Global supply chains have dealt with a long list of challenges in recent years—shortages of materials, port congestion, labor shortages, and capacity issues, to name a few. As a result of these problems, many companies have struggled with delayed shipments, missed deadlines, and increased costs and are rethinking their supply chains to avoid these issues in the future. The answer might be found in nearshoring—investing in manufacturing closer to their end markets, cutting down on their reliance on volatile overseas supply chains and transportation.
When engineering company ABB surveyed over 1,600 executives in the U.S. and Europe in June 2022, 70% reported they planned to bring production closer to home in response to the impacts of supply chain issues on their company. Nearshoring is gradually gaining traction across a variety of industries, including automotive, aerospace, electronics, and high-end goods. As more logistics leaders are beginning to ask, “What is nearshoring?” they must understand the role of this strategy, the pros and cons, and the potential it has to transform their supply chains.
What is Nearshoring?
Nearshoring is when manufacturing or production operations are located in a country neighboring the home country of the business. This is not to be confused with reshoring — moving production back to the business’ home country — a strategy often mentioned alongside nearshoring. Nearshoring takes advantage of lower shipping times and labor costs and reduces the risk of issues associated with manufacturing farther away. In many ways, nearshoring has much in common with overseas outsourcing, but the primary difference is removing the several thousand miles between production and the end market.
In the U.S., the majority of overseas outsourcing takes place in China. In 2020 and 2021, 30% of U.S. import cargo tonnage was from China, the same percentage as from all other Asian countries combined. China’s share of the U.S. total imports is, in fact, trending down while imports from other countries are increasing—like Vietnam, Malaysia, Thailand, and Indonesia, along with nearshoring countries. Businesses in the U.S. typically refer to nearshore countries such as Canada, Mexico, and even some in Central America. Mexico is an increasingly popular choice, evidenced by the substantial growth of its manufacturing industry—over 5% in 2022 alone.
What is the Role of Nearshoring?
For the past few years, companies have seen more barriers to shipping from China to the U.S., from tariffs to COVID-19-related shut-downs of major factories. While interest in nearshoring began before the pandemic, supply chain issues from pandemic-related disruptions have given businesses new reasons to consider nearshoring. Companies may move production from overseas to nearshore as a long-term strategy for diversifying production and reducing their reliance on ocean shipping, the slowest mode of transportation.
Many companies are now weighing whether the benefits of their current production plan overseas, which often includes low costs, are worth the risks of unreliability and receiving their goods too late. Nearshoring offers businesses the opportunity to have greater control over their supply chains while keeping many of the advantages of outsourcing. What started with high-end retailers in particular — those whose margins offer more flexibility for exploring new strategies — is continuing to expand to more businesses that want to find an alternative to the hassles of overseas shipping.
Is Nearshoring Manufacturing Worth the Investment?
The Pros of Nearshoring
Nearshoring manufacturing has several benefits, starting with closer proximity to the home country and greater control over the supply chain. Nearshoring can provide greater flexibility and agility when supply chain disruptions occur, enabling companies to respond quickly to changes by having more options like transportation available to them.
Transportation may be the most significant benefit of nearshoring, which is cheaper due to the shorter distance that goods must travel. Transportation via trucks is always faster than shipping across the ocean, which can take weeks, even over a month. This can be particularly important for businesses that are more likely to experience changes in demand that make it difficult to forecast. Nearshoring also provides greater reliability for deliveries to arrive on time with less risk of long delays.
With nearshoring comes opportunities for better inventory management strategies. Businesses can get better cash flow as less is tied up in inventory when production aligns with demand, and the chain is better supported by efficient transportation. This also reduces the risk of waste due to inventory obsolescence.
Companies should consider the added reasons for moving production from China to Mexico specifically. For one, there are no tariffs due to the US-Mexico-Canada Agreement (USMCA), which improves the cost-effectiveness of manufacturing in Mexico. China is currently experiencing rising labor costs, surpassing labor costs in Mexico. The Mexican Peso has been less volatile in recent years than the Chinese Yuan, which can help reduce the risk of currency fluctuations.
The time zones of Mexico are the same as the U.S., allowing for better communication and simpler coordination, and travel to Mexico to visit manufacturing sites is easier to pull off. Lastly, when nearshoring in Mexico, businesses avoid the potentially complicated trade relations and greater tensions between the U.S. and China, making Mexico a more stable and secure option.
- Greater supply chain control and agility
- Faster and more reliable transportation
- Cost savings from transportation, tariffs, and labor
- Improved inventory management
- Easier communication with nearshore partners
- Better outlook for trade relations with nearshore countries
The Cons of Nearshoring
While having its advantages, nearshoring also comes with drawbacks that companies must research. Nearshoring is not a quick solution, and it requires an investment. The initial costs can present a significant barrier, and companies should consider it a long-term commitment. It may also take longer than expected to plan nearshoring from the time of research until it is fully operational, as there are new logistical aspects to navigate, including regulations of the nearshore country.
Companies may need to start from square one finding the required services for manufacturing, warehousing, and other solutions. which can be time-consuming and costly. Businesses must redesign their supply chains, including how they handle their materials because companies must still transport any materials from Asia to the production location. Overall, nearshoring manufacturing is a complex strategic decision that requires careful consideration of the pros and cons before committing to it.
- Increased costs in the short term as an investment
- Time and research required to redesign supply chains
- Continued reliance on materials shipped from Asia
How Will Nearshoring Transform the Global Manufacturing and Transportation Industries?
With a large percentage of U.S. manufacturing outsourced to China in the past decade, a shift to nearshoring can bring significant growth to the manufacturing industries of the nearshore countries and the global landscape of freight transportation.
In 2021, a report by ThomasNet estimated that if 80% of U.S. manufacturers used one new domestic single-contract supplier, it would result in a $443 billion boost to the U.S. economy. Nearshoring would bring a similar effect on the manufacturing country’s economy. The nearshore country would need the supporting infrastructure for new demand, and building this up would be a gradual process over many years. Companies would need access to warehousing, labor, and distribution resources, including transportation and materials through nearshore suppliers.
As more companies like Whirlpool, Boeing, and Apple are nearshoring, it pushes the global manufacturing and transportation industries in this direction with greater momentum. At some point, industry demand — and subsequently, supplier infrastructure — becomes big enough that businesses’ switch to nearshoring requires less risk and increases its cost-effectiveness. A survey by consulting firm Kearney has even shown that almost two-thirds of CEOs would be influenced to reshore or nearshore based on whether other U.S. companies are making these moves. Once nearshoring begins to pick up momentum in the industry, it can quickly become a popular strategy.
Whether Near or Far, VIZION API Provides Shippers with Full Visibility of Container Events
Shippers now have nearshoring as a strong manufacturing strategy to consider. It is a long-term investment, but it offers companies greater control over their supply chains, especially from the transportation perspective, where it brings better speed and reliability. With VIZION API, shippers can track their containers in real time, regardless of location. They get complete, standardized, and detailed visibility data for container events, supported by our API-first approach, which leads to greater operational agility. To learn more about VIZION, contact us today to schedule a demo.