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Navigating geopolitical shifts: opportunities and challenges in a 'China plus one' world

In recent years, geopolitical relations between the United States and China have undeniably been frosty, if not outright antagonistic.

Geopolitical landscape: A frosty relationship

Despite the efforts made during the recent meeting between Presidents Biden and Xi to improve relations, mutual distrust lingers, and the competitive tensions between the two nations remain. This predicament poses a significant dilemma for companies and investors worldwide.

The question arises: should one reinforce existing investments in China, hoping for a diplomatic resolution and a return to the fully globalised supply chains of the past, or is it wiser to diversify investments beyond China to shield against potential geopolitical fallout?

The rise of 'China Plus One' strategy

A growing number of companies are leaning towards the latter option. The traditional strategy of committing funds to manufacturing in China is being reconsidered, with a new approach known as the 'China Plus One' strategy gaining traction among major global players. This strategy involves diversifying supply chains outside of China to mitigate risks. According to Chinese data, foreign direct investment into the country has experienced a sharp decline, reaching a net negative for the first time in Q3 2023.

China's economic dynamics: Foreign direct investment into China

China's economic dynamics investments


An array of anecdotal evidence supports this trend. Business association surveys, as reported by the Rhodium Group, indicate that a significant portion of EU, UK, Japanese, and US companies do not plan to increase investments in China. Moreover, around 20% of UK and German firms, along with 10% of US firms, express intentions to reduce their investments in China.


Emerging opportunities in a 'Multipolar World’

While the concept of decoupling may seem straightforward, the reality is more complex. Modern supply chains are deeply entrenched and intricately woven through the global trading network, a result of the cost-driven globalisation era. China still possesses substantial advantages in logistics, infrastructure, and low outbound shipping costs. Consequently, the shift away from China is not an instantaneous process. For instance, replicating a textile mill in Bangladesh is relatively straightforward, whereas reproducing a factory manufacturing advanced electronic components is a more challenging endeavour.

Nevertheless, this shift away from China presents lucrative opportunities for investors who can anticipate and leverage the dynamics of this emerging 'multipolar world.' Several countries are poised to benefit from this trend, with India, Vietnam, and Mexico emerging as key players.


India's ascendancy: A key beneficiary

India has seen a substantial uptick in its role as a global supplier. Wal-Mart, for instance, increased its US imports from India from 2% in 2018 to one quarter between January and August 2023, while simultaneously reducing Chinese imports from 80% to 60% in the same period.[1]

Apple is also seeking to diversify its manufacturing operations by expanding iPhone production in India, aiming to assemble a quarter of its total production there and scale up to 50 million devices annually in the coming years.[2]


Vietnam: A crucial player in Southeast Asia

In Southeast Asia, Vietnam has become a crucial supplier for several industries. Foreign Direct Investment (FDI) into Vietnam reached a record $23.2bn in 2023, whilst future FDI pledged rose over 32% year on year to $36.6bn.[3]

Samsung, a major player in the tech industry, now considers Vietnam its "key production site," producing around half of its smartphones there.[4] Similarly, LG has invested significantly in Vietnam to produce appliances and cameras.[5]


Mexico's nearshoring advantage

Mexico, in proximity to the United States, has positioned itself as a key beneficiary of 'nearshoring.' The preference for sourcing goods closer to home by the US, coupled with geopolitical trade barriers, has led to increased investment in Mexico. Industrial vacancy rates near the US border were remarkably low in 2022 as investment poured in to manufacture products such as communications and computer equipment.[6]

Autos are also leading the charge, with announced investments including $870m from BMW, $764m from VW, $700m from Nissan and $200m from Stellantis in addition to a $5b Tesla investment.[7]


Investing in Emerging Markets: Navigating uncertainties

In conclusion, as the tides of geopolitical relations continue to shape the global economic landscape, investors stand at a crossroads. The 'China Plus One' strategy underscores a pivotal shift in approach, with diversification becoming a strategic imperative. While decoupling from China is a nuanced challenge, the emerging opportunities in India, Vietnam, and Mexico showcase the resilience of global markets. There is an emphasised need for strategic foresight in navigating the unpredictable currents of today's investment landscape. As we embrace this 'multipolar world,' the key lies in adapting to change, seizing emerging prospects, and navigating uncertainties with informed precision.

With Arbuthnot Latham's experts, skilled in identifying trends and complexities, investors can feel assured that the investment team is able to navigate these uncertainties and position client portfolios for success in the dynamic global marketplace. The journey continues, and the opportunities are as vast as the evolving global economic canvas.

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Author -

Freddie Gabbertas

Freddie Gabbertas

Investment Management, Head of Emerging Market and Asian research

Freddie joined Arbuthnot Latham in 2016, and is head of Emerging Market and Asian research. He sits on the Global and European equity and Fixed Income pods, whilst also looking at Ethical and ESG mandates. He holds the IAD and IMC qualifications and graduated from University College London with a B.A. (Hons) in Geography. 

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