Strategic Diversification: Cutting Costs with the China Plus One Model in European Manufacturing

Global businesses are facing increasing challenges from geopolitical disruptions, supply chain vulnerabilities, and rising production costs in China, their favorite traditional manufacturing hub. This is pushing them to adopt modern approaches like the China Plus One strategy.

This method involves diversifying operations beyond China to reduce dependence on a single region and ensure resilience. Central and Eastern Europe and the Balkans are emerging as cost-effective, strategically positioned alternatives for European manufacturing firms.

Here, we’ll examine how companies can tactically diversify operations using the China Plus One model in the CEE and Balkans to access a competitive mix of low costs, skilled labor, strong logistics, and a favorable business environment.

Understanding the Challenges of Relying on a Single Manufacturing Source

When manufacturing businesses rely on a single location, whether in China or Western Europe, the results can be devastating due to the unpredictable nature of the modern business environment. Here are some of the most commonly occurring issues that you will face due to this obsolete approach:

• Escalating Production Costs: China’s wage growth and regulatory pressures have increased operating costs, forcing companies to find more affordable manufacturing hubs. Similarly, Western Europe’s high labor and energy costs make it difficult for businesses to maintain competitive pricing.
• Supply Chain Disruptions: Global supply chains have been severely impacted by COVID-19 lockdowns, trade wars, and freight delays. Businesses relying on long-distance shipping from Asia risk inventory shortages and increased lead times.
• Geopolitical Risks: China’s involvement in international trade conflicts and sanctions makes over-reliance risky. Companies also face rising scrutiny over human rights concerns and compliance risks in global supply chains.

By adopting the China Plus One model focusing on CEE and the Balkans, companies can reduce such risks while cutting costs and gaining operational flexibility.

The Rise of CEE and the Balkans as Alternative Production Destinations

The Central and Eastern European and Balkan countries have risen tremendously over the past few decades as modern manufacturing powerhouses. They are proving to be excellent destinations to relocate a part of your production and move beyond China.

CEE countries like Poland, Hungary, Romania, and the Czech Republic offer several advantages including:

• Lower labor costs
• Modern infrastructure
• Proximity to key markets
• Industry expert talent. 

On the other side, Balkan countries like Serbia, North Macedonia, and Bosnia and Herzegovina  have rapidly evolved into promising manufacturing hubs due to:

• Highly affordable labor
• Growing infrastructure
• Favorable incentives and government aid
• Strategic geographical location in Europe

The former is a great location for automotive, electronics, and machinery while the latter is amazing for textile and manual labor intensive businesses.

Why the Strategic Diversification with China Plus One Strategy Works?

The China Plus One strategy is an incredible way to cut costs, maintain competitiveness, and maximize profitability amid cut-throat global competition. This strategic diversification allows your business to stay prepared for risks and mitigate them promptly. You can achieve a faster time-to-market and prevent disruptions.

Here’s why you shouldn’t ignore this strategy as a manufacturing business owner:

Reduced Operational Costs & Improved Supply Chains

CEE and Balkan countries have way more affordable labor than Western Europe. It’s still costlier than in China but the skill difference is significant enough to choose them. For instance, Poland offers a cost-effective expert workforce while Serbia is great for labor-intensive production due to its lower wages.

Moreover, the proximity of this region to European consumers minimizes shipping costs and times. You can fulfill orders in just days when manufacturing here, unlike imports from Asia which take weeks and months.

CEE countries also offer Special Economic Zones (SEZs) and R&D grants that appeal to foreign investors. Similarly, Balkan nations give corporate tax exemptions and subsidized land for factories to slash operational costs. Businesses can leverage these incentives to boost profitability.

Balanced Cost, Quality, and Security

All CEE and some Balkan nations are EU members and align with their regulatory standards which makes market entry easier and ensures proper compliance with intellectual property, environmental and labor policies. EU member nations also enjoy tariff-free trade within Europe which further reduces costs and risks.

Moreover, CEE countries have specialized labor for industries like automotive and electronics manufacturing while the Balkans provide workforce expertise in textile production, metal processing, and IT services. This diversity helps companies balance quality and efficiency in different sectors.

This region provides a stable business environment with predictable and manageable regulations. Companies find them ideal for long-term investments. Balkan countries have also made strides toward political stability through EU integration efforts which makes them highly secure for massive manufacturing investments.

Maximized Profitability with Minimal Risk

The China Plus One model allows companies to distribute production between multiple manufacturing locations. It reduces exposure to risks in any one region. When your business relies on multiple countries instead of just one, disruptions like labor strikes and policy changes in one region won’t hamper its operational continuity.

Moving manufacturing facilities closer to end markets also helps your brand reputation. It reduces carbon footprints while also keeping your business aligned with EU sustainability regulations. This builds a better brand reputation through the promotion of sustainable and ethical production.

Plus, it boosts customer satisfaction and keeps them loyal to your brand as you’ll be meeting their demands faster. Loyal customers mean happy customers. This gives you a much-needed edge in the market, especially in the fashion and consumer electronics domains.

How to Go Ahead with the China Plus One Strategy?

Need a blueprint to proceed with the China Plus One strategy? Here is a foolproof method to implement this smart model to transform your production. Follow it for a flawless transition:

Step-1. Identify Strategic Locations: Start with finding the right manufacturing site. Assess factors like labor availability, operational costs, infrastructure quality, and market proximity.

Step-2. Aim for Government Incentives: Find favorable government incentives, tax breaks, and subsidies, and CEE and Balkan countries have really good ones. It will reduce setup costs and make operations affordable for enhanced profitability.

Step-3. Build Agile Supply Chains: Create flexible supply chains that allow switching between production sites in case of demands and disruptions. A dual setup between CEE and the Balkans offers operational flexibility, cost-efficiency, and sustainability.

Step-4. Work on Local Partnerships: Collaborate with local suppliers and partners to navigate regulatory frameworks and enhance market entry. This helps businesses reduce the time and costs associated with establishing operations.

Step-5. Monitor and Optimize: When the relocation is complete, keep a close eye on processes, systems, and employees to identify any shortcomings and inefficiencies. When you find any, optimize them to have the best result.

If the plan seems complicated, you can also get help from a reputed relocation expert, like us, to have a seamless transition and achieve your goals without facing struggles.

Final Words

The China Plus One strategy is an amazing way to cut costs, strengthen supply chains, fend off risks, and expand into new markets– all at once. The CEE and Balkans region has become a trump card for manufacturers due to a blend of affordability, skilled labor, EU regulatory alignment, and geographic benefits.

As global uncertainties continue to surge rapidly, strategic diversification through the China Plus One model is no longer an option. It has become a necessity for European manufacturers. Don’t underestimate its ability to transform your company’s market position.

Need a trusted partner to navigate your organization’s toughest challenges? CE Interim, backed by the global strength of the Valtus Alliance, provides expert interim management services for greenfield, brownfield, factory relocations, operational excellence, and supply chain optimization. With a global network, we’re ready to step in wherever and whenever needed to ensure your business remains resilient. Let’s talk about your needs today!