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China Decoupling: Exploring Alternative Markets

By 31 July, 2023No Comments

China decoupling


Geopolitical tensions, trade disputes, and supply chain risks related to foreign companies in China continue to affect global business operations. As a result, the concept of “China decoupling” has gained popularity among corporations and industries and emerging markets are being viewed as potential beneficiaries of this trend. This article is the first one in a series and explores the potential benefits of decoupling from China, identifies markets that offer compelling alternatives, and discusses decoupling strategies. Furthermore, it highlights how third party firms can assist businesses in navigating the complexities and challenges of decoupling from China.

Exploring Alternative Markets

To prepare for potential uncertainties, multinational corporations (MNCs) are exploring strategies to shift their value chains from a “global factory” to smaller regional manufacturing hubs. These hubs are commonly emerging markets and provide compelling alternatives to China for corporations seeking to diversify their manufacturing and supply chain operations. Emerging markets, particularly neighboring countries of China such as India and ASEAN members, have been attracting significant foreign investment as they offer relatively affordable labor supplies, above-average manufacturing sectors, and strategic locations, making them viable options for businesses looking to reduce their reliance on China.

Current ASEAN and India positions

India and Members of the Association of Southeast Asian Nations (ASEAN), specifically Vietnam, Malaysia, Thailand, and Indonesia, are becoming increasingly important as potential contenders, as they have made significant preparations in recent years to receive possible influxes of foreign investments that may be diverted from China.

Labor Force

China’s rise as a manufacturing hub has been one of the most significant developments in the global economy in recent years. Initially, part of China’s major competitiveness used to come from their supply of relatively low-cost labor force. However, ASEAN members, most notably Vietnam, Thailand, Indonesia, and Malaysia, along with India have been closely keeping tabs on their labor supplies as well. They can provide low-cost labor pools and are currently investing in developing their own skilled workforce. Additionally, these emerging players have more youthful working population as median ages for India, Indonesia and Vietnam are well below 33, in contrast to the median age of China being 38.

India plays a key role in offering a comparable quantity to that of China. The country’s middle class is expected to grow by 200% in the next 5 years, reaching around 600 million people. By 2030, it is predicted to exceed 1.5 billion people.

Geographical Location

ASEAN countries offer significant advantages for companies seeking alternatives to reduce their dependence on China. The relatively close geogrpahical proximity between China and ASEAN members enhances ease of transportation, reduces shipping times, and lowers logistics costs. This makes it feasible for companies to maintain some level of linkage with Chinese markets while diversifying their operations.

Furthermore, ASEAN countries are active participants in various regional trade agreements, including the ASEAN Free Trade Area (AFTA), the ASEAN-China Free Trade Area (ACFTA), and the Regional Comprehensive Economic Partnership (RCEP). These agreements provide companies with preferential access to regional markets and tariff benefits, thereby enhancing their competitiveness.


Since gaining momentum to build and prepare for foreign investments, manufacturing hubs have been actively trying to increase their outputs. For example, Vietnam recently received a $20 billion R&D fund from Samsung in 2022, as the technology conglomerate aims to increase the quantity and quality of its Vietnam-based talent pool and put a focus on smart technologies, including AI and big data.  Indonesia is also focusing on maximizing its capacities and securing a spot among the top 10 manufacturing countries by output in 2023. India is similarly updating its manufacturing outputs, resulting in a 40% increase in output of electrical machinery and equipment between 2020 and 2021.

As a result, these manufacturing hubs are starting to capture the loss of output caused by China’s Zero-Covid policy. China may lose some of its status as the center of manufacturing, and multinational corporations might eventually consider these alternative hubs that offer reduced labor costs with attractive policies. Nevertheless, their infrastructures are still in development.

