A year after U.S. tariffs pushed companies to diversify production away from China, some businesses are discovering that replacing the country’s manufacturing ecosystem is more difficult and expensive than expected.
The shift reflects the limits of the “China plus one” strategy, under which companies maintained production in China while developing additional manufacturing capacity in countries such as Vietnam, India and Indonesia to reduce exposure to U.S. tariffs.
While diversification continues, some companies are now restoring Chinese suppliers or bringing production back after facing higher costs, supply chain disruptions, shortages of skilled labour and unreliable infrastructure elsewhere.
What’s Happening
Heather Kuang, vice president of China based Dawang Metals, said the company lost business last year when a major U.S. customer moved some orders to India in response to higher tariffs.
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The customer has since returned with new orders after encountering problems in India. Dawang itself also explored moving some production overseas but ultimately abandoned the plan.
Kuang said China’s supply chain advantage remains difficult to reproduce elsewhere.
Other companies are reaching similar conclusions.
U.S. retailer Target has moved some orders back to Chinese suppliers, according to two people familiar with the matter, who cited supply chain disruptions and production constraints.
Chinese exporter Jin Chaofeng also moved production back to China after closing a workshop in Ho Chi Minh City that had opened in 2024. He said he struggled to find the necessary equipment in Vietnam and had to import basic supplies such as screws and moulds from China.
After calculating the full cost of operating abroad, Jin said the overall expense was not significantly different from producing in China.
The Tariff Advantage Is Narrowing
One of the main reasons companies moved production away from China was the difference in U.S. tariff rates.
According to Economist Intelligence Unit estimates from July, China faced an effective U.S. tariff rate of about 20%, compared with 6.1% for Vietnam, 13.4% for Indonesia and 4.5% for Thailand.
That gap, however, has narrowed as Washington expanded tariffs across a wider range of countries.
The changing tariff environment has made it harder for companies to justify relocating production solely to avoid duties on Chinese goods.
Chinese manufacturers are also reconsidering overseas investment as the benefits of lower tariff rates become less certain.
Beyond Tariffs
For many companies, the decision is increasingly about more than tariffs.
Access to reliable electricity and the broader manufacturing infrastructure have become important considerations, particularly after the Middle East crisis pushed up energy costs and highlighted vulnerabilities in global energy markets.
Stanislaw Krykun, CEO of Poland based packaging company DST Pack, said his six year Chinese manufacturing partner helped the company navigate a period when plastic input costs rose sharply.
DST Pack currently sources about 80% of its production from a factory in Shenzhen, with the remainder coming from established backup plants in the United States and Europe.
Those alternatives cost two to three times more per unit.
Krykun said he had rejected the idea of relocating to Southeast Asia after seeing a business partner struggle with production and exports in Vietnam.
A Qingdao based lawyer who advises manufacturers, Guan Baokui, also pointed to electricity supply problems in Vietnam and Indonesia, describing their power systems as unstable and discontinuous.
China’s Manufacturing Ecosystem
The experience of these companies highlights China’s broader manufacturing advantage.
The country has developed extensive networks of suppliers, specialized equipment manufacturers, skilled workers and supporting industries. Companies can often source multiple components and services within the same industrial ecosystem.
This means that moving one factory does not necessarily mean moving only production. Businesses may also need to recreate the network of suppliers, machinery, logistics and technical expertise that supports that factory.
For companies that have already spent years building relationships in China, the cost and complexity of reproducing that ecosystem elsewhere can outweigh the benefits of lower tariffs.
Diversification Has Not Ended
The return of some manufacturing to China does not mean the supply chain diversification trend has stopped.
Vietnam remains one of the biggest beneficiaries of companies seeking alternatives to China and continues to attract billions of dollars in foreign investment.
Some businesses are also maintaining production outside China as insurance against future policy changes.
Yu Yangxian, who sells electric lockers and vending machines, said her company is keeping about one eighth of its total capacity in Vietnam as a hedge.
She said the company could expand production there again if tariffs rise sharply.
This suggests that many companies are moving toward a more flexible strategy rather than choosing China or another country exclusively.
Why It Matters
The developments show that tariffs alone cannot determine where global manufacturing takes place.
Lower tariffs can make countries such as Vietnam, Indonesia and Thailand attractive, but companies must also consider electricity, equipment availability, supplier networks, labour skills, logistics and the overall reliability of the production system.
For China, the return of some orders provides evidence that its manufacturing ecosystem remains difficult for competitors to replicate despite rising geopolitical and trade pressures.
For companies, however, maintaining production in China still carries tariff and geopolitical risks. That is why many are keeping alternative capacity elsewhere even when Chinese production remains cheaper or more reliable.
Key Stakeholders
Chinese manufacturers continue to benefit from established supplier networks, skilled labour, infrastructure and production capabilities.
U.S. companies and retailers are balancing tariff costs against the reliability and overall cost of alternative manufacturing bases.
Vietnam, India and Indonesia remain important destinations for companies pursuing supply chain diversification.
Thailand also retains an advantage through comparatively low U.S. tariff rates, although the gap with China has narrowed.
The U.S. and Chinese governments remain central to the outlook because future tariff decisions could alter companies’ calculations again.
What’s Next
Businesses are watching the expected meeting between Donald Trump and Chinese President Xi Jinping for signs of whether Washington and Beijing can reduce trade barriers on some non sensitive goods.
However, exporters do not expect the meeting to resolve the broader uncertainty.
Companies are likely to continue maintaining manufacturing capacity across multiple countries rather than relying entirely on a single production base.
Analysis
The return of some manufacturing to China reveals a weakness in the assumption that supply chains can be relocated simply by following tariff differences.
China’s advantage is not just the cost of producing an individual product. It is the dense industrial ecosystem surrounding that production. When companies move factories abroad, they may discover that machinery, components, skilled workers, electricity and logistics cannot be replicated at the same cost or speed.
At the same time, the diversification strategy has not failed completely. Companies are increasingly using countries such as Vietnam as backup capacity rather than complete replacements for China.
This could lead to a more fragmented global manufacturing system in which China remains the core production hub for many businesses while Southeast Asia and other emerging hubs provide alternatives.
The result may therefore be less of a reversal of globalization than a more complicated form of it. Companies are learning that reducing dependence on China does not necessarily mean abandoning China. Instead, they may need to maintain Chinese production while building enough alternative capacity elsewhere to protect themselves against future tariffs, geopolitical shocks and supply chain disruptions.
With information from Reuters.
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