China Plus One Strategy: Building a Diversified Supplier Base

McKinsey's 2025 supply chain risk survey of 100 companies found that 82 percent of respondents said their supply chains are affected by new tariffs. Looking forward, 43% of respondents said they plan to shift more of their supply chain footprint, and 38% told McKinsey they plan to reduce their supply chain presence in China. Intent is not execution, but the share of leaders planning change has risen sharply, and procurement is expected to deliver it.

The pattern is not new. Gartner's 2022 survey of 403 supply chain leaders found that 95% were evaluating or executing changes to their China sourcing, and that 55% of those had already acted on their plans. A separate survey of 324 companies by the Shanghai chapter of the EU Chamber of Commerce, reported in January 2026, found that seven in ten European companies operating in China were reviewing their supply chain strategies. Review is widespread; completed transition is not.

For a Chief Procurement Officer, the implication is that diversification has changed character. It is no longer a response to a single event that can be closed out after a year. Tariff regimes, export controls and customer requirements change on political timetables, and a supplier base that was well balanced at the start of a year can be unbalanced by its end. Procurement needs a standing capability, with owners, metrics and budget, rather than a time-limited project team.

It is worth separating three distinct drivers, because each calls for a different response. Tariffs raise the cost of serving one market from one origin. Export controls and sanctions can stop flows entirely. Customer and regulatory requirements, such as supply-chain due diligence rules, change what a buyer is willing to accept. Procurement teams that diagnose which driver applies to each category avoid overreacting to the loudest one and avoid spreading effort across the whole base.

Boards will ask what the programme costs and what it saves. Frame the answer as a risk-adjusted case: the cost of qualification, dual-sourcing inefficiency and inventory against the revenue and margin protected if a key supplier or corridor fails. The case rarely rests on average-year savings. It rests on avoiding a few severe, low-probability events, so present scenarios with plausible durations rather than single-point estimates.

What to do: establish diversification as a continuing programme with an executive sponsor, a quarterly review and a small dedicated budget for supplier qualification. Define the target in terms of resilience, such as the proportion of critical spend with a qualified alternative, rather than in terms of exit from a country. Brief the board that the programme will run for years and will not be finished by a single sourcing event.

Data from the largest destination market makes the scale visible. The Peterson Institute for International Economics reports that China's share of US imports had fallen to 9 percent by the end of 2025, down 4 percentage points from the start of that year, and that real US imports from China dropped by 28 percent in 2025 alone. The average US tariff on imports from China remained at nearly 50 percent through the end of 2025, which explains a large part of the decline.

Where did the volume go? Kearney's 2026 Reshoring Index, reported by Supply Chain Management Review, found that direct US imports from mainland China fell by almost one-third in 2025, but that 13 other Asian low-cost countries and regions gained $194 billion, more than offsetting China's losses. US imports from Mexico rose 8%, driven by a $47 billion increase in computer and electronic products. In other words, buyers moved suppliers across borders more than they moved production back home.

This distinction matters for procurement. If volumes are re-routing through third countries, then the dependence on Chinese inputs, equipment and know-how may be hidden rather than reduced. Customs authorities and customers increasingly look at origin of content and transhipment. A diversification programme that changes the country on the invoice without changing the origin of the critical components may offer less resilience than it appears and may raise compliance questions.

The same logic applies to your own competitors. Rivals with established positions in other Asian hubs or in Mexico can reroute orders with limited disruption, while those who wait may find the best suppliers' capacity already allocated. Capacity at good second-tier suppliers is finite, and early movers often secure better terms. That is an argument for qualifying alternatives before they are urgently needed, even at modest volume.

A further point concerns timing relative to customers. Many buyers, particularly in regulated sectors, now ask suppliers to demonstrate where components originate and whether alternatives exist. A documented diversification plan therefore has commercial value in tenders and customer reviews, as well as operational value. Procurement can bring this to the sales organisation as a differentiator rather than a purely defensive measure.

What to do: when reporting progress, distinguish between supplier location and content origin. For each critical category, ask the new supplier where the key sub-components, materials and machinery come from, and record the answer. Where the second source relies on the same upstream chokepoint as the first, treat it as a partial hedge only. Share this analysis with trade compliance and legal teams before volumes move.

Exhibit 1 shows one of the clearest signals of relocation. Vietnam's implemented foreign direct investment rose from $19.74 billion in 2021 to $27.62 billion in 2025, a five-year high, according to reporting by Vietnam Investment Review. Manufacturing and processing took 82.8% of the 2025 total. The capital is real and it is building capacity, but capacity takes time to mature into reliable, high-quality supply.

