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
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.
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.
Connected Economic Concepts
Positive and Normative Economics
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