What is nearshoring?

Nearshoring is a business tactic where companies move their operations to the closest country with a qualified workforce, favorable labor costs, or comparable time zone. The scope of operations may encompass manufacturing, marketing, customer service, or software development, among other pursuits.

Aspect	Explanation
Concept	Nearshoring is a business practice in which a company outsources its business processes, services, or manufacturing to a service provider or partner in a neighboring or nearby country. It is often chosen as an alternative to offshoring, which involves outsourcing to more distant, typically lower-cost, offshore locations. Nearshoring aims to strike a balance between cost savings and geographical proximity.
Key Characteristics	Nearshoring exhibits the following characteristics: – Proximity: Nearshore locations are geographically close to the company’s home country, often in the same time zone or a nearby time zone. – Cultural Affinity: Nearshore partners may share similar cultures, languages, or business practices, which can ease communication and collaboration. – Cost Savings: While not always as cost-effective as offshore outsourcing, nearshoring can offer competitive labor costs while reducing some of the challenges of offshore distance. – Collaboration: Nearshoring facilitates more direct communication, easier visits, and stronger collaboration between the company and its outsourcing partner. – Strategic Considerations: Companies choose nearshoring based on factors like the need for talent, access to markets, and risk mitigation.
Purposes and Goals	Nearshoring serves several purposes and goals: – Cost Efficiency: Companies aim to reduce operational costs while maintaining control and quality. – Access to Talent: Nearshoring allows access to a skilled workforce in neighboring regions. – Market Expansion: Companies use nearshore locations as entry points to new markets or to serve existing customers more effectively. – Risk Diversification: Nearshoring can mitigate geopolitical, logistical, and cultural risks associated with offshore outsourcing. – Agility and Responsiveness: Proximity enables quicker response times and agile operations.
Examples	Nearshoring scenarios vary by industry: – Software Development: A U.S. software company might nearshore to Mexico for development and maintenance due to cost-effectiveness and proximity. – Manufacturing: An automotive manufacturer in Germany might nearshore production to Poland to access skilled labor and reduce costs. – Customer Support: A UK-based company may nearshore customer support services to Ireland to ensure English-speaking support and time zone alignment. – Call Centers: U.S. companies often nearshore call center operations to countries like the Dominican Republic for cost savings and language proficiency.
Benefits	Nearshoring offers several benefits: – Cost Savings: While not as low-cost as offshore outsourcing, nearshoring can still result in significant savings compared to domestic operations. – Access to Skills: Companies gain access to a diverse talent pool, often with strong technical skills. – Time Zone Alignment: Time zone proximity allows for real-time collaboration and quick issue resolution. – Cultural Alignment: Similar cultures and languages can reduce misunderstandings and enhance teamwork. – Risk Mitigation: Nearshoring can lower geopolitical and logistical risks associated with offshore outsourcing.
Challenges	Nearshoring also presents challenges: – Costs: Nearshoring may not always be as cost-effective as offshore outsourcing, and labor costs can vary by location. – Quality Control: Ensuring consistent quality and standards across borders can be challenging. – Legal and Regulatory Issues: Compliance with different labor laws, tax regulations, and legal frameworks requires careful consideration. – Communication: While proximity helps, effective communication across borders and cultures is essential.
Factors Influencing Location Choice	Companies consider several factors when choosing a nearshore location: – Cost of Labor: Labor costs in the nearshore location compared to the home country. – Skills Availability: The presence of a skilled workforce in the chosen location. – Infrastructure: Reliable infrastructure, including transportation and technology, is crucial. – Language Skills: Proficiency in languages relevant to the company’s operations. – Stability: Political stability and favorable business conditions. – Market Access: Access to target markets and customer bases.
Real-World Application	Nearshoring is widely employed in industries like IT outsourcing, manufacturing, customer support, and shared services centers. For instance, many European companies nearshore IT development to Eastern European countries, while U.S. companies often nearshore customer support to Latin American nations.
Considerations	Companies should carefully assess their specific needs, budget constraints, and the cultural and regulatory landscape of potential nearshore locations before making a decision. A comprehensive due diligence process is essential.

