In recent years, a notable trend has emerged in global supply chains: Western companies, along with their Asian counterparts, are increasingly diversifying manufacturing operations away from China. This movement, often dubbed the “China Plus One” strategy, aims to mitigate risks associated with over-reliance on a single market.
Driven by geopolitical tensions and economic pressures, firms are relocating to countries like Vietnam, India, Indonesia and others in Southeast Asia. As of 2025, this shift is accelerating, with foreign direct investment (FDI) in manufacturing surging in these regions while declining in China.
Several interconnected factors are propelling companies to reduce their footprint in China. Geopolitical risks top the list, particularly the ongoing U.S.-China trade tensions. Since the trade war intensified in 2017, U.S. tariffs on Chinese goods—escalating to as high as 100% on electric vehicles (EVs) in some cases – have made exporting from China costlier.
Policies like the U.S. CHIPS and Science Act and the Inflation Reduction Act (IRA) further incentivize “friend-shoring” and onshoring, encouraging production in allied nations to secure critical technologies such as semiconductors and batteries.
Economic challenges in China exacerbate this. Rising labor costs, a slowing economy, and overcapacity in sectors like solar photovoltaics (PV) have eroded China’s cost advantages. Global political and economic disruptions exposed vulnerabilities in concentrated supply chains, prompting firms to prioritize resilience.
Additionally, strengthened security regulations in China, increasing competition from local firms, and anti-foreign sentiment have accelerated withdrawals. Between 2019 and 2023, FDI into China dropped by 17%, while Southeast Asia saw a 20% increase, reaching $24 billion from Chinese firms alone in 2023.
The primary beneficiaries are Vietnam, India, and Indonesia, each attracting investments in distinct sectors due to their unique advantages like low labor costs, strategic locations, and trade agreements.
Vietnam has emerged as the frontrunner, with its manufacturing FDI rising 40% in 2023. Exports grew from $320 billion in 2019 to $440 billion in 2023, at a compound annual growth rate (CAGR) of 8.2%, driven by electronics. Its proximity to China, 16 free trade agreements (including CPTPP and RCEP), and business-friendly policies make it ideal for seamless transitions.
Examples abound: Samsung produces nearly a quarter of Vietnam’s exports, while Apple and Foxconn have shifted iPhone assembly lines there. In apparel, Vietnam’s global export share nearly doubled from 5% in 2014 to 9.8% in 2023. Nike, Adidas, and LG have also relocated from China, citing cost and risk reductions. However, Vietnam’s reliance on Chinese imports for raw materials remains a vulnerability.
India is competing fiercely, particularly in smartphones and automobiles, bolstered by its production-linked incentive (PLI) schemes and a vast skilled workforce. Smartphone exports surged from $137 million in 2017 to over $14 billion in 2023. Bilateral trade with China exceeded $100 billion in 2023-24, underscoring intertwined economies despite diversification efforts.
Notable shifts include Apple’s expansion in mobile manufacturing and IBM closing its China R&D division in 2024 to boost staff in India. In autos, Suzuki withdrew from China in 2018 to focus on India, while Honda and Mitsubishi have followed suit. India’s renewable energy ambitions (500 GW by 2030) also position it for solar PV growth. Yet, challenges like infrastructure bottlenecks and rigid labor laws hinder faster progress.
Indonesia leads in metals, minerals and chemicals, with exports rising from $180 billion in 2019 to $290 billion in 2023 (CAGR 12.3%). It attracted $33 billion in greenfield manufacturing FDI in 2023. Retail firms like Japan’s Lotte have shifted focus to Indonesia and Vietnam.
Beyond these, Cambodia and Laos are gaining in solar PV assembly, with Southeast Asia accounting for 20% of global module exports and 70% of U.S. imports. Mexico appeals for North American markets due to proximity, while Central and Eastern Europe (CEE) and North Africa see Chinese-led investments.
While promising, these shifts are not without hurdles. Infrastructure gaps in Southeast Asia could require $60 billion more in investments to handle future trade flows, particularly in ports, roads and logistics. Vietnam faces rising labor costs and corruption, while India’s regulatory complexities and power unreliability deter investors. Many relocations remain “shallow,” with firms still dependent on Chinese inputs, allowing Beijing to exert influence through export restrictions.
Chinese firms themselves are leading much of the outbound investment, blurring lines and complicating true de-risking. For instance, in solar PV, Chinese companies like LONGi and Jinko Solar have expanded in Malaysia and Vietnam to circumvent U.S. barriers.
Looking ahead to 2026, the trend is expected to persist amid U.S. policies like potential component tariffs and rules-of-origin revisions. Vietnam aims for high-income status by 2045, while India could see a “massive boom” if it addresses structural issues. However, China’s efficiency and dominance – exporting 4.14 million passenger cars in 2023 – mean it will retain significant market share.
For Western companies, this diversification enhances resilience but increases costs and complexity. Stakeholders, including logistics firms, can capitalize on opportunities in specialized supply chains, such as EVs and electronics. Ultimately, while the shift reduces risks, it underscores the interconnected nature of global trade, where complete decoupling from China remains elusive.