At the end of 2022, it was announced that there had been a 40% reduction in US manufacturing orders from China. Because of the pandemic, this was likely unsurprising to many. However, there are signs that this may be part of a longer-term move away from China as the automatic choice for global expansion. Many companies are instead choosing to look closer to home as part of an effort to diversify or improve supply chains via “nearshoring”.
With continued disruption to supply chains worldwide, the idea of bringing global supply chains closer to home has more merit than ever. Here, we’ll explore the idea of nearshoring and how to rethink your supply chains.
What is Nearshoring and Why are Companies Considering It?
Nearshoring is the policy of expanding or outsourcing services to countries that are close to the home country of a company.
When companies consider expansion, key parts of the process like manufacturing are often sent abroad. Nearshoring offers the advantages of global market expansion, with the added bonuses of more efficient transportation and less potential for problems.
The global pandemic and the 2021 Suez Canal Blockage proved to many that centralizing a supply chain in one country, typically China, can be disastrous. In addition, increasing political change and growing questions about ethical and ecological concerns have shown many that diversification must be considered.
For many, there are signs that China is becoming too expensive to work as a manufacturing hub. This is due to a variety of reasons such as higher demand for better jobs and the ongoing trade war. With problems maintaining the same production cost, many industries now see the same or better costs elsewhere.
US companies looking at Mexico have been surprised to learn that labor costs are already cheaper in Mexico than in China at 4.8 dollars per hour compared to China’s 6.5.
What Nearshoring Options Exist for Companies Outside of the US?
Even for Chinese companies, there has been an explosion of companies transferring their own manufacturing elsewhere. What’s more, this happens as China attempts to increase the value of its service industry.
More than just the US, nearshoring can be used by companies in any country that want to move their supply chains closer to home.
In the EU, this could mean realigning their strategies with the less developed economies in Eastern Europe. For Asian companies, this could mean moving their production to Vietnam where the average cost of manufacturing labor is as low as 2.9 dollars per hour.
Nearshoring and diversified supply chains also allow the spread of economic opportunity to more countries than ever before, whether this is the result of a long-term strategy or a reaction to the concerns of the moment.
As such, there are a lot of reasons that companies are rethinking their global expansion strategy. While it seems unlikely that many will bring the entirety of their supply chains back home, nearshoring represents a way to solve many of the problems of globalization, without losing its benefits.
The 5 Biggest Reasons to Start Nearshoring Your Business Today
Shorter Supply Chains Mean Less Transport Time and Cost
Companies transporting their goods between the US and Mexico for example will find a single trip to take as little as a few days, whereas the same trip to China can take upward of a month. This reduction in time can be a huge benefit in especially competitive markets.
This also means benefitting from the growing green energy movement and the incentives that governments are giving to carbon-conscious companies or taxes that are being levied from those that continue as usual.
As part of the ongoing trade war between the US and China, trade tariffs remain high globally. Many of the Trump-era tariffs remain, increasing the price of some goods from China by as much as 25%. These increases are impossible for many companies given the current economic climate.
These types of tariffs increase global uncertainty and may make it harder for companies to succeed if potential clients are concerned about where they source or manufacture products. In some cases, this can lead to companies choosing to lower their margins to continue business as usual, rather than look for new options.
A Cheaper, Younger, and Potentially Better Educated Workforce
Limiting yourself to a single country or region disregards the wealth of talent that exists around the world. With the benefits of technology, remote work, or async work options that exist today, companies are completely free to search worldwide for the next member of the team.
For this reason, many are looking closer to home than ever, where cultural and linguistic similarities among neighboring countries can make integration or collaboration easier.
Fewer Complications Due to Distance or Time zones
By looking closer to home your teams can work with their colleagues abroad much more easily than if they’re on the other side of the world. For time-sensitive projects or work involving greater amounts of collaboration, it can be essential to have everyone work together in a similar time zone.
Boosting the ability of a team to resolve problems quicker or brainstorm naturally can be especially vital in industries involving short deadlines or creative input requirements.
Greater Long-Term Security
With regions like the EU releasing new product safety laws almost yearly, companies are required to constantly update the way they work to meet regulations and offer high-quality finished products.
Being able to retain closer control over the production process or move manufacturing centers to countries with the same quality standards can offer a superior level of safety and consistency going forward.
Customers are also now more likely to respond to products or services that are made closer to home. This is part of a general consumer move away from lower-cost and lower-quality goods.
By making the switch now, companies can avoid the difficulty of moving their production to regions with a higher quality of production later.
What are the Alternatives to Nearshoring?
BPO refers to the idea of outsourcing some of the more technologically-intensive parts of a business’s necessary functions. Typically, these involve HR processes like payroll services and benefits management. This is done through a third-party specialist like a PEO (Professional Employer Organization) services provider.
This option can be the perfect way to streamline traditionally complex tasks, without disrupting supply chain elements. Here, companies can enjoy the advantages of global expansion without the scaled up overheads.
A total rejection of offshoring, onshoring relates to companies expanding their manufacturing or services while sticking to their home country.
Also known as reshoring, this option makes use of incentives or programs that want to bring manufacturing or other services back to developed countries.
However, companies practicing onshoring may rely more on technology-based solutions to continue working with partners abroad.