McKinsey Global Institute's trade analysis supplies the caveat. By 2024, 25% of ASEAN's imports came from China, up from 20% in 2017, and about 25% of the value of Vietnam's electronics exports represented value added originally in China. Mexico became the largest supplier of goods to the United States in 2023. The new hubs are not independent of China; they are often assembly and finishing stages of chains that still draw on Chinese components and machinery.

Tariff exposure differs by hub as well. According to Mexico Business News, the effective US tariff rate in July 2025 was 40.4% on China, 9.7% on average globally, 9.1% on the EU and 4.7% on Mexico (Exhibit 2). Tariff advantages can change quickly, so a location chosen primarily for tariff reasons carries its own policy risk. The strongest cases for a second hub combine tariff position with genuine supplier depth, logistics and labour availability.

Labour, energy and infrastructure can also become binding constraints as investment concentrates. When many buyers approach the same set of suppliers in the same few industrial parks, wages, rents and lead times rise. Procurement should therefore compare hubs on a forward-looking basis, asking not only what a hub offers today, but what its cost and capacity will look like when more buyers have arrived.

Do not neglect logistics in the hub profile. Port capacity, customs efficiency, inland transport and the reliability of ocean and air schedules vary widely and shape lead time and inventory needs. A hub with a slightly higher unit cost but a faster, more predictable route to market can reduce working capital enough to be cheaper overall. Include freight volatility in the landed-cost model rather than assuming a fixed rate.

What to do: build a one-page hub profile for each candidate country that covers landed cost, supplier depth in your categories, dependence on Chinese inputs, tariff and rules-of-origin position, logistics and political stability. Use it to choose two or three hubs rather than one, so that a policy change in a single country does not recreate the concentration you set out to remove. Review the profile every six months.

McKinsey's 2025 survey found that 95 percent of respondents now have visibility into at least tier-one supplier risks, yet visibility extends into tier two or beyond for only 42 percent of them. Procurement teams generally know their contracted suppliers well. They know much less about the sub-suppliers, material processors and equipment makers behind them, which is where a regional dependency is most likely to be concentrated.

This gap explains why companies that believe they have diversified can still be exposed. Two apparently independent suppliers in different countries may buy the same component from the same upstream plant. Moving a final-assembly contract to a new country does nothing for resilience if the critical sub-assembly remains single-sourced. McKinsey's research identifies three main ingredients for resilience: end-to-end visibility, high-quality master data and effective scenario planning.

Master data is the unglamorous constraint. Mapping tier-two and tier-three suppliers requires consistent supplier identifiers, bills of materials, and component-to-supplier relationships that are often scattered across systems and spreadsheets. Without them, scenario planning cannot be run quickly enough to inform a decision, and risk reviews become qualitative exercises. Investing in this foundation pays back across every other element of the diversification programme.

Visibility also depends on relationship. Sub-suppliers rarely disclose their own sources unless a customer is large enough, or the request is structured as a shared-risk conversation rather than an audit. Mid-sized buyers can use industry groups, third-party risk platforms and shared supplier audits to build the picture without carrying the full cost, and by focusing on a few critical components rather than every part number.

Digital tools help but do not replace discipline. Supplier-risk platforms can surface ownership links, financial distress and geographic exposure, and can shorten the time to produce a tier-two map. Their output is only as good as your bill-of-materials data and the willingness of suppliers to confirm it. Treat them as an accelerator for a process you have defined, not as a substitute for deciding which categories matter most.

What to do: start tier-two mapping on the categories where disruption would stop production or revenue, not across the whole base. Ask tier-one suppliers to disclose their critical sub-suppliers as a contractual requirement for strategic categories, and verify a sample. Build a simple single-points-of-failure list, with locations, and review it with operations and finance. Expand the map in waves as you learn what is feasible.

McKinsey's 2025 data show how leaders are responding to tariffs. Of respondents facing tariff impacts, 45% are increasing inventories, 39% are pursuing dual sourcing strategies for components or raw materials, and 33% are developing supplier nearshoring or onshoring plans (Exhibit 3). In an earlier 2023 survey reported by The SC Xchange, 78% of respondents were pursuing dual-sourcing strategies for critical raw materials, showing that the approach is well established for the most critical inputs.

Dual sourcing has a clear economic logic. A qualified second supplier gives the buyer negotiating leverage, a fallback during disruption and a route to shift volume when tariffs change. It does not require moving all production, and it can be introduced at modest cost by allocating a minority of volume, for example in a 70-30 or 80-20 split, to the alternative. The cost is the duplicated qualification effort and some loss of volume discount.

Pass-through of cost is the other pressure on procurement. McKinsey found that the weighted average pass-through rate of tariff costs to customers was only 45 percent, which means that the remainder is absorbed by the company. Every point of unnecessary cost in a diversification programme therefore reduces margin directly. Dual sourcing targeted at critical categories adds resilience with limited cost, while a blanket relocation of all categories can add cost that cannot be recovered.

