U.S. companies are increasingly adopting a “China + 1” strategy as they navigate the complexities of their supply chains amid ongoing tensions between the United States and China. This strategy has helped firms keep a foothold in China, while taking obvious and measured steps to diversify their supply chains to other countries. By doing so, these companies gain both time and flexibility to adjust their operational strategies without entirely severing ties with the Chinese market.
Rebalancing supply chains with a “China + 1” strategy has become the new normal. Its purpose is to make our supply more resilient and reduce our overreliance on a single country. Jinyuan (Stephanie) Song is an expert in international business strategy. She argues widely that using this approach allows firms to effectively balance costs and benefits. By retaining some manufacturing capabilities in China while establishing parallel operations in other nations, businesses can better adapt to the evolving global landscape.
Firms that exhibit low economic dependence on China are more likely to align their strategies with governmental preferences regarding trade and supply chain management. Firms deeply dependent on the Chinese market face efficiency pressures that limit their capacity to shift directions. There are two distinct types of dependence that firms may experience: market revenue dependence and supplier capacity dependence. Market revenue dependence indicates the share of a firm’s total revenue that comes from customers located in China. Alternatively, supplier capacity dependence exposes if suppliers beyond China can handle the firm’s operational demand.
Recent data show enormous changes in the domestic supplier base for U.S. companies. Prior to 2017, firms in strategic and non-strategic sectors alike sourced from a similar number of Chinese suppliers. Both 2021 and 2022 have seen record levels of announced actions by firms in these strategic industries. They’ve reduced their dependence on Chinese suppliers by 29%. This trend further highlights the need for companies to proactively adjust their sourcing strategies to react against evolving geopolitical landscapes.
Indeed, the Biden administration has largely continued the previously established supply chain priorities of the last administration. For this reason, companies are currently reconsidering their dependence on China. Policymakers need to be aware of the economic realities and our national interests that have driven these changes. Finding the right equilibrium is key to promoting a competitive, business-friendly environment and addressing appropriate national security risks.