For decades, China has been considered a key player in global manufacturing, with its inexpensive, skilled labor and its ability to support supply chain infrastructure. But now, many U.S. businesses are instead turning their sights toward Mexico and Canada, which have seen an increase in nearshoring over the past few years.
In the past, offshoring — moving manufacturing operations over to distant countries, like China — was lauded as a savvy business move. But after the pandemic proved just how fragile the supply chain is, companies are reconsidering offshoring in favor of nearshoring, now an increasingly desirable option for U.S. businesses.
Although nearshoring trends are on the rise, the pandemic isn’t the only factor influencing this shift. So, beyond the pandemic, what’s the appeal of nearshoring?
Read on to find out.
What is nearshoring?
In contrast to offshoring, nearshoring is the process of moving business operations to nearby countries. For example, many U.S. companies are choosing to establish their manufacturing operations in countries like Mexico and Canada, rather than in nations like China or South Korea.
Why has nearshoring become more common?
According to a recent Gartner study, 88% of small-to-medium-sized companies have changed their suppliers to ones closer to their main operations.
There are multiple reasons behind this trend, one of which being the pandemic. Many companies experienced firsthand just how detrimental relying on overseas shipments can be, especially during times of crisis. The negative impacts of the pandