Image courtesy of DHL
A new white paper from DHL Global Forwarding, DHL Group’s ocean and air freight division, discusses “various countries in South East Asia, Southern and Eastern Europe as well as Middle East and South America as strategic alternatives and additions to China.”
The 28-page paper examines going beyond “China Plus 1” strategy and operating in several countries in order to diversify and stabilize supply chain and production. Why? “China Plus 1, which gained traction around 2019, has proven too limited to deliver the resiliency and risk hedging required to adjust to fast-changing supply chain situations,” writes author Lisa Harrington, president of the lharrington Group and a research scholar and fellow at the University of Maryland. The limitations became evident because of a series of events that included U.S. tariffs implemented by President Donald Trump in 2019, the pandemic, initial escalation of trade tensions among the U.S., China and the EU, and increased political tensions among those same parties on top of the trade war.
Five areas to examine, Harrington writes, are transportation, cost, infrastructure (including broadband capacity), workforce and the regulatory environment. In the transportation arena, the report highlights the significant investments being made by Vietnam and Mexico in their transportation networks. Regarding workforce, India gets a shoutout for its investment in education “to prepare their labor force for emerging industries, like semiconductors,” says the white paper.
The regulatory environment “encompasses taxes, customs, tariffs and participation in trade agreements, which can significantly impact operational efficiencies and costs,” the report states. “Emerging Plus X countries are actively seeking to establish favorable trade agreements and offer with that increasingly trade-friendly environments to attract foreign investment. In this context, a long-term commitment to these locations is crucial, as establishing a diversified production base often requires substantial upfront investments.”
Asked to comment on the white paper, John Evans, co-founder and managing director of Tractus Asia, tells Site Selection, “What is being coined as China Plus X is a correct analysis, but this is not a new phenomenon. It is a trend that started several years before Trump #1 and the tariffs. Rapidly rising costs in China and increasingly costly logistics had MNCs already looking at diversification. This is a more than 10-year-old evolution from a strategy of one low-cost global export hub that quickly evolved to one of multiple smaller, more highly automated operations near market.”
Evans and colleague Hank Hulick analyzed the China Plus 1 approach for Site Selection in 2019 in “U.S.-China Tariffs Expedite Export Manufacturing’s ASEAN Migration.” But their first analysis of China Plus 1 came in 2010 in “Grabbing a Tiger By the Tail.”
The examples the DHL analysis provides have only accelerated this trend as risk mitigation has become an increasingly more important factor in site selection, Evans says. “This trend will continue and only be accelerated by the geo-political and economic uncertainty of today,” Evans says, “making a proper site selection strategy even more relative to the long-term success of an investment.”
More context can be found in a November update by DHL and New York University’s Stern School of Business today of their DHL Global Connectedness Tracker, an update and extension of their DHL Global Connectedness Report, which helps form the basis for Site Selection’s annual Global Best to Invest report in each year’s May issue. The tool tracks how flows of trade, capital, information and people move around the world.
Despite the rising of trade barriers, says the update, as recently as 2023, “21% of the value of all goods and services produced around the world was traded internationally — just shy of the all-time high of 22% first reached in 2008 and matched in 2022.”
“In turbulent times, it is essential to look beyond the political crossfire about globalization to make informed decisions based on how international flows are actually developing,” said Steven Altman, senior research scholar and director of the DHL Initiative on Globalization at NYU Stern’s Center for the Future of Management. “While there is no guarantee that the recent resilience of global flows will continue,” he said, the tracker “highlights how companies and countries often find creative ways to preserve benefits they derive from globalization. As long as markets stay connected, a company that unilaterally retreats from globalization can put its competitive position at risk.” — Adam Bruns
