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Nearshoring: Should My Company Move to a Neighbouring Country?

May 10, 2022

 by David Collins III

Truck driving
Last month we discussed “re-shoring” along with the associated risks and rewards. Now we will discuss the advantages and disadvantages of “nearshoring”. Let’s first take a quick look at some of the key terminology.

Key Terminology to Note

Re-shoring: the practice of transferring a business operation that was moved overseas back to the country from which it was originally relocated.

Nearshoring: the practice of transferring a business operation that was moved overseas to a country in the same region from which it was originally relocated.

Offshoring: the practice of transferring a business operation to another, typically lower-cost country.

Outsourcing: The business practice of transferring a business operation to an external organization.

This article will focus on nearshoring either through finding a new supplier in a nearby country or creating a new facility in the other country. As I mentioned in the previous blogs, there will be different costs and benefits, depending on the setup. However, for the purposes of this blog, we are treating them the same.

 

What Is Nearshoring?

Nearshoring mostly, though not exclusively, is used in the context of North America or Europe. In North America, nearshoring means sending production to Mexico or, to a lesser extent, Central America. In the European context, it means moving production from Western European countries to Central or Eastern European usually, though not exclusively, within the European Union.

 

Advantages Faced by Nearshoring Companies

Nearshoring is attractive for many reasons: 

1. Labor rates are relatively low

Labor rates are cheaper than in the home country. Mexican labor is half of the US minimum wage of $7.25 and about a fourth of the average industrial workers’ salary of $15.70. Similarly, wages in Poland and Romania are considerably lower than those in Germany and Italy.

2. The ability to establish concrete supply chains

Many nearshoring companies have well-developed supply chains due to their close interactions with their wealthier neighbors. Around $700B in trade crosses over the US-Mexican border every year and Mexico has a well-developed industrial sector, especially in the northern part of the country. Billions of dollars of goods travel between EU countries daily. To understand the extent of this trade, one only needs to look at the supply chain backups caused by Brexit. The reason for this is not only the proximity of the countries but the free trade zones established. NAFTA and the EU both facilitate mostly tariff-free trade and simplify cross-border movement. In the EU especially, crossing borders is more or less the same as traveling between states in the United States.

3. Time zone & travel times

Another advantage is operating in the same or close to the same time zone and quick travel times. This may seem small but anyone who has traveled regularly between North America and Asia or had conference calls can attest to the difficulty of 12-hour time differences and 12+ hour flights.

 

 

 

The drawbacks faced by near-shoring companies

However, as with any other change, there are bound to be drawbacks:

1. Higher transportation costs

While overall costs in Mexico are cheaper, transportation costs are higher and, until recently, Mexican labor was still more expensive than Chinese labor. There are the costs of raw materials some of which need to be imported from the very countries that nearshoring is trying to get away from. There is also a high turnover cost (though this is shared in China). It is not uncommon for Mexican factories to have turnover rates of 20% per month. High turnover has a strong impact on productivity.

2. Political risks and concerns

There are greater risks on the political front, especially in Mexico and Central America. Both areas have very high crime rates and serious problems with corruption. Just like China, they can bear the brunt of domestic political concerns. For example, Texas Governor Greg Abbot’s recent actions cost companies $1 billion a week. These events happen with some frequency. Russia’s invasion of Ukraine has made companies skittish about further involvement with neighboring EU members.

3. Strong dependence on currency fluctuations

The currency fluctuations are also an element to consider. A stronger US dollar makes Mexican goods a better deal. Having the Euro in Eastern European countries is helpful at times, but it also raises price levels in those countries higher than they would be if they had their own currencies and makes them somewhat less competitive.

The Bottom Line

Nearshoring has many advantages but before making that move, it is vital to compare your company’s specific needs and costs to each potential location.

 


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Manufacturing Management

Topics: Manufacturing Consulting, Manufacturing In China, Process Improvement, Shoring

David Collins III

David Collins III

David was a Senior Strategy Consultant for Deloitte, served in Iraq as a Special Operations Civil Affairs soldier, and as a Governance Advisor to the Afghan Government with the Department of State. At CMC, David advises clients on strategy and investments.

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