The numerous supply chain disruptions over the past two years have highlighted the fragility of offshoring – a business operations model introduced in the 1960s where manufacturing was outsourced to Asia. Offshoring allowed industries like automotive, retail, electronic components and others to operate more affordably. However, as supply chain constraints have been intensified by a lack of diversified resources, many businesses are considering transferring operations back to nearby countries. This practice, known as nearshoring, has emerged as an attractive alternative to the offshoring method.
Offshoring – The Initial Shift to Overseas Manufacturing
Offshoring has steadily grown and shifted much of the United States semiconductor manufacturing to countries like Taiwan, China and India. As a result, today, the US only domestically manufactures 12% of the chips it designs. Comparatively, Taiwan manufactures over 60% of the world’s wafers.
Offshoring has been positive for both businesses and countries alike. It has created higher profit margins; granted opportunities for foreign countries to grow a specialized workforce; allowed companies to scale up sustainably; and diminished the administrative burden usually linked to growing operations.
Despite the benefits, the global supply chain has been threatened by trade wars, extreme weather events and limited geographic distribution in manufacturing. Along with factory shutdowns, congested ports and a diminished workforce due to the Covid-19 pandemic, friction within the global market has reached an all-time high.
Due to these drawbacks, manufacturers are increasingly enticed by the possibility of nearshoring as a strategic solution.
Nearshoring Benefits – Strategically Sourcing Closer to Home
Diversifying resources in the global supply chain would add necessary support and reduce the impact of shocks and shortages. According to an April 2020 Thomas survey, 64% of North American manufacturers interviewed reported that they are likely to bring manufacturing production and sourcing back to the Americas. Latin America, specifically Mexico, is poised to profit the most from this developing trend. More recently, Latin America saw a 156% increase in hiring from foreign companies, particularly for software engineers.
Some companies have already started the move from China to Latin America. Microchip Technology, Toyota, Mazda and Nissan have all moved portions of production to Mexico. According to Border Now, 172 out of 260 executives of companies with manufacturing plants in China acknowledged their interest in Mexico to supply the US market.
As the United States’ fastest-growing trade partner, Latin America has appealing advantages for manufacturers. Once dominated by agriculture, Mexico’s economy has shifted focus to technology. The country’s manufacturing clusters offer concentrated areas of skilled workers, advanced industry-specific technology and an established knowledge base. These locations have steadily expanded Mexico’s presence in industries like aerospace, automotive, electronics, furniture/appliances and medical devices.
A cornerstone of nearshoring is increased collaboration through real-time communication within similar time zones and more opportunity for onsite visits. Manufacturing clusters have adopted an agile framework that focuses on short phases of work and frequent reassessment for adaptation, enabling teams to move faster and more efficiently. This methodology closely aligns with the nearshoring approach to teamwork, boosting Mexico’s prospects for nearshoring operations.
Hand in hand with agility, a country's resiliency is a major factor in whether it makes a trustworthy partner. In Central Asia, nearly half the population is cut off from digital connection, with three out of the five countries below the global average of individuals using the internet. Mexico and Latin America’s supply chain is fortified by reliable communication infrastructure and internet connections, enabling quicker reactions to unforeseen outages.
Thanks in part to its relatively young population, Mexico benefits from having an energetic and highly competitive workforce. This has resulted in a willingness to keep wages cost friendly. As reported by Statista, China saw a 30% increase in labor costs between 2016 and 2020. Mexico saw an increase of only 6.8%.
Along with competitive labor costs, closing the geographical distance in supply chains is becoming progressively necessary. Shipping costs for Chinese goods escalated during the COVID-19 pandemic, with rates climbing 30% for goods coming to the US West Coast and almost double for the US East Coast. Shipping containers, and availability on those containers, have become a scarce commodity. Latin America’s vicinity to the US effectively shrinks the distance between the supply chain’s destination market for goods, alleviating costly shipping expenses.
The US isn’t alone in feeling the constraints of the current global supply chain’s reliance on China. European, Middle Eastern and African companies have been looking to neighboring countries in Central and Eastern Europe and North Africa for possible solutions. In response to the Covid-19 pandemic, Ernst & Young conducted flash research and found that in Europe, 88% of respondents were contemplating nearshoring over low-cost areas outside of EMEA. Sixty-one percent were seeking to reduce reliance on dominant source countries like China.
Sourcing from Eastern European or Mediterranean countries reduces lead times, meaning faster production and more robust planning cycles — leaving room for better response time in the face of unpredicted disruptions. Countries like Poland, Bulgaria, Spain and the Czech Republic, have been the popular options for western European countries due to geographic proximity and cultural similarities.
Although cost is a concern with nearshoring, Bulgaria has the advantage of low production costs, cheap labor and a flat tax rate of 10% -- the lowest in the EU. Large global brands like Microsoft and Oracle have already opened research centers in Poland, making it another strategic option for expanding nearshoring efforts.
Middle Eastern companies are also reexamining where they can source closer to home to decrease supply chain shocks. Shippers, freight forwarders, carriers and ports have begun sharing “milestone” events and data surrounding shipping operations. The goal is to make shipping more economical and cost-effective by increasing transparency and quality.
Disadvantages – Undoing What Has Become the Status Quo
Despite its attractiveness, nearshoring is costly, and it will take years to move operations. In 2020, reports indicated the total joint cost for US and European companies to move manufacturing out of China would come to $1 trillion over the next five years. Relocating to a new country also adds pressure to the local economy. If a company were to withdraw just one percent from China and nearshore to a country like Poland, Poland would have to increase its production by 25%. The cost, compounded by how much time these changes could take, is enough to make companies wary.
The results of these expenses would culminate in a higher price tag for items manufactured. Despite consumers’ willingness to pay a 20% premium for items made in America that enthusiasm may not extend to products that come from nearshoring. A consistent complaint about nearshoring is that it isn’t close enough to reshoring, which is the practice of bringing a business operation that was overseas back to its source country.
Chasing that enthusiasm for US-made goods, companies have already started investing in reshoring projects. Samsung Electronics has made significant strides to strengthen relationships with domestic manufacturers, with the goal of being the world’s biggest semiconductor firm by 2030. Micron Technology Inc. is one step ahead. It is spending an estimated $40 billion to build a new semiconductor factory in Central Texas.
Supply Chain Forecasting – Adaptability is Key
The return on investment for nearshoring is a strategic move, but completely undoing the web of the current supply chain is a long-term goal that will not be achieved without a significant investment of time and money. The best business model will most likely involve building flexibility into the supply chain with a hybrid of nearshoring, reshoring and offshoring.