Table of Contents

Understanding nearshoring

Nearshoring is an approach where one company moves some of its operations to a less expensive nearby country.

Nearshoring is similar to the process of offshoring where a company moves its operations to another country.

The only difference between the two may be the location of the company or contractors who perform the work.

Offshoring is concentrated in countries with access to cheap labor, while nearshoring prioritizes distance.

The preference for proximity has important implications for efficiency.

This is because teams who work in comparable time zones are better able to communicate and synchronize their tasks and activities.

Countries such as Brazil and Mexico with similar time zones to the United States became ideal nearshoring options in the early 2010s.

Mexico was also producing a significant number of skilled graduates at the time which increased its suitability as a nearshoring location.

Where is nearshoring most prevalent?

Here are five industries where nearshoring is common:

IT

Some western companies outsource IT operations to countries we touched on earlier such as Brazil and Mexico.

For companies in Europe, Ukraine, Poland, and Romania are ideal locations.

Customer support

Companies such as Uber, Amazon, and 3M have moved customer support operations to San Jose, Costa Rica.

Colombia is also a popular option, with thousands of new call center jobs created there in 2020 alone.

Automotive

Mexico is also the base for many automotive manufacturing operations with 80% of all vehicle exports destined for the bordering United States.

Companies such as Ford, General Motors, Audi, BMW, Nissan, and Toyota all have a presence there.

Pharmaceuticals

Several American pharmaceutical companies nearshore their manufacturing in Mexico.

Medtronic – a renowned medical equipment manufacturer – nearshored in the country as early as the 1970s.

Apparel

Zara parent company Inditex nearshores around 53% of its total production output to Morocco, Turkey, Spain, and Portugal.

In late 2021, Italian fashion firm Benetton shifted more than 10% of its production from countries such as Vietnam and China to several closer European locations.

The company has plans to halve its Asian production by the end of 2022.

Key benefits of nearshoring

Some of the key benefits of nearshoring include:

Cost-efficient

Nearshoring allows companies to hire cheaper labor.

If the labor is also located in a time zone where teams across countries can collaborate easily, costs are further reduced.

Workforce Access

Assembling in-house teams can be expensive and time-consuming for any company.

This is particularly true when skilled workforces need to be recruited and trained.

Nearshoring enables the business to access a ready-made workforce in a location that is convenient operationally.

Cultural fit

Since nearshoring involves establishing a presence in a nearby country, there is more chance that each party will share the same cultural perspectives and traditions.

A software development company based in Chicago, for example, would work well with a nearshoring partner in Vancouver, Canada.

Both countries approach business relationships the same way with common work cultures and ways of life.

Nearshoring vs. Reshoring

For the last two decades, one of the major trends in business has been offshoring part of the business.

This has led to new lightweight business models, such as drop-shipping.

dropshipping-business-model — Dropshipping is a retail business model where the dropshipper externalizes the manufacturing and logistics and focuses only on distribution and customer acquisition. Therefore, the dropshipper collects final customers’ sales orders, sending them over to third-party suppliers, who ship directly to those customers. In this way, through dropshipping, it is possible to run a business without operational costs and logistics management.

In short, the flow worked pretty well for those who, years back, started a dropshipping business, as they could set up a website, outsource manufacturing of cheap items to China through Alibaba, and sell it back to the US.

Yet, with the complete disruption of the supply chain, after the pandemic, and the complete block of China, due to the zero-COVID policy of the government, many former Chinese suppliers have not been able to fulfill their orders.

This has led to a complete change, where the real costs of outsourcing most of the manufacturing to China have shown its drawbacks.

