By Liza Lin

For a growing number of Western tech companies, "Anything But China" is the order of the day.

In recent years, many multinationals decided they had become overreliant on suppliers in China, prompting them to pursue a so-called "China Plus 1" strategy of augmenting China-based suppliers with those in other countries.

Now, with U.S.-China tensions soaring again, many tech businesses are accelerating moves to shift production out of China and look for suppliers elsewhere, signifying a global tech world that is increasingly bifurcated between the two powers.

"Everybody is trying to look for an alternative to China," said Wong Siew Hai, the head of the Semiconductor Industry Association in Malaysia, a destination for many tech companies leaving China. "Companies are redesigning their business. There's no more 'just-in-time' strategy. Some people call this new strategy 'just in case.'"

The trend is throwing up opportunities for countries in Asia and Latin America to move up the value chain. It is also pushing Chinese suppliers to expand overseas at a faster clip, as many set up plants beyond their borders at the request of Western customers.

Unlike the first wave of diversification, when companies moved only the assembly of products outside of China, the current phase has involved shifting factories making components such as sensors, printed circuit boards and power electronics, according to a recent report by S&P. Such moves involve heavy upfront investments in machinery and parts, making the relocation in supply chains away from China much more permanent, S&P analysts wrote.

China's draconian Covid-19 lockdowns, which caused production snarls in everything from iPhones to cars, triggered a large exodus of Western companies from China to places such as Vietnam and India.

Since then, the battle between the U.S. and China over who holds the keys to the most critical technologies of the future has accelerated the shift. Tech executives now expect the return of President Trump to increase pressure to diversify away from China. Trump recently placed 10% tariffs on all Chinese imports and has threatened even higher levies.

The "Anything But China" trend is particularly pronounced in products linked to semiconductors, the product at the heart of the U.S.-China tech friction. Over the past two years, Washington has banned China's access to the most cutting-edge chips and equipment, while China has pushed hard to develop its own domestic chip alternatives.

China was previously one of the biggest hubs for global server production. But since the U.S. restricted artificial-intelligence chips from being exported to China in October 2022, AI servers are increasingly assembled in places such as Mexico and Malaysia.

Recipients of funding from the $53 billion U.S. Chips Act -- which offers rich incentives to companies investing in chip production in the U.S. -- are barred from expanding semiconductor manufacturing in China for 10 years.

Chip toolmakers and their suppliers are also unwinding their reliance on the country. Applied Materials and Lam Research are uprooting Chinese companies from their direct supply chains, spurred on by U.S. government pressure, the Journal reported in November.

Advanced Energy Industries, which makes power systems and other components used in semiconductor production, said last month that the company would shut its third and last factory in China by July. The company, based in Denver, has been moving production from China to the Philippines and Mexico over the past two years, its Chief Executive Stephen Kelley said.

"A large part of that is due to our customers not wanting us to manufacture in China," he said. A spokesman for the company said the move was part of its plan to close underused factories and improve margins.

The outflow is happening across consumer devices as well, from smartphones to laptops.

In an annual survey by the American Chamber of Commerce in China, 30% of the more than 360 respondents said they were considering or had begun moving to alternative places for manufacturing. About a quarter of tech and research-and-development companies said they had already started to shift supply chains out of China.

Southeast Asia, a region with similar labor and energy costs to China, is booming as Western tech companies move production and assembly of their most advanced chips, AI servers and consumer devices there. Foreign direct investment in Southeast Asia was $230 billion in 2023, up from $155 billion in 2018, according to data from the region's intergovernmental organization, the Association of Southeast Asian Nations.

Chipmakers Intel, Infineon Technologies and Micron Technology have poured billions into facilities in Malaysia and Singapore. Palo Alto, Calif.-based laptop maker HP has added production sites in Thailand to assemble portable computers over the past three years. Factories in the Malaysian state of Penang now churn out state-of-the-art AI servers.

This has led Malaysian exports of semiconductors, computers and other electronic products to hit a record $137 billion in 2024, with a large expansion of exports to the U.S.

As of 2023, China produced almost all of the world's notebook computers. This year, research firm TrendForce estimates the country's share of global production to fall to 80%, with Vietnam and Thailand producing an increasing number of laptops.

Thai laptop exports jumped almost eightfold over the past four years.

Vietnam, arguably the region's biggest beneficiary of supply chain moves from China, is also seeking to woo investment from the semiconductor industry.

At a recent semiconductor forum in its capital, Hanoi, hundreds of attendees and executives from some of the world's largest semiconductor companies crowded into a convention center to listen to senior Vietnamese officials pitching the country as a worthwhile partner. The government has proposed tax breaks and set a goal to train 50,000 engineers to support the chip industry.

In December, AI chip giant Nvidia said it would open a research and development center in the country.

Santa Clara, Calif.-based Marvell Technology, which designs high-end chips used in automotive and cloud computing sectors, is also seeking to tap the pool of engineering talent in Vietnam, said Quang-Dam Le, the general director at the semiconductor maker's Vietnam unit. Marvell grew its work force in Vietnam from 300 to almost 470 engineers over the past year and expects to grow headcount by 20% annually in the coming years, Le said.

In contrast, Marvell cut research and development staff in China in October 2022 as part of a realignment of its research efforts globally.

Meanwhile, many Chinese companies are also moving overseas, setting up subsidiaries and factories away from home on request from their Western customers.

In 2023, Eoptolink Technology, a China-based maker of optical transceivers for data centers, expanded its Thailand plant to increase supplies to overseas customers and avoid any fallout from worsening U.S.-China relations. The company, which counts major tech companies such as Meta Platforms and Amazon as customers, had been asked by its customers to expand overseas capacity so clients wouldn't have to buy its products from China, according to people familiar with the situation.

Vital New Material, based in Shenzhen, which produces soldering materials for laptop computers, solar panels and industrial machinery, has opened subsidiaries in Southeast Asia and Mexico after many of its clients moved out of China.

To be sure, few countries can match China's thriving ecosystem of infrastructure, suppliers and labor.

Marcel Wismer, the CEO of Kemikon, a Penang-based contract manufacturer for the chip-equipment industry, estimates a switch away from China could cost suppliers as much as 15% more.

"Chinese manufacturing is hard to beat," Wismer said. "You can't beat them in cost, quantity and lead time."

In the longer term, creating new production lines will get more expensive and risky, said IDC analyst Mario Morales.

"The [tech] supply chain has already reached over a trillion dollars in value," he said. "The sophistication and complexity will only increase, making things more challenging for companies shifting."

Write to Liza Lin at liza.lin@wsj.com

(END) Dow Jones Newswires

February 16, 2025 23:00 ET (04:00 GMT)

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