Nearshoring refers to the outsourcing strategy in which a company delegates part of its production to third parties located in other countries, but in nearby destinations and with a similar time zone.
This tactic arises as an alternative to offshoring, which seeks to reduce costs when searching for suppliers in destinations generally located in Asia.
It is undeniable that long distances and time differences between continents often generate problems in the supply chain; with nearshoring, we seek to bring outsourced production centers closer together to solve these problems.
In recent years, major global corporations have explored options to optimize their resources, seeking a comprehensive improvement in their supply chains. In this context, Nearshoring has emerged with force, a practice aimed at promoting growth in an environment challenging business.
The possibilities are evident, since according to information from the Inter-American Development Bank (IDB), the practice of Nearshoring has the potential to increase Latin American exports by approximately 78 billion dollars in a short period.
Nearshoring VS Offshoring
Nearshoring and offshoring are two outsourcing strategies which involve the transfer of business activities to external locations, but differ mainly in geographical proximity.
It involves the outsourcing of business processes to geographically close locations, usually on the same continent or in neighboring countries.
The distinctive characteristic is geographical proximity, which facilitates more effective coordination and communication between the company and its external suppliers.
It seeks to take advantage of advantages such as similar time zones, lower transportation costs, and greater cultural understanding.
A company based in Europe that moves part of its production to Eastern Europe.
It involves the outsourcing of business activities to geographically distant locations, often on different continents.
It is characterized by a greater geographical distance between the company and external suppliers, which can create challenges in terms of communication and coordination.
It primarily seeks to reduce costs by seeking cheaper labor and other competitive advantages in remote regions.
An American company moving its customer service center to India to take advantage of lower labor costs.
That is, while nearshoring involves outsourcing to geographically close locations, offshoring involves outsourcing to distant locations, the choice between these strategies will depend on factors such as costs, geographic proximity, communication requirements and other considerations specific to each company.
Both strategies have their advantages and challenges, and the appropriate choice will depend on the particular objectives and circumstances of each organization.
Nearshoring in different countries
Latin America is presented as a strategic, reliable and perfect location for entrepreneurs worldwide, in this region, they can take advantage of skilled labor, stable legislation and growing economies, this attraction has driven the relocation of the production chains of numerous foreign companies, thanks to the recent industrial phenomenon known as Nearshoring.
Mexico stands out as a preferred destination for international manufacturers, mainly due to its proximity to the United States, an important global consumer, its stable economy, qualified workforce and diversity of industries with years of experience make it a safe choice for many multinationals.
Other countries of the region that follow Mexico in terms of attractiveness for relocation include Argentina, Brazil, Colombia, Chile, Costa Rica and the Dominican Republic.
Both the United States and the European Union are introducing stimuli to support the translation of semiconductor production, an example of this is the Taiwan Semiconductor Manufacturing Company (TSMC), which is already investing $40 billion in a new manufacturing facility. manufacturing in the United States, and is evaluating the possibility of expanding in Japan and Germany.
The following graph highlights several countries that are considered “winners” in the face of the distancing of manufacturing in China, among them, nations belonging to the ASEAN (Association of Southeast Asian Nations), India and Mexico, ASEAN was the first to benefit from the phenomenon known as “friendshoring”. Companies began to head to countries close to their operations in China, but that share more similar values, present favorable demographic trends, are subject to conducive political reforms and participate in growing commercial cooperation.
Considering that imports of goods from the United States reached USD 3,277.3 billion in 2022, a 5% decrease in China's market share would represent approximately USD 165 billion in additional trade for other countries.
Friendshoring What is it?
Miguel Moreno Tripp, teacher at the EGADE Business School, mentions in a post on the institution's blog that the term "nearshoring" was coined in 2020 by the American press, and that the expression "allied-shoring" is also used to refer to this trend.
It involves establishing economic alliances with those who share our values and strategic interests, it refers to the reconstruction of our economy through collaboration with close friends with whom we already maintain closely linked production and business service networks, such as Canada, Mexico, Costa Rica and US territories such as Puerto Rico and Guam.
Due to the interruptions in the production chains originating in China, container transportation costs increased significantly, in addition, it can be stated that the competitive advantage in terms of labor costs in China has decreased, after these factors , new origin requirements came into effect in the T-MEC area.
What are the industries that are favored by the application of Nearshoring?
According to the information provided by Market Analysis, the manufacturing sector in Mexico represents the 91% of the industrial spaces configured for this emerging modality, distributed as follows:
- Automotive section
It constitutes 44% of the newly established factories in the country and this percentage is anticipated to increase in the coming years. This trend is due to the fact that it was one of the sectors most affected by interruptions in supply chains during the pandemic, and now seeks to change its approach by adopting nearshoring.
According to the National Auto Parts Industry (INA), the production of vehicle components represents 37% of the investment opportunities in the country derived from nearshoring. In this area, the manufacturing of batteries and other elements for electric cars stands out, which is will take place with the arrival of Tesla to the state of Nuevo León.