That trend has become clear, as in 2022, Apple, which for over a decade made China its main outsourcing partner for producing the iPhone (with Chinese Foxconn making most of Apple’s iPhones), is now planning to move the production outside China.

Just like Apple had been among the ones who opened the way to offshoring, Apple is opening the way to a new trend, restoring.

Of course, in Apple’s case, the company will move manufacturing to India and other countries outside the US.

But for many other companies, where supply from China had been cheap, convenient, and efficient, it worked pretty well until this mechanism completely broke down in 2022.

Today the cost of doing business has increased, and companies realized that to build a viable business in the long term, they needed to bring manufacturing back home.

Thus, we might see more and more companies, especially in the US, bringing back the supply side at home to have more control over it, even if, in the short-term might be more expensive.

Key takeaways

Nearshoring is an approach where one company outsources work to a less expensive company that is located in close proximity.
Nearshoring is common in industries such as IT, customer support, vehicle manufacturing, pharmaceuticals, and apparel.
Nearshoring has numerous benefits. The practice increases efficiency since both companies in the arrangement tend to work in closely aligned time zones. Nearshoring is also cost-effective and in some cases, avoids potential issues arising from cultural differences.

Key Highlights:

Nearshoring Defined: Nearshoring is a business strategy where companies relocate their operations to nearby countries with qualified workforces, favorable labor costs, or comparable time zones. This practice is especially common in industries like manufacturing, marketing, customer service, and software development.
Comparison with Offshoring: Nearshoring is similar to offshoring, where companies move operations to other countries, but the key distinction lies in the proximity of the location. Nearshoring focuses on neighboring countries for ease of communication and synchronization.
Efficiency through Proximity: Teams working in similar time zones can communicate and collaborate more effectively. Nearshoring enhances efficiency by facilitating better coordination among teams.
Industries and Locations: Nearshoring is prevalent in various sectors:
- IT: Western companies outsource IT operations to countries like Brazil, Mexico, Ukraine, Poland, and Romania.
- Customer Support: Companies like Uber, Amazon, and 3M move customer support operations to countries like Costa Rica and Colombia.
- Automotive: Mexico is a hub for automotive manufacturing, with companies like Ford, GM, Audi, BMW, Nissan, and Toyota having a presence.
- Pharmaceuticals: American pharmaceutical companies nearshore manufacturing to Mexico, with examples like Medtronic.
- Apparel: Companies like Zara’s parent company Inditex and Benetton nearshore production to locations like Morocco, Turkey, Spain, and Portugal.
Benefits of Nearshoring:
- Cost Efficiency: Nearshoring allows companies to access cheaper labor and potentially reduce costs.
- Workforce Access: Ready-made workforces in convenient locations can save time and expense associated with hiring and training.
- Cultural Fit: Proximity often leads to shared cultural perspectives and traditions, improving business relationships.
- Efficient Collaboration: Teams in compatible time zones can collaborate more effectively, reducing communication barriers.
Nearshoring vs. Reshoring: Reshoring involves bringing manufacturing operations back to the company’s home country, whereas nearshoring focuses on neighboring countries. The disruptions caused by the pandemic highlighted the limitations of over-reliance on offshore manufacturing, leading to a resurgence of interest in reshoring.

