Mercado | Article | Is nearshoring set to become the new norm for importers?

Is nearshoring set to become the new norm for importers?


Is nearshoring set to become the new norm for importers?

Here’s why the experts don’t think so.

As we’ve all seen first-hand, the supply chain has been through a turbulent few years. Through the chaos and confusion has come a recurring call from shareholders, board members, and the C-Suite alike: the import supply chain is in desperate need of greater resilience.
The response has been varied, however a swath of companies who depend on manufacturing to produce and deliver their goods (typically from thousands of miles away) are beginning to demonstrate their resilience by investing in three key areas: talent, technology, and — critically — location.

The terms offshoring and nearshoring have significantly increased in frequency across supply chain media, as businesses look to shift their manufacturing capabilities to counter the supply-side issues they faced as a result of market shifts through tariffs, trade wars, and most recently, the global pandemic.

Before we get too deep into the detail, we should first highlight the nuances between the two practices:

  • Offshoring is defined as the practice of outsourcing operations overseas, usually by companies from industrialized countries to less-developed countries, with the intention of reducing the cost of manufacturing goods.

  • Nearshoring is the practice of outsourcing operations closer to home — for example, Mexico has recently made a name for itself as an up-and-coming manufacturing hub for the US. The cost is somewhat reduced compared to local manufacturing (albeit not as much as more traditional manufacturing hubs located in Asia), however the close proximity and reduced travel time are incredibly convenient for importers.

As globalization took off in the latter half of the 20th century, offshoring became a key strategy for many Western firms in particular, as governments in developing nations, such as China and Singapore, offered significantly cheaper labor forces and raw materials relative to what North America and Europe had to offer. Central to its adoption however, was their ability to mobilize these workforces and deliver on demand at scale. For years, these systems grew and embedded themselves as “business as usual,” with many companies becoming beholden to ways of working designed over 50 years ago.

When the pandemic hit in later 2019, these systems became heavily exposed. The vulnerability of poorly connected networks, a lack of digitization and standardization, and the vast distances goods had to travel rendered nearly every importer in the US vulnerable to delays, defects, and a loss of sales in response to factories closing, suppliers being unable to get hold of raw materials, and shipping rates exploding.

Almost overnight, the world’s attention was grabbed by headlines focused on the chaos that ensued — and the question was raised: “Wouldn’t nearshoring solve all of these issues?”

The idea of moving manufacturing closer to home isn’t new — some companies have always prided themselves on being “Made in America,” while others require the skills of home-grown labor to produce products. And the benefits are numerous too: Shipping costs are often lower as goods have less distance to travel, whilst operations can operate in the same, if not similar, time zones creating greater channels of communication and efficiency. Crisis management can also be handled more effectively, as representatives have shorter distances to travel to rectify issues at-source, with language barriers often being minimal.

Some things never change

Yet, despite its numerous benefits, nearshoring has yet — if ever — to make its way to becoming the norm, and with good reason.

The main issue standing in the way is cost. Despite shifting conditions around the world, labor continues to trend cheaper in the global East, with raw material costs also being comparably cheaper than sourcing them from the US or the Americas more generally.

Secondly, by setting up offshore operations around the world, companies can leverage local market benefits and more expansive customer bases. Whilst globalization has seen a large deceleration, an organization can still benefit from having a wider geographic footprint compared to its rivals, helping to strengthen its position, sales, and market dominance.

Finally, many of the countries that provide offshore operations are still labeled as developing nations, and are typically eager to improve their economic standing by welcoming foreign businesses that can boost employment at home and help improve exports’ impact on GDP.

This is echoed in the substantial tax breaks and other financial incentives many countries considered viable for offshoring offer. For example, Malaysia provides a “Pioneer Status and the Investment Tax Allowance” which gives a five-year partial exemption from income tax, in addition to a requirement to only pay tax on 30% of its statutory income. Incentives like this are a major factor in the reasoning behind many businesses operating in offshore countries.

The bottom line

While executives, having faced a myriad of disruptions, remain resilient and innovative in doubling down on new ways to expand and strengthen their operations to minimize potential future concerns, it appears that there will continue to be a place for offshoring in order to maintain the fiscal benefits to importers’ bottom lines, and ensure maximum profits for shareholders whilst reducing the impact placed on customer prices.

If countries closer to home — such as those in Latin America — were to become more competitive with labor and price, then the tables may turn. However, until that becomes mainstream, it’s unlikely we’ll see a great shift away from the East and offshoring will continue to outperform nearshoring as a strategy for growth and scale.
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