Beyond China: Where To Next In Asia Pacific
Over the last several years, many companies have employed a “China Plus One” strategy to diversify their footprints and steer clear of rising geopolitical tensions and narrowing cost advantages posed by the world’s manufacturing superpower. While China remains a dominant force in global production, its increasing costs and evolving operating conditions are prompting executive teams to ask, “Where to next?”
China’s status as a prime location for Western manufacturers gained momentum following its accession into the World Trade Organization in 2001.1 As Western companies looked to shift operations to lower-cost markets to reduce operating costs and boost profitability, China emerged as the “go-to” manufacturing destination largely thanks to its large, low-cost labor pool. From 2000 to 2023, foreign direct investment flowing from the United States (U.S.) into China increased from $11.1 to $126.9 billion annually,2 and China’s economy boomed to become the second largest in the world.3
Special Economic Zones (SEZs) played an important role in China’s economic transformation, offering foreign investors tax breaks, incentives and less stringent regulations to allow companies to set-up shop quickly. Over time, China’s manufacturing capabilities evolved, enabling the country to transition from lower- to higher-end production. In 2015, the Chinese government introduced its “Made in China 2025” initiative to accelerate China’s position as an advanced manufacturing leader in industries such as automotive, aviation, information technology, medical devices and robotics.4
While this concentration of manufacturing presents clear advantages—economies of scale, a specialized labor force and an unmatched manufacturing ecosystem, it also presents vulnerabilities. The pandemic shed light on the interconnectedness of the world’s supply chain and just how much companies (and consumers) rely on China. This newfound focus on footprint diversification begs the question of which nations in the Asia Pacific (APAC) region are best poised to support new manufacturing operations.
The tailwinds that helped prompt Western investment into China have subsided. Intensifying trade relations and the rise in protectionism places uncertainty on the future of China for new investments by Western companies. Since George H.W. Bush’s presidency, each U.S. administration has taken various measures to address trade issues with China, including the use of tariffs. In 2018, the U.S. escalated trade discussions with China by imposing a series of tariffs on Chinese goods to reduce the trade deficit and address issues like intellectual property concerns and forced technology transfers.
The Biden Administration largely upheld many of the tariffs imposed during Trump’s first presidency and pressed for reforms to address issues like China’s state-led economic practices. As part of a broader strategy to address national security concerns and maintain the U.S.’s technological edge, the Biden Administration also took steps to limit semiconductor exports to China.5 The incoming Trump Administration may also potentially maintain a tough stance on China.
But it is not just the federal government that is taking a hard look at China: U.S. states are as well. Since 2023, more than 250 bills restricting property ownership by foreign entities have been considered by 40 U.S. states. Of those bills passed during states’ 2023-2024 legislative sessions, 14 include language prohibiting Chinese citizens or companies from owning some form of property.6
The Chinese government has aimed to counteract U.S. actions while also asserting its own interests on the global stage, imposing retaliatory tariffs on American goods and deepening ties with other countries and emerging economies to counterbalance U.S. influence. China continues to subsidize state-owned high-tech businesses to bolster their capabilities and technology self-sufficiency, whereas foreign companies are left to deal with escalating barriers to doing business. The Mercator Institute for China Studies reports that foreign companies’ exclusion from certain local subsidy programs and low-level data protections make it more difficult to compete with state-owned enterprises.7
Geopolitics, coupled with other relevant costs and operating conditions, should prompt every company with—or thinking about—production capacity in APAC to put serious thought into which markets best fit their business needs and risk tolerance.
APAC remains fertile ground for manufacturing deployments thanks to the region’s high economic growth potential, large talent pool and cost advantages. Many APAC countries are experiencing rapid economic and population growth, making them attractive destinations for foreign investments and business expansion. S&P Global reports that the strong economic outlook in the APAC region—which is the largest globally in terms of nominal GDP—is attributed to foreign direct investment as companies look to diversify their operations portfolios, namely their supply chains.8
Labor cost arbitrage is often the primary driver for American companies seeking to deploy manufacturing projects in new markets, including the APAC region. For example, wage rates for electronics assemblers are 72 percent lower in China, 88 percent lower in India and 92 percent lower in Vietnam compared to the U.S.9 While China still presents a significant cost savings to the U.S., other developing APAC countries may present even greater cost savings.
Though the cost profile in these locations may be more palatable than China’s, the maturity of their manufacturing ecosystems and infrastructure capabilities may present operational challenges. As executives contemplate the location for future manufacturing deployments in APAC, the tradeoffs between costs and operating conditions along with risk factors should be equally weighed.
Operating outside major cities, for example, is often out of the question. Low-grade roads and poor connectivity to airports and ports often steer investment to more developed areas, where the competition for labor can be more severe.