One caution is inventory. Raising buffers is the most common response, and it works in the short term, but it ties up working capital and can hide the underlying concentration. Buffers should be a bridge while a second source is qualified, with a planned decline once the alternative is live. Otherwise the business pays carrying cost indefinitely for a risk it could have removed.

Negotiation strategy should anticipate the incumbent's reaction. A supplier that learns it is losing volume may offer concessions, which is a legitimate benefit of dual sourcing, or may reduce service levels. Plan the communication, keep the incumbent informed about the rationale, and make the volume split transparent. Maintaining a constructive relationship preserves access to capacity and know-how that would be costly to replace.

What to do: rank categories by revenue at risk and by time to qualify an alternative, and select the top group for dual sourcing within twelve months. Agree the volume split, the qualification plan, the quality gates and the commercial terms before the first purchase order. Use the second source actively, with real volume, because an unused qualified supplier loses its approval status and its price discipline quickly.

Speed is the first trap. McKinsey's survey, as reported by The SC Xchange, found that it can be two years or longer before supply chain changes happen on the ground. Qualifying a supplier, transferring tooling, validating quality and building logistics all take longer than the purchase-order cycle. Programmes that promise a full shift within a year usually either miss the target or achieve it by accepting quality and delivery compromises that surface later.

A phased portfolio is the practical answer. The first phase protects critical categories: map them, qualify a second source and build safety stock where lead times are long. The second phase builds alternative capacity: develop two or three hubs, move selected volumes and invest in supplier development. The third phase optimises: rebalance volumes by total landed cost, consolidate where a hub proves itself and retire marginal suppliers. Exhibit 4 sets out the phases in more detail.

Different categories deserve different treatments. Highly specialised components with a single qualified source and long approval cycles need early action and may need co-investment. Commodity-like categories can be moved with less risk and may offer quick savings, but they often have lower strategic value. Categories where Chinese suppliers offer unmatched scale or technology may stay China-anchored, with resilience provided by inventory and monitoring rather than relocation.

Supplier development is a lever that is often underused. Where a promising supplier in a new hub lacks capability, a modest investment in training, tooling or quality systems can bring it to standard faster than searching for a more capable one, and it builds loyalty. The cost should be weighed against the price of a long search and the risk of a poorer fit, and tied to volume commitments that protect your investment.

What to do: build a category matrix that scores criticality, substitutability, switching cost and time to qualify, and allocate each category to a phase. Give each phase an explicit cost and quality target, such as landed cost within an agreed band of the incumbent and defect rates at parity within a set number of months. Report progress against the portfolio rather than against an overall percentage of spend relocated.

The most common reason diversification disappoints is that quotations are compared on unit price rather than on total landed cost. Freight, duties, inventory carrying cost, quality failure, working capital, lead-time variability and management time all differ by hub. A supplier that is 10% cheaper per unit can be more expensive once these are included. Procurement should insist on a standard landed-cost model for every alternative, agreed with finance and updated as tariffs and freight rates move.

Quality discipline matters just as much. New suppliers in new hubs carry a learning curve, and the failure costs of quality escapes in regulated or high-value products can far exceed the savings. Establish a staged qualification protocol with first-article inspection, audits, trial lots and pre-agreed acceptance criteria, and keep the incumbent active until the alternative meets them. Joint improvement plans with suppliers reduce the ramp-up period and build the relationship.

Governance should connect procurement with engineering, quality, logistics, finance and legal. Diversification decisions are rarely procurement decisions alone, because they affect product specifications, compliance, inventory and cash. A cross-functional steering group that meets regularly and has authority to approve budget and trade-offs tends to move faster than a series of bilateral negotiations. It also gives the board a single point of accountability for the programme.

Contracts should reflect the new reality. Include clauses covering origin disclosure, change of sub-supplier notification, tariff-sharing mechanisms, minimum volumes for the second source and rights to audit. These do not guarantee performance, but they set expectations and give procurement a basis to act. Involving legal advisers early ensures the terms are enforceable in the relevant jurisdictions.

What to do: publish a one-page standard for supplier qualification and landed cost, make it mandatory for every dual-sourcing decision, and review results at each quarterly meeting. Track a small set of metrics: share of critical spend with a qualified alternative, landed-cost variance against the incumbent, quality performance and lead time. If the numbers show diversification is costing more than the risk it removes in a category, have the discipline to slow down.

Karter McKinley supports Strategy and Transformation work for procurement leaders: category criticality mapping, hub shortlisting, supplier longlists and outreach, and phased diversification plans with landed-cost and quality governance. We help structure the programme and the decision papers; contracts and supplier qualification remain with your teams and advisers.