Case Studies

Context	Description	Benefits	Examples
IT and Software Development	Many tech companies nearshore software development and IT tasks to countries in their region. This approach allows for collaboration in real-time, similar time zones, and reduced language barriers.	– Faster development cycles and quicker problem resolution. – Cost savings compared to onshore development. – Access to a talent pool with relevant skills and cultural familiarity.	A U.S.-based software company nearshores software development to Mexico to tap into the skilled IT workforce and maintain efficient communication.
Call Centers and Customer Support	Call center operations are often nearshored to countries with a well-trained workforce and good language skills. This helps companies provide efficient customer support while reducing operational costs.	– Cost-effective customer service solutions. – Agents with proficiency in the required languages. – Similar working hours to the home country for real-time support.	A European airline nearshores its customer support operations to a country in Eastern Europe to benefit from cost savings and multilingual agents.
Manufacturing and Assembly	Manufacturing companies may nearshore production processes to neighboring countries to reduce labor costs, logistics expenses, and tariffs. This allows for efficient supply chain management and quicker turnaround times.	– Lower labor and production costs. – Simplified logistics and reduced shipping times. – Compliance with trade agreements and regulations.	An automotive manufacturer nearshores the assembly of certain vehicle components to a neighboring country to take advantage of lower labor costs and proximity to suppliers.
Financial Services	Banks and financial institutions nearshore back-office processes, such as data entry, transaction processing, and compliance tasks. This helps reduce operational expenses while maintaining data security and regulatory compliance.	– Cost-effective processing of financial transactions. – Adherence to data security and compliance standards. – Efficient handling of high-volume, repetitive tasks.	A U.S.-based bank nearshores data entry and compliance-related tasks to a country in South America to benefit from cost savings and expertise in financial processes.
Research and Development	Companies engaged in research and development (R&D) may nearshore R&D centers to countries with strong educational systems and a pool of skilled scientists and engineers. This fosters innovation and accelerates product development.	– Access to highly skilled talent in specific fields. – Collaboration with local universities and research institutions. – Cost-efficient R&D operations.	A pharmaceutical company nearshores its R&D center to India to leverage the country’s large talent pool of scientists and researchers and to expedite drug discovery.
Language Services	Translation and localization services are commonly nearshored to countries where the native language is spoken. This ensures accuracy and cultural sensitivity in translations while keeping costs reasonable.	– High-quality language services by native speakers. – Cost-effective translation and localization solutions. – Cultural understanding and adaptation for target markets.	A multinational corporation nearshores its translation services to Spain for Spanish language support, ensuring accurate and culturally relevant translations for its Spanish-speaking customers.
Supply Chain Management	Businesses often nearshore supply chain management functions to countries with strategic geographic locations and transportation infrastructure. This improves supply chain efficiency and reduces transportation costs.	– Enhanced supply chain visibility and responsiveness. – Lower transportation and inventory carrying costs. – Access to local expertise in logistics and distribution.	A European retailer nearshores its supply chain management to the Netherlands, benefiting from the country’s central location in Europe and well-developed transportation networks.
Data Entry and Processing	Data entry and data processing tasks can be nearshored to countries with a skilled workforce, ensuring accuracy and efficiency in handling large volumes of data. This is especially common in the healthcare and finance sectors.	– Efficient and accurate handling of data-intensive tasks. – Cost savings compared to in-house processing. – Compliance with data privacy regulations.	A healthcare insurance company nearshores claims data processing to the Philippines to benefit from a well-trained workforce and ensure compliance with data privacy regulations.
E-commerce Fulfillment Centers	E-commerce businesses nearshore their fulfillment centers to locations strategically positioned for fast and cost-effective shipping to customers. This reduces shipping times and shipping costs, enhancing customer satisfaction.	– Faster order processing and shipping to customers. – Reduced shipping costs and improved order tracking. – Efficient inventory management and returns processing.	An online retailer based in the United States nearshores its e-commerce fulfillment center to Mexico to take advantage of lower labor and shipping costs and provide faster delivery to its customers in North America.
Back-Office Administrative Support	Back-office functions, such as HR, payroll, and administrative support, can be nearshored to countries with a highly educated and skilled workforce. This streamlines administrative processes while reducing operational costs.	– Efficient handling of administrative tasks. – Cost-effective back-office operations. – Access to well-educated professionals for support functions.	An international corporation nearshores its HR and payroll processing to a country in Eastern Europe to benefit from a skilled workforce and streamline administrative tasks across multiple regions.

