nearshoring

What is nearshoring?

Business / By / September 5, 2023

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.

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

reshoring
Reshoring involves a company moving its manufacturing operations from a foreign country to the country in which it is based. The process is the opposite of offshoring, where manufacturing operations are moved overseas to access cheaper labor markets.

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.

Connected Economic Concepts

Market Economy

market-economy
The idea of a market economy first came from classical economists, including David Ricardo, Jean-Baptiste Say, and Adam Smith. All three of these economists were advocates for a free market. They argued that the “invisible hand” of market incentives and profit motives were more efficient in guiding economic decisions to prosperity than strict government planning.

Positive and Normative Economics

positive-and-normative-economics
Positive economics is concerned with describing and explaining economic phenomena; it is based on facts and empirical evidence. Normative economics, on the other hand, is concerned with making judgments about what “should be” done. It contains value judgments and recommendations about how the economy should be.

Inflation

how-does-inflation-affect-the-economy
When there is an increased price of goods and services over a long period, it is called inflation. In these times, currency shows less potential to buy products and services. Thus, general prices of goods and services increase. Consequently, decreases in the purchasing power of currency is called inflation. 

Asymmetric Information

asymmetric-information
Asymmetric information as a concept has probably existed for thousands of years, but it became mainstream in 2001 after Michael Spence, George Akerlof, and Joseph Stiglitz won the Nobel Prize in Economics for their work on information asymmetry in capital markets. Asymmetric information, otherwise known as information asymmetry, occurs when one party in a business transaction has access to more information than the other party.

Autarky

autarky
Autarky comes from the Greek words autos (self)and arkein (to suffice) and in essence, describes a general state of self-sufficiency. However, the term is most commonly used to describe the economic system of a nation that can operate without support from the economic systems of other nations. Autarky, therefore, is an economic system characterized by self-sufficiency and limited trade with international partners.

Demand-Side Economics

demand-side-economics
Demand side economics refers to a belief that economic growth and full employment are driven by the demand for products and services.

Supply-Side Economics

supply-side-economics
Supply side economics is a macroeconomic theory that posits that production or supply is the main driver of economic growth.

Creative Destruction

creative-destruction
Creative destruction was first described by Austrian economist Joseph Schumpeter in 1942, who suggested that capital was never stationary and constantly evolving. To describe this process, Schumpeter defined creative destruction as the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Therefore, creative destruction is the replacing of long-standing practices or procedures with more innovative, disruptive practices in capitalist markets.

Happiness Economics

happiness-economics
Happiness economics seeks to relate economic decisions to wider measures of individual welfare than traditional measures which focus on income and wealth. Happiness economics, therefore, is the formal study of the relationship between individual satisfaction, employment, and wealth.

Oligopsony

oligopsony
An oligopsony is a market form characterized by the presence of only a small number of buyers. These buyers have market power and can lower the price of a good or service because of a lack of competition. In other words, the seller loses its bargaining power because it is unable to find a buyer outside of the oligopsony that is willing to pay a better price.

Animal Spirits

animal-spirits
The term “animal spirits” is derived from the Latin spiritus animalis, loosely translated as “the breath that awakens the human mind”. As far back as 300 B.C., animal spirits were used to explain psychological phenomena such as hysterias and manias. Animal spirits also appeared in literature where they exemplified qualities such as exuberance, gaiety, and courage.  Thus, the term “animal spirits” is used to describe how people arrive at financial decisions during periods of economic stress or uncertainty.

State Capitalism

state-capitalism
State capitalism is an economic system where business and commercial activity is controlled by the state through state-owned enterprises. In a state capitalist environment, the government is the principal actor. It takes an active role in the formation, regulation, and subsidization of businesses to divert capital to state-appointed bureaucrats. In effect, the government uses capital to further its political ambitions or strengthen its leverage on the international stage.

Boom And Bust Cycle

boom-and-bust-cycle
The boom and bust cycle describes the alternating periods of economic growth and decline common in many capitalist economies. The boom and bust cycle is a phrase used to describe the fluctuations in an economy in which there is persistent expansion and contraction. Expansion is associated with prosperity, while the contraction is associated with either a recession or a depression.

Paradox of Thrift

paradox-of-thrift
The paradox of thrift was popularised by British economist John Maynard Keynes and is a central component of Keynesian economics. Proponents of Keynesian economics believe the proper response to a recession is more spending, more risk-taking, and less saving. They also believe that spending, otherwise known as consumption, drives economic growth. The paradox of thrift, therefore, is an economic theory arguing that personal savings are a net drag on the economy during a recession.

Circular Flow Model

circular-flow-model
In simplistic terms, the circular flow model describes the mutually beneficial exchange of money between the two most vital parts of an economy: households, firms and how money moves between them. The circular flow model describes money as it moves through various aspects of society in a cyclical process.

Trade Deficit

trade-deficit
Trade deficits occur when a country’s imports outweigh its exports over a specific period. Experts also refer to this as a negative balance of trade. Most of the time, trade balances are calculated based on a variety of different categories.

Market Types

market-types
A market type is a way a given group of consumers and producers interact, based on the context determined by the readiness of consumers to understand the product, the complexity of the product; how big is the existing market and how much it can potentially expand in the future.

