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Nearshoring: Bringing the supply chain closer

Disruptions and economic uncertainties have led businesses to relocate their supply chains much closer to home.

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Quantumrun Foresight
August 17, 2023

Insight highlights

Nearshoring, or sourcing from nearby countries, has grown in popularity as global disruptions and trade challenges push companies to optimize supply chains. While nearshoring can offer benefits such as improved supply chain resilience and economic growth in nearshore countries, it also introduces potential risks, including over-reliance on one region and possible exploitation of workers in less-regulated countries. Despite these complexities, this trend is reshaping global trade dynamics, spurring local entrepreneurship, and prompting shifts in economic and demographic landscapes.

Nearshoring context

Although nearshoring and reshoring are often used interchangeably, they have distinct meanings. Nearshoring involves a company collaborating with supply chain partners located in nearby countries. For example, a US business may engage in nearshoring by sourcing from a Mexican supplier instead of one in China.

Conversely, reshoring involves returning manufacturing and production operations to the company's home country or region. For instance, a company headquartered in North Carolina could reshore by collaborating with manufacturers in Georgia. In light of multiple challenges affecting international trade, particularly with imports from Asia, several companies are turning to nearshoring, investing substantial funds to set up plants close to their main markets. Consequently, numerous manufacturers, whose primary customer base is in the US and Canada, are now opening factories in Mexico.

Global disruptions such as the COVID-19 pandemic, Russia's invasion of Ukraine, and decoupling from China have led many companies to consider nearshoring or reshoring to reduce supply chain costs. The 2020 Savills' Nearshoring Index highlighted Vietnam as a top choice for nearshoring potential. Meanwhile, three-quarters of UK companies aim to reshore production due to increased shipping costs following Brexit and the pandemic.

US companies, including Google and Mattel, are increasingly investing in Mexico for manufacturing and talent development. Automation firm ABB reports 70 percent of executives plan to invest in production capacity closer to the US. In addition, the Reshoring Initiative projected reshoring and foreign direct investment jobs rose to 350,000 in 2022 from 260,000 in 2021.

Disruptive impact

Nearshoring can lead to more resilient and flexible supply chains in the long term. By shortening the distance between manufacturing and the target market, companies can improve their response times to changes in demand or disruption. This proximity can also facilitate better communication with suppliers due to fewer time zone differences and potential cultural or linguistic similarities, leading to smoother operations and quicker problem-solving.

However, nearshoring can also introduce new challenges and complexities. Although labor costs may be lower in nearshoring countries, other expenses like infrastructure, training, and potentially higher regulatory costs could offset these savings. Additionally, nearshoring could lead to over-reliance on a single region, leaving companies vulnerable to localized disruptions such as political instability, natural disasters, or economic downturns.

Nonetheless, nearshoring could have substantial implications for global trade dynamics. As more companies nearshore their operations, countries traditionally reliant on providing cheap labor for far-shored production may need to adapt their economies and upskill their workforces. However, nearshoring could also foster regional economic development and integration, bolstering resilience and interdependence among neighboring countries.

The trend could lead to the evolution of regional clusters of industries, potentially fostering innovation and growth in those sectors. In addition, countries can create more competitive and sustainable trade deals and partnerships, resulting in more accountability and ethical practices across the supply chain.

Implications of nearshoring

Wider implications of nearshoring may include:

Improved infrastructure, better living conditions, and decreased income inequality in specific regions as multinational companies invest in the facilities, infrastructure, and workforce nearby allied nations. The presence of these international businesses may also lead to innovation and technological spillovers, improving the global competitiveness nearshore countries.

Substantial job creation in a given nearshore country, helping reduce domestic unemployment rates and opening up opportunities for highly skilled workers.

The influx of foreign businesses (for developing nations) may lead to the rapid upskilling of their respective domestic workforces. Workers would gain valuable skills and experience, which could lead to better career prospects and wages, boosting local economies and improving living standards.

Political tensions between the home country and the nearshore country as this could lead to job losses in the home country, disagreements over regulations and standards, or conflicts over resources.

Demographic shifts as workers migrate to areas with more job opportunities. This development could alter the demographic balance in the home and nearshore countries, with potential implications for social cohesion, infrastructure needs, and public services.

Nearshoring leading to the exploitation of workers in nearshore countries—if not adequately regulated—where labor laws may be less stringent or less well enforced.

Nearshore countries becoming overly dependent on foreign companies for economic stability, leading to severe consequences for the local economy and job market if these foreign businesses fail or leave.

The influx of foreign capital and business expertise stimulating local entrepreneurship as individuals and businesses learn from their international counterparts.