Related Concepts	Description	When to Apply
Nearshoring	Nearshoring is a business strategy where companies outsource certain business processes or functions to external service providers located in nearby or neighboring countries, typically within the same geographical region or continent. Nearshoring offers advantages such as reduced costs, improved communication and collaboration, and cultural affinity compared to offshoring to distant locations. By leveraging nearshoring, companies can access a pool of skilled talent, mitigate risks, and enhance operational efficiency while maintaining proximity to their core markets.	– Geographical Proximity: Consider nearshoring when seeking to outsource business processes or functions while maintaining geographical proximity to the home market. Nearshoring can be advantageous for companies looking to leverage the benefits of outsourcing while minimizing logistical complexities, time zone differences, and cultural barriers associated with offshore outsourcing.
Cost Efficiency	In the context of Cost Efficiency, nearshoring offers cost-saving opportunities for companies seeking to optimize their operational expenses while maintaining quality and service levels. Nearshore service providers often offer competitive pricing structures compared to domestic providers, allowing companies to reduce labor and overhead costs without compromising on service quality or delivery timelines. By leveraging nearshoring, companies can achieve cost efficiency while benefiting from skilled talent and proximity to key markets.	– Cost Optimization: Explore nearshoring as a cost-effective alternative to in-house operations or offshore outsourcing arrangements. Evaluate the cost savings potential, including labor costs, overhead expenses, and operational efficiencies associated with nearshore service providers. Consider nearshoring as part of broader cost optimization initiatives aimed at improving profitability, enhancing competitiveness, and optimizing resource allocation within the organization.
Supply Chain Resilience	Nearshoring contributes to Supply Chain Resilience by reducing dependency on distant suppliers and minimizing supply chain disruptions associated with global supply chains. By relocating manufacturing or sourcing activities to nearby regions, companies can mitigate risks related to transportation delays, geopolitical instability, and natural disasters that may affect offshore supply chains. Nearshoring enables companies to build more agile and resilient supply chains capable of responding quickly to market fluctuations and unforeseen disruptions.	– Supply Chain Risk Management: Incorporate nearshoring as part of supply chain risk management strategies aimed at enhancing resilience and agility. Assess the vulnerability of existing supply chains to various risks, including geopolitical, economic, and environmental factors. Diversify sourcing and manufacturing locations by incorporating nearshore options to minimize dependency on single-source suppliers and reduce exposure to supply chain disruptions.
Cultural Affinity	Nearshoring offers Cultural Affinity advantages due to shared language, cultural similarities, and business practices between companies and service providers in neighboring countries. Cultural affinity facilitates smoother communication, collaboration, and relationship-building between stakeholders, fostering trust and alignment in business operations. Companies may find it easier to integrate nearshore teams into their organizational culture and work processes, resulting in enhanced productivity and synergy.	– Cultural Compatibility: Consider nearshoring when cultural affinity and alignment are important considerations for business operations. Evaluate the cultural compatibility of nearshore service providers in terms of language proficiency, work culture, and business etiquette. Prioritize nearshore locations with cultural similarities and shared values to facilitate effective communication, collaboration, and relationship-building between internal teams and external service providers.
Talent Access	Nearshoring provides access to a Talent Pool of skilled professionals in neighboring countries who can fulfill specialized roles and competencies required for business operations. Nearshore service providers often offer access to a diverse talent pool with expertise in areas such as information technology, customer service, finance, and engineering. Companies can tap into this talent pool to augment their internal capabilities, scale operations, and execute projects more efficiently.	– Skills and Expertise: Leverage nearshoring to access specialized skills and expertise not readily available in the domestic market. Evaluate the talent landscape in nearshore locations, considering factors such as educational infrastructure, technical proficiency, and industry experience. Partner with nearshore service providers that demonstrate a track record of recruiting and retaining top talent in relevant fields to ensure access to the skills needed to drive business growth and innovation.