Rational Choice Theory

rational-choice-theory
Rational choice theory states that an individual uses rational calculations to make rational choices that are most in line with their personal preferences. Rational choice theory refers to a set of guidelines that explain economic and social behavior. The theory has two underlying assumptions, which are completeness (individuals have access to a set of alternatives among they can equally choose) and transitivity.

Conflict Theory

conflict-theory
Conflict theory argues that due to competition for limited resources, society is in a perpetual state of conflict.

Peer-to-Peer Economy

peer-to-peer-economy
The peer-to-peer (P2P) economy is one where buyers and sellers interact directly without the need for an intermediary third party or other business. The peer-to-peer economy is a business model where two individuals buy and sell products and services directly. In a peer-to-peer company, the seller has the ability to create the product or offer the service themselves.

Knowledge-Economy

knowledge-economy
The term “knowledge economy” was first coined in the 1960s by Peter Drucker. The management consultant used the term to describe a shift from traditional economies, where there was a reliance on unskilled labor and primary production, to economies reliant on service industries and jobs requiring more thinking and data analysis. The knowledge economy is a system of consumption and production based on knowledge-intensive activities that contribute to scientific and technical innovation.

Command Economy

command-economy
In a command economy, the government controls the economy through various commands, laws, and national goals which are used to coordinate complex social and economic systems. In other words, a social or political hierarchy determines what is produced, how it is produced, and how it is distributed. Therefore, the command economy is one in which the government controls all major aspects of the economy and economic production.

Labor Unions

labor-unions
How do you protect your rights as a worker? Who is there to help defend you against unfair and unjust work conditions? Both of these questions have an answer, and it’s a solution that many are familiar with. The answer is a labor union. From construction to teaching, there are labor unions out there for just about any field of work.

Bottom of The Pyramid

bottom-of-the-pyramid
The bottom of the pyramid is a term describing the largest and poorest global socio-economic group. Franklin D. Roosevelt first used the bottom of the pyramid (BOP) in a 1932 public address during the Great Depression. Roosevelt noted that – when talking about the ‘forgotten man:’ “these unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power.. that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid.”

Glocalization

glocalization
Glocalization is a portmanteau of the words “globalization” and “localization.” It is a concept that describes a globally developed and distributed product or service that is also adjusted to be suitable for sale in the local market. With the rise of the digital economy, brands now can go global by building a local footprint.

Market Fragmentation

market-fragmentation
Market fragmentation is most commonly seen in growing markets, which fragment and break away from the parent market to become self-sustaining markets with different products and services. Market fragmentation is a concept suggesting that all markets are diverse and fragment into distinct customer groups over time.

L-Shaped Recovery

l-shaped-recovery
The L-shaped recovery refers to an economy that declines steeply and then flatlines with weak or no growth. On a graph plotting GDP against time, this precipitous fall combined with a long period of stagnation looks like the letter “L”. The L-shaped recovery is sometimes called an L-shaped recession because the economy does not return to trend line growth.  The L-shaped recovery, therefore, is a recession shape used by economists to describe different types of recessions and their subsequent recoveries. In an L-shaped recovery, the economy is characterized by a severe recession with high unemployment and near-zero economic growth.

Comparative Advantage

comparative-advantage
Comparative advantage was first described by political economist David Ricardo in his book Principles of Political Economy and Taxation. Ricardo used his theory to argue against Great Britain’s protectionist laws which restricted the import of wheat from 1815 to 1846.  Comparative advantage occurs when a country can produce a good or service for a lower opportunity cost than another country.

Easterlin Paradox

easterlin-paradox
The Easterlin paradox was first described by then professor of economics at the University of Pennsylvania Richard Easterlin. In the 1970s, Easterlin found that despite the American economy experiencing growth over the previous few decades, the average level of happiness seen in American citizens remained the same. He called this the Easterlin paradox, where income and happiness correlate with each other until a certain point is reached after at least ten years or so. After this point, income and happiness levels are not significantly related. The Easterlin paradox states that happiness is positively correlated with income, but only to a certain extent.

Economies of Scale

economies-of-scale
In Economics, Economies of Scale is a theory for which, as companies grow, they gain cost advantages. More precisely, companies manage to benefit from these cost advantages as they grow, due to increased efficiency in production. Thus, as companies scale and increase production, a subsequent decrease in the costs associated with it will help the organization scale further.

Diseconomies of Scale

diseconomies-of-scale
In Economics, a Diseconomy of Scale happens when a company has grown so large that its costs per unit will start to increase. Thus, losing the benefits of scale. That can happen due to several factors arising as a company scales. From coordination issues to management inefficiencies and lack of proper communication flows.

Economies of Scope

economies-of-scope
An economy of scope means that the production of one good reduces the cost of producing some other related good. This means the unit cost to produce a product will decline as the variety of manufactured products increases. Importantly, the manufactured products must be related in some way.

Price Sensitivity

price-sensitivity
Price sensitivity can be explained using the price elasticity of demand, a concept in economics that measures the variation in product demand as the price of the product itself varies. In consumer behavior, price sensitivity describes and measures fluctuations in product demand as the price of that product changes.

Network Effects

negative-network-effects
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

Negative Network Effects

negative-network-effects
In a negative network effect as the network grows in usage or scale, the value of the platform might shrink. In platform business models network effects help the platform become more valuable for the next user joining. In negative network effects (congestion or pollution) reduce the value of the platform for the next user joining. 

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About The Author

Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
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