Why ‘China plus one’ is paying off less than Southeast Asia hoped

“China plus one” has been a winning strategy for Southeast Asia. The proposition was simple: Draw in global manufacturers pivoting away from China due to rising costs and geopolitical tensions, and win stronger growth, higher wages, and more jobs for local economies. 

Yet despite winning billions of dollars of investment in new factories, the region is reaping fewer benefits than its leaders may have hoped. 

“China plus one has been a net gain for Southeast Asia, but a conditional and uneven one,” says Meng-Chun Liu, the director of the Chung-Hua Institution for Economic Research (CIER), a Taiwan-based think tank. “It brought factories, exports and jobs to the region, but not the design, core components and process know-how that captures most of the value.”

Vietnam, the star economy of Southeast Asia, focuses primarily on final assembly before export to developed markets, rather than manufacturing intermediate components. To make matters worse, companies like Target—frustrated by an underdeveloped Southeast Asian factory ecosystem—are moving supply chains back to China.

And now Southeast Asia faces a bigger challenge: as Chinese firms increasingly view Southeast Asia as a region of consumers, not workers, a flood of cheap exports could end up undercutting the region’s manufacturing gains. 

Flying geese returning home

The “flying geese” model, formulated by Japanese economist Kaname Akamatsu in the 1930s, suggests that manufacturing automatically flows from economically advanced countries to less-advanced ones. Over time, these follower nations also become too expensive for manufacturing, and so factories shift to nations even further along the frontier.

Yet, according to Liu, this model no longer holds. “The old ‘flying geese’ pattern, in which China passed lower-end manufacturing on to its neighbors, is breaking down: China now aims to keep the full supply chain at home and to sell into Asia, rather than hand production over to it,” he says.

A key factor holding Southeast Asia back is its fragmented manufacturing capabilities. Vietnam specializes in electronics assembly, Thailand in automotives, and Malaysia in chip packaging. 

Yet without........

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