If not China, what countries are American companies betting on? While China dominated U.S. capital investment from 2003 to 2013 in APAC, other countries in the region took more investment share from 2013 to 2023. During this latter period, U.S. investment in China and India was relatively equal.10 But when considering job creation, for every one job created in China by a U.S. firm, approximately 2.8 jobs were created in India. Vietnam saw a 71 percent increase in U.S. capital investment during this period, but other countries in APAC were flat on jobs and capital investment.11
Many U.S. companies are going “all-in” in on India while remaining cautious about entering other APAC markets. While India has traditionally been viewed as a favorable off-shore location for back office and software development outposts, the world’s most populous country is attempting to transform itself into a manufacturing hub. A world-leading smartphone manufacturer set a goal of manufacturing 32 percent of its global output in India by 2027, representing a total potential production value of $34 billion; simultaneously, the company plans to steadily ramp down expansion plans in China and Taiwan.12 India’s Production Linked Incentive (PLI) scheme for mobile devices, which offers an incentive based on sales of goods manufactured in-market, is potentially a contributor to this portfolio decision. Like the incentives China rolled-out in the early 2000s, India has made strategic investments in incentive programs and efforts to streamline regulations to attract foreign direct investments, specifically in the manufacturing sector. Locations like Chennai, Pune and Ahmedabad have emerged as hotbeds for manufacturing investment activity.
The “Make In India” Program, for example, was introduced in 2016 in an effort to raise India’s manufacturing GDP share to 25 percent by 2025, with particular focus on target sectors like chemicals, food processing, pharmaceuticals and energy.13 The program also focused on expanding job opportunities for the approximately 12 million Indian citizens entering the workforce during this time, who could otherwise not be staffed solely by domestic employers. The success of the program is yet to be determined as India’s manufacturing GDP share has dropped a few percentage points since 2016.14
Like with entry into any new market, understanding laws, licensure and permitting requirements is critical. More bureaucracy and barriers to entry for foreign enterprises can make the ease of doing business in India less favorable, and the likelihood of considerable reform is uncertain given the governing party’s diminished parliamentary majority.15
What other countries may still deserve consideration? Of course, there is inherent risk in being among the “first” investors for a major manufacturing investment in a location, regardless of global region. And many companies want to see demonstrated proof—or the clustering of other similar or tangential firms—before investing millions in a new market.
The investment climate in Vietnam continues to grow, with headline announcements by several global brands in recent years. One major American athletic footwear and apparel company manufacturers half of its footwear and nearly a third of its apparel at one of its 155 Vietnamese factories, many of which are operated by subcontractors.16 A technology manufacturing leader produces half of its mobile phones in Vietnam and ties approximately 30 percent of its total global revenue to its manufacturing footprint in the country.17 These examples speak to the importance Vietnam plays in some manufacturers’ global footprints.
According to the Vietnam Investment Review, foreign direct investment flows in Vietnam are comparable to what inflows China experienced in its “heyday.”18 Locations like Ho Chi Minh City, Hanoi, Binh Duong and Hai Phong are the benefactors of most foreign investment.19 This rapid pace of economic growth and influx of new manufacturing deployments is leaving some areas challenged by overburdened infrastructure, unreliable energy supply and a shortage of higher-skilled workers.20
In June 2023, for example, emergency blackouts were triggered in northern Vietnam due to a heat wave and insufficient generation capacity to meet a rise in energy demand. At least five industrial parks were impacted, and many manufacturers modified production schedules to off-peak hours to avoid power disruptions.21 In response to reliability events such as this, the government unveiled a $120 billion roadmap to improve grid reliability and a plan to double-down on investments in renewable energy.22 The government also understands the importance of infrastructure upgrades to continue attracting manufacturing investments. Vietnam is often lauded as one of the leading countries in APAC for infrastructure investment, allocating nearly 6 percent of its GDP annually to development projects.23 The country is especially well-poised to support export-oriented industries.
Companies considering Vietnam should consider investing in onsite backup electric generation assets and conducting labor due diligence activities in markets of interest to inform a robust hiring, training and recruitment strategy to counteract potential operational risks.
As the global business landscape continues to evolve, the strategic importance of location strategy cannot be overstated. Understanding the interplay between costs, operational risks and ecosystem maturity across markets is an integral first step in any company’s global footprint strategy. Executives may wish to look beyond China to diversify their operations, and other APAC markets may present valuable opportunities for investment—or serious consideration at the very least.
Chief Executive Group exists to improve the performance of U.S. CEOs, senior executives and public-company directors, helping you grow your companies, build your communities and strengthen society. Learn more at chiefexecutivegroup.com.
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