- metalworking industry
It represents 14% of the facilities destined for manufacturing activities in the country and constitutes one of the sectors that has experienced the greatest benefits due to the migration of foreign companies, mainly from China. Mexico has specialized technology in the molding and casting of metals, which encourages the attraction of companies focused on this area.
The plastic products sector represents 7% of the facilities moved as part of the nearshoring trend. This type of material is used in a variety of sectors, including the medical industry, electronics, toys, industrial products, bottling, among others.
It is a type of business model that involves the acquisition and sale of products through digital platforms, its use increased during the period of confinement caused by the pandemic, and the rise of nearshoring has contributed even more to the growth of income in this sector. The relocation of facilities and the associated logistical improvements have favored a 6% increase in online commerce, and the emergence of more companies competing in this area is anticipated.
Mainly, the northern region of Mexico has emerged as an attractive destination for wooden furniture producers, mainly due to its proximity to the United States, this constitutes approximately 5.7% of the total relocation of production in this sector.
The significant influx of companies to our nation has generated a notable increase in the construction of industrial facilities and parks, benefiting companies operating in that sector with an increase of 4%, during the years 2021 and 2022, unprecedented demand was experienced of buildings intended for industrial use, and this trend is projected to persist in the coming years.
- Consumer products
They constitute 3.9% of the transfer of production to Mexico and include items of daily use such as food, cleaning products, personal care items, electronic devices, clothing from recognized brands, among others, the relocation of these companies in Mexico provides greater foreign investment, opportunities for economic growth, job creation and, especially, greater competitiveness, this moment could be crucial to transform Mexican industry and consolidate our country as a fundamental element in global supply chains.
How to prepare a company for the entry of Nearshoring?
For your company to function with this practice, the following is necessary:
- Adhere to recognized global standards, meeting these standards will allow you to compete in international markets, such as obtaining ISO certification, Company B, or various specific certifications in the food sector.
- Adapt your operation to be more flexible, offering innovative solutions to each client becomes possible by addressing various segments in the industrial sector, cultivate versatility in your approach.
- Allocate resources to implement automations, the main goal is to achieve an efficient and simplified process, which will make it possible to gain the trust of your clients.
- Supply Chain Assessment, Analyze your current supply chain, identifying areas susceptible to improvements and optimizations.
- Evaluate the costs associated with the current supply chain and determine where there could be benefits in moving certain operations to nearby destinations through Nearshoring.
- Risk and Benefit Analysis, performs a detailed analysis of the risks and benefits associated with the adoption of Nearshoring, considering aspects such as costs, delivery time, product quality, geopolitical risks, among others.
- Staff training, Prepare your staff for the new dynamics and challenges associated with Nearshoring.
- Provides training on cultural and logistical differences that may arise when working with suppliers in close but different locations.
- Technological Adaptation, It implements systems and technologies that facilitate supply chain management in Nearshoring environments.
- Make sure you have communication tools efficient to coordinate activities with nearby suppliers.
- Strategic Alliances, establishes strong relationships with local suppliers in Nearshoring destinations, close collaboration can be key to success.
- Consider strategic partnerships with suppliers who share values and business objectives.
- Continuous monitoring, implement continuous monitoring and evaluation systems to ensure that the expected benefits of Nearshoring are being realized and that any issues that arise are being effectively addressed.
- Quality management, establishes clear protocols and quality standards. Ensure that the quality of products or services is not compromised by the relocation of operations.
- Transparent Communication, transparently communicate both internally and externally about the transition to Nearshoring, this includes informing employees, customers and other stakeholders.
When preparing a company for the entry of Nearshoring, it is essential to adopt a comprehensive approach that encompasses logistical, technological, personnel and strategic aspects to ensure a successful transition and long-term benefits.
The viability of nearshoring in the long term depends on various economic, commercial and political factors. Here are some things to consider:
The economic stability of the countries participating in nearshoring is crucial. Factors such as sustainable growth, sound economic policies and the ability to maintain a competitive position are essential for long-term success.
Political and Regulatory Environment
Political and regulatory conditions can influence the sustainability of nearshoring, political stability and favorable business regulations are essential to maintain smooth and predictable operations.
Assessing market trends is crucial, this includes understanding changing consumer demands, emerging technologies and evolving global supply chains.
The continued adoption of technologies, such as automation and artificial intelligence, can influence the competitiveness and efficiency of nearshoring in the long term.
The ability to compete in a global market remains essential, countries participating in nearshoring must constantly adapt to meet competition and take advantage of emerging opportunities.
Supply Chain Resilience
The ability to build resilient supply chains is essential to mitigate risks, factors such as supplier diversification and operational flexibility can increase resilience.
Sustainability and Social Responsibility
Environmental and social considerations are increasingly important, companies and countries that adopt sustainable and socially responsible practices can have a long-term advantage.
The ability to adapt to rapid changes in the business environment is key, the flexibility to adjust strategies as necessary can determine the long-term success of nearshoring.
In summary, for nearshoring to be sustainable in the long term, it is necessary to continually evaluate and adapt to changing economic, political and business conditions, while maintaining a focus on resilience, innovation and global competitiveness.