Matching the No.1 Spot

Despite recent challenges such as the pandemic, economic downturns, and global disputes, China remains a major player in global production. Its competitive edge is not only due to the large quantity but also the quality of its labor pool. To expand its skilled talent pool, China has sinigicantly invested in education, resulting in an impressive increase of 700% in terms of college graduates compared to 2000. Out of those graduates, about 5 million are STEM graduates, signaling that China has an annual supply of STEM graduates greater than that of India, the United States, Japan, Germany, France, Italy, the UK, and Canada combined.

Another key point to consider is that China has effectively leveraged its talent pool and established itself as the premier value-added manufacturer for years to come. It currently accounts for over 28% of the global output. As the value of high-tech manufacturing continues to increase by 7% year-on-year and equipment manufacturing by nearly 6%, China’s abundant high-skilled workforce has fully captured nearly all the growth in these high-value manufacturing sectors.

Compared to China, the emerging manufacturing hubs still lack certain qualities beyond the availability of high-skilled labor, such as quality infrastructure and supportive policies from the government. As a result, these hubs are currently attracting mostly labor-intensive industries and lower-value goods, such as apparel. Although brands like Adidas, Nike, and Samsung have started shifting their manufacturing outside of China, their core manufacturing chains are likely to remain in China for the time being.

The process of shifting value chains away from China is expected to be a long-term project. It will take years for companies to decide what they want to transfer to emerging markets. These new players must ramp up infrastructure development and increase their manufacturing outputs significantly to capture even 20% of China’s current capacity.

Strategies for Successful Decoupling or Staying

To better prepare for the future, foreign companies should already be in talks about their operational strategies with China. This section briefly covers how the four most common types of foreign entities in China can form a strategic approach given the current political and economic climate between China and the rest of the world.

The first strategy is proposed for companies that manufacture their products primarily in China and rely on China as a key sales region, such as Adidas, Nike, and Apple. With China’s promotion of the Dual Circulation policy, which encourages the Chinese government to invest internally and externally to boost domestic demand and strengthen China’s self-sufficient economy, these companies are expected to eventually lose their foothold in China in terms of top-line revenue. Furthermore, the heavy taxation of Chinese exports in foreign countries ultimately limits these corporations’ revenues.

Therefore, a temporary solution proposed for these issues is to implement an “in China, for China” strategy that separates their upstream and downstream operations in China from the rest of their global operations. In other words, their Chinese manufacturing operations will solely serve the Chinese market, while manufacturing operations outside of China will serve the rest of the global demand. To effectively implement this strategy, companies must ensure that the Chinese market provides substantial revenue and that manufacturing facilities outside of China are sufficient to meet global demand.

The second strategy is applicable to companies with low revenue in the Chinese market and manufacturing operations outside of China. With little focus on downstream and upstream activities, and the Chinese government promoting onshore entities, the only viable option for such foreign entities in China is to sell off their operations and close shop. Instead, they should focus on utilizing their resources to discover new or existing markets outside of China.

The third strategy is for foreign companies that rely on China for their manufacturing capability. These companies likely established production in China prior to the recent political disputes and trade war. Given China’s status as a one-stop manufacturing hub and top-tier value-added manufacturer, it’s understandable why these companies are present in China. However, the trade war between China and the rest of the world, especially the U.S., has severely impacted the revenues and profits of these companies through tariffs and trade sanctions on Chinese-manufactured goods. Therefore, a common strategy for these players is to carry out a China Plus One approach. As previously mentioned, China Plus One refers to diversifying investments into other markets other than China. In this context, the companies are supposed to set up their manufacturing operations elsewhere while maintaining their Chinese operations until the current situation is resolved.

The final strategy is for foreign companies that import finished goods into China to sell, since the Chinese market is substantial for their top lines. The strategy in this category varies based on whether the foreign company is B2B or B2C. B2B is expected to be harder to sustain due to China’s support for local competitors through subsidizing local entities and onshore production. On the other hand, B2C companies must approach the market through Chinese platforms such as Alipay and WeChatPay. B2C foreign players are expected to adopt local values into their propositions in the Chinese market. These companies can mostly keep their downstream operations as-is, but are expected to make changes in their upstream activities later on.

