The 'China plus one' strategy, designed to shift manufacturing from China to Southeast Asia amid costs and geopolitical tensions, is delivering mixed results. While the region has won new factories and job opportunities, its gains remain limited by fragmented supply chains and China's retention of core manufacturing capabilities.
- Southeast Asia mainly gains low-skill assembly jobs, missing out on higher-value manufacturing.
- Vietnam and Malaysia lead the region’s gains but still depend heavily on Chinese supply chains.
- China’s evolving strategy risks undercutting Southeast Asian manufacturing with cheap exports.
What happened
The 'China plus one' approach encouraged global manufacturers to diversify operations by building factories in Southeast Asia to reduce dependence on China. This strategy brought billions of dollars in investment, new exports, and job creation, particularly in countries like Vietnam and Malaysia.
However, these benefits have been uneven and conditional. Southeast Asian countries primarily focus on final assembly, lacking the production of intermediate components and advanced manufacturing processes that generate higher value. Consequently, firms frequently source key inputs from China, limiting the region’s manufacturing autonomy and value capture.
Why it matters
Without developing fully integrated and mature local manufacturing ecosystems, Southeast Asia risks becoming locked into low-value roles that constrain economic growth and technological advancement. The heavy reliance on Chinese inputs and assembly limits the region’s potential to nurture high-value industries.
Furthermore, the traditional expectation that manufacturing will naturally flow from more developed to less developed economies—the 'flying geese' model—is eroding. China now aims to retain comprehensive supply chains domestically and leverage Southeast Asia more as a consumer market. This strategic shift threatens to flood Southeast Asian markets with cheap Chinese exports, potentially stifling local manufacturing progress.
What to watch next
Policymakers in Southeast Asia are seeking ways to build more comprehensive manufacturing hubs by leveraging regional strengths in sectors like electronics in Vietnam and semiconductors in Malaysia. Efforts to reduce dependence on Chinese inputs and boost local capabilities will be critical.
Additionally, monitoring how China’s evolving economic priorities impact trade flows and manufacturing investment in Southeast Asia will be important. The region’s ability to move up the value chain and integrate more design and component production will largely determine the long-term success of the 'China plus one' strategy.