Chinese companies turn to SEA amid China’s economic, regulatory challenges
9 Jul 20246 min read
Summary
- Chinese companies are increasingly turning to Southeast Asia as they face economic and regulatory challenges at home, reversing the traditional “China Plus One” strategy once used by Western firms. In the first quarter of 2024, China’s non-financial outbound investments surged 36.7% year-on-year into the region, with major firms like BYD, Xiaomi, and Midea expanding production in Thailand and Vietnam to tap local incentives and bypass trade restrictions.
- The shift is driven by Southeast Asia’s growing consumer markets, favorable tax regimes, and developing industrial base, but challenges persist. Intellectual property protection remains weak, and a shortage of skilled labor has led many Chinese firms to relocate staff from China or invest in local training and university partnerships to bridge capability gaps.
- While some industries continue to expand within China’s inland provinces, export-oriented companies see Southeast Asia as a strategic growth frontier. By building new facilities closer to end markets, Chinese firms are reshaping regional manufacturing networks and strengthening their resilience amid ongoing global trade tensions.
For years, the China Plus One strategy served as a buffer against supply chain disruptions. Western companies adopted such approach to diversify their operations away from China amidst rising operating costs and the country’s escalating trade tensions against the United States (US).
But the tables are now turning. What began as a strategy for foreign firms is now a defining trend for Chinese companies themselves.China is increasingly directing its investments eastward, focusing on Southeast Asia (SEA). China’s State Council Information Office (SCIO) on April 22 said in a press release that a significant part of China’s non-financial outbound direct investments (ODI) is going to SEA.ODI are investments made by a country’s entities abroad. These investments are aimed at gaining influence in foreign markets.In the first quarter of 2024 alone, China’s non-financial ODI reached 242.92 billion Chinese yuan, with investments in SEA experiencing a surge of 36.7% year-on-year, according to SCIO.
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“For Chinese companies seeking to expand globally, ASEAN (Association of Southeast Asian Nations) is usually their first stop and an important market for their overseas development,” Eddie Ching, EVP and Deputy CEO of HSBC China said in a webinar in 2022.
Chinese companies face challenges in SEA
But while the China Plus One strategy unlocks exciting prospects for Chinese companies in SEA, specific challenges arise.
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“Supply chain shifts of this size take long periods to complete, often years, but the shift has started already, especially in areas such as the auto industry and electronics, with ASEAN’s share of intermediate goods on an increasing trend, but there is still a long way to go before this reaches an equilibrium,” independent research firm CrossASEAN Research founder Angus Mackintosh said.
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