Time Zone Alignment	Nearshoring offers Time Zone Alignment benefits, particularly for companies operating in regions with significant time zone differences from traditional offshore locations. By selecting nearshore service providers in closer geographical proximity, companies can minimize time zone disparities and facilitate real-time communication, collaboration, and decision-making between teams. Time zone alignment enhances operational efficiency, reduces latency in project execution, and improves responsiveness to customer needs and market demands.	– Real-Time Collaboration: Opt for nearshoring when real-time collaboration and communication are essential for project success. Choose nearshore locations that offer favorable time zone alignment with the home office or primary customer base to facilitate synchronous interactions and minimize delays in information exchange. Leverage technology tools and communication platforms to bridge time zone differences and ensure seamless collaboration between distributed teams across different locations.
Regulatory Compliance	Nearshoring helps companies navigate Regulatory Compliance requirements by selecting service providers in countries with favorable regulatory environments and standards aligned with industry regulations. Nearshore locations may offer greater regulatory predictability, legal frameworks, and intellectual property protections compared to offshore jurisdictions, reducing compliance risks and legal complexities associated with international outsourcing arrangements. Compliance with local regulations and standards enhances business continuity and mitigates legal liabilities for companies engaging in nearshore partnerships.	– Legal and Regulatory Considerations: Evaluate regulatory compliance requirements when considering nearshoring options for business processes or functions. Conduct due diligence on regulatory frameworks, data protection laws, and intellectual property rights in nearshore jurisdictions to ensure alignment with organizational policies and industry regulations. Seek legal counsel and risk assessment guidance to address potential compliance challenges and mitigate legal risks associated with nearshore outsourcing agreements.
Customer Experience	Nearshoring impacts the Customer Experience by enabling companies to deliver timely and responsive services to customers through proximity to key markets. Nearshore service providers can offer localized support, language capabilities, and cultural understanding that enhance the overall customer experience. Companies can leverage nearshoring to establish customer service centers, technical support hubs, and sales operations in strategic locations closer to their target customer base, resulting in improved customer satisfaction and loyalty.	– Customer-Centric Operations: Leverage nearshoring to enhance the customer experience by providing localized support, personalized services, and timely responses to customer inquiries and needs. Establish nearshore service centers or contact hubs in regions with high customer concentration to deliver seamless and responsive customer service across multiple channels. Align nearshore operations with customer-centric strategies and service level agreements to meet and exceed customer expectations while driving brand loyalty and retention.
Scalability and Flexibility	Nearshoring offers Scalability and Flexibility advantages, allowing companies to scale their operations up or down rapidly in response to changing market demands and business needs. Nearshore service providers offer flexible engagement models, resource scalability, and agility to accommodate fluctuating workloads, project timelines, and resource requirements. Companies can leverage nearshoring to access on-demand talent, infrastructure, and capacity without long-term commitments or significant upfront investments.	– Agile Resource Allocation: Embrace nearshoring as a strategic enabler of scalability and flexibility in operations. Partner with nearshore service providers that offer flexible engagement models, resource scalability, and rapid deployment capabilities to support dynamic business requirements and market fluctuations. Leverage nearshore teams as an extension of internal resources, allowing for agile resource allocation and capacity adjustments to meet evolving project demands and strategic objectives.
Competitive Advantage	Nearshoring contributes to Competitive Advantage by enabling companies to leverage external resources, capabilities, and cost efficiencies to gain a competitive edge in the marketplace. Nearshore service providers offer complementary skills, innovation potential, and operational efficiencies that enhance the competitiveness of companies across various industries. By strategically integrating nearshoring into their business strategies, companies can differentiate their offerings, drive growth, and capture new market opportunities more effectively.	– Strategic Differentiation: Harness nearshoring as a source of competitive advantage by leveraging external expertise, innovation, and cost efficiencies. Identify areas where nearshoring can create strategic value and differentiation in the marketplace, such as product development, service delivery, or operational excellence. Develop nearshoring strategies that align with overarching business goals and market dynamics to capitalize on competitive opportunities and strengthen market positioning in the long term.