus on the underlying business fundamentals.

The C+1 trend creates a fertile ground for bottom-up stock picking. An investor could look for:

1. Local Champions: Well-run industrial companies, logistics providers, or port operators in the “Plus One” countries that are directly benefiting from an influx of new business.
2. Industrial Real Estate: Companies that build and lease the factories and warehouses needed by the relocating multinational corporations.
3. “Picks and Shovels” Plays: Businesses that supply the machinery, components, or services essential for setting up new manufacturing operations in these Emerging Markets.

The goal is to find companies with a durable Competitive Advantage that are poised for growth thanks to this trend, but whose shares are still trading at a reasonable price.

While the C+1 strategy is real, it's crucial to be cautious.

• Don't Overpay for a Good Story: When a trend becomes popular, stock prices of associated companies can get bid up to speculative levels. Always conduct thorough Due Diligence and demand a Margin of Safety.
• New Countries, New Risks: Investing in emerging markets comes with its own challenges, including political instability, currency volatility, and weaker corporate governance. These risks must be carefully assessed.
• China Isn't Going Anywhere: Remember, the strategy is “China Plus One,” not “China Minus One.” China's manufacturing ecosystem is incredibly sophisticated and will remain a critical part of the global economy for the foreseeable future. A company heavily invested in China is not automatically a poor investment.