C+1 or C++ Strategy - Doing it Right!
When corporates in western economies werelooking tooffshore their manufacturing operations from their home countries for various internal factors, with China openingtheir policyaround thelate 1970s offering low labour and manufacturing costs, resources to expand, tax incentives, and expanding local consumer market, China became the go to destination and over a time of 30-40 years, it has turned intoagiant factory of the world.About a decade ago, China’s plus one strategy discussions might have flagged organisations of having all their eggs in one basket. Most companies may not have taken it seriously to pursue shifting partial or all of their operations out of China for several possible reasons like out-of-pocket cost, slow establishment curve, availability of skills, resources, or higherproduction costs.
However, recently, the desire for companies to adopt a diversification strategy from China to one, two or more countries has been on the increase depending on their product manufacturing or supply chain. Disruption of supply chain due to stringent pandemic measures, raising labour costs, geo-political tensions, and trade tariffsto name a few are fuelling it further.
While it may be easier for some large corporations to make exit decisions based on theiravailable resources and deep pockets, it has not been easier for many organisations to decide whether to or not to do it.
It is understandable thatChina’s deep manufacturing know-how, sophisticated supply chain, industrial infrastructure, local market size, and its industrial clusters and scalability of production are some of the factors that refrain many companies from making their move out of China either partially or wholly.
They are also cognizant that neighbouring alternatives come with a package of challenges like unreliable supply chain, lack of skills, and lower resource pool compared to China and quality costs in the earlier phases of establishment, along with attractive incentives, cheaper labour, and initiatives that businesses can exploit and leverage on opportunities.
Both international and Chinese companies, looking to diversify or enter newer markets or to leverage on country of origins for tax incentivesneed to take‘China Plus One or multiple strategy’ seriously and plan for a successful transition.
Sensible Approach
Businesses need appropriate strategies considering short, medium, and long-term outlook. Both their internal and external factors has to be thoroughly understood, the level of reliance on existing manufacturing country and available alternative options, degrees of separation or independence from their current source, arising implications and impacts from those options.
Existing gaps to be assessed with an internal review of components, manufacturing technologies, quality levels, skills requirement and external review of alternatives,newer supply chains, government subsidies, policies, tax incentives, labour pool, training time, and market size to develop an understanding and insight into how those gaps to be addressed.
During this process of evaluation, potential opportunities that China and its increasing potential market size present cannot be ignored but has to be included in the equation.
Strategic choices
There may be several options available for an organisation to potentially diversify or exit from a current base. The key success factor lies in choosing a suitable choice benefiting the organisation holistically. Few possible individual or a combination of scenarios are as follows:
No Change, Stay the Same – As they say “the more things change, the more they stay the same. Turbulent changes do not affect reality on a deeper level other than to cement the status quo”. This is fine but as an organisation, this approach misses out the opportunities, incentives, competitive advantages, its entrepreneurial spirit, and it might be too late to change when all things fail later on.
Relocate out of China – This means completely moving out of China based on internal and external assessment. There is no doubt there may be few companies that might have been completely worn out with various upheavals in their business journey in China and had enough to opt for a complete exit severing ties with China,but this may be to an extreme.There is a risk of loosing connections built over time, skills, organisational knowledge, or know-how which is a valuable resource and a competitive edge, and more importantly a large domestic market in China.
Diversify within China – Relocating to regional centres, away from industrial clusters. Challenges of establishment curve maystill be there with this move, however familiarity and past experience ofthe environment, government, labour, and retention of management and skills due to internal relocation, and there by, retention of know-how within the organisation that will help to lower the establishment curve. However, this approach has the same disadvantages of ‘maintaining the status quo.’
Diversifywithin China and then Diversify Outside – This approach may be suitable for organisations having a stronger domestic and overseas market presence but feeling the pinch of raising wages and cost of doing business in a more urbanised China. With this approach, there is a relocation to regional areas with lower costs of doing the business and retention of talent pool. It might be possible for organisations to shift their initial investment capital based on government policies and subsidies due to moving to regional areas. And then, plan a suitable timing for the diversification or a branch outside of China to exploit the opportunities presented by the alternatives. Careful considerations are required to time the two moves and it is pertinent that they are phased out accordingly to provide the required time of establishment in each move.
In the end, the success of an organisation lies in its ability to be able to replicate its current model of success with a lesser establishment curve and economic output. And it’s not money, buildings, or machineries that make its success, but its people.
Whether out of Western economies to China some 30 to 40 years ago, or out of China now or out of elsewhere 30 to 40 years later, fundamentals will remain the same for an organisation to evaluate short, medium, and long-term outlooks, internal, and external factorsand devise appropriate strategies, keeping in mind its human capital which is a valuable resource.
During this process of evaluation, potential opportunities that China and its increasing potential market size present cannot be ignored but has to be included in the equation.
Strategic choices
There may be several options available for an organisation to potentially diversify or exit from a current base. The key success factor lies in choosing a suitable choice benefiting the organisation holistically. Few possible individual or a combination of scenarios are as follows:
No Change, Stay the Same – As they say “the more things change, the more they stay the same. Turbulent changes do not affect reality on a deeper level other than to cement the status quo”. This is fine but as an organisation, this approach misses out the opportunities, incentives, competitive advantages, its entrepreneurial spirit, and it might be too late to change when all things fail later on.
Relocate out of China – This means completely moving out of China based on internal and external assessment. There is no doubt there may be few companies that might have been completely worn out with various upheavals in their business journey in China and had enough to opt for a complete exit severing ties with China,but this may be to an extreme.There is a risk of loosing connections built over time, skills, organisational knowledge, or know-how which is a valuable resource and a competitive edge, and more importantly a large domestic market in China.
Diversify within China – Relocating to regional centres, away from industrial clusters. Challenges of establishment curve maystill be there with this move, however familiarity and past experience ofthe environment, government, labour, and retention of management and skills due to internal relocation, and there by, retention of know-how within the organisation that will help to lower the establishment curve. However, this approach has the same disadvantages of ‘maintaining the status quo.’
Stay the same in China and Diversify out of China – Here the company retains existing capability scaling its production to the needs of the local market if it can withstand the cost of operations and diversify some of its operations out of China to get the best of both worlds. This way, an organisation can still retain the talent pool, skills, and know-how that it can utilise to train the talent pool in the newer manufacturing or supply chain capabilities.Both international and Chinese companies, looking to diversify or enter newer markets or to leverage on country of origins for tax incentives need to take ‘China Plus One or multiple strategy’ seriously and plan for a successful transition.
Diversifywithin China and then Diversify Outside – This approach may be suitable for organisations having a stronger domestic and overseas market presence but feeling the pinch of raising wages and cost of doing business in a more urbanised China. With this approach, there is a relocation to regional areas with lower costs of doing the business and retention of talent pool. It might be possible for organisations to shift their initial investment capital based on government policies and subsidies due to moving to regional areas. And then, plan a suitable timing for the diversification or a branch outside of China to exploit the opportunities presented by the alternatives. Careful considerations are required to time the two moves and it is pertinent that they are phased out accordingly to provide the required time of establishment in each move.
In the end, the success of an organisation lies in its ability to be able to replicate its current model of success with a lesser establishment curve and economic output. And it’s not money, buildings, or machineries that make its success, but its people.
Whether out of Western economies to China some 30 to 40 years ago, or out of China now or out of elsewhere 30 to 40 years later, fundamentals will remain the same for an organisation to evaluate short, medium, and long-term outlooks, internal, and external factorsand devise appropriate strategies, keeping in mind its human capital which is a valuable resource.