Foreign companies operating in China need to clarify their ties with the country and allocate resources to develop the most suitable strategic response. Ultimately, they must adapt their value propositions and business models to revolve around the constantly changing economic and geopolitical landscape related to China.

How can a consulting firm help?

However, each market presents its own set of challenges and considerations that businesses must evaluate before making informed decisions about diversifying their operations. Factors such as regulatory environments, infrastructure, logistics capabilities, political stability, and labor conditions can vary widely across different markets. Therefore, businesses must conduct thorough market research and assess the risks and opportunities of each market before making informed decisions about diversifying their operations.

A third party firm can help businesses navigate the complexities and challenges of decoupling from China. The process of reducing economic and technological dependence on China while exploring alternative strategies and markets requires careful planning, market insights, and expertise. Here’s how a consulting firm can assist businesses in this context:

  1. Market Research and Analysis: Consulting firms can conduct in-depth market research and analysis to help businesses identify potential alternative markets and supply chain options. They can assess the economic, political, and regulatory landscapes of different countries, providing valuable insights to support decision-making.
  2. Risk Assessment and Mitigation: Consultants can help businesses understand and assess the risks associated with any operation related to decoupling from China, such as supply chain disruptions, geopolitical tensions, and regulatory changes. They can develop risk mitigation strategies to safeguard the company’s operations and investments.
  3. Supply Chain Diversification Strategies: Consulting firms can work with businesses to design and implement supply chain diversification strategies. They can help identify suitable suppliers, manufacturing locations, and logistics partners in alternative markets to reduce or strengthen reliance on China.
  4. Regulatory Compliance and Market Entry: Navigating regulatory frameworks in new markets can be challenging. Consulting firms can provide guidance on compliance requirements, market entry strategies, and legal considerations to ensure smooth operations in alternative locations.
  5. Cost-Benefit Analysis: A consulting firm can conduct cost-benefit analyses to help businesses assess the financial implications of decoupling from China. This includes evaluating the potential costs of relocating operations, establishing new supply chains, and accessing new markets.


In today’s global landscape, businesses must think strategically about their relationship with China. Companies are reevaluating their approach to the Chinese market due to international trade dynamics, geopolitical tensions, and supply chain vulnerabilities. You have three potential pathways to consider: staying engaged, pursuing decoupling, or adopting a hybrid approach. Each pathway has unique opportunities and challenges, and strategic planning is crucial.

  1. Staying Engaged: China offers immense potential as one of the world’s largest economies and a thriving consumer market. Staying engaged with China allows you to benefit from its manufacturing capabilities and access to a vast consumer base. However, this approach requires careful consideration of potential risks, including geopolitical tensions and regulatory changes.
  2. Pursuing Decoupling: Decoupling from China involves diversifying supply chains and reducing dependence on the Chinese market. This strategy aims to mitigate risks, enhance supply chain resilience, and explore alternative markets. Decoupling can create opportunities in emerging economies, lower-cost manufacturing bases, and untapped consumer markets. However, it requires thorough research, investment, and restructuring efforts, and incurs possible risks associated with entering new markets.
  3. Adopting a Hybrid Approach: A hybrid approach allows businesses to maintain a presence in China while diversifying operations elsewhere. This approach is more less China Plus One strategy, which offers the advantages of both options while reducing risks associated with overreliance. A hybrid strategy involves careful risk assessment, supply chain optimization, and market segmentation. It requires a keen understanding of your business priorities and the ability to adapt swiftly to changing circumstances.

In conclusion, the geopolitical landscape in China has created a lot of uncertainty for foreign entities operating there. However, this situation also presents an opportunity for firms to reassess their current positions in China and consider the attractiveness of emerging markets in terms of growth and manufacturing capabilities. Successfully navigating this ever-changing political and economic landscape between China and other countries will require sustained effort and attention. Nonetheless, what ultimately will end up as the best option will largely depend on each company’s specific needs and it is important to carefully assess your capabilities and goals before deciding on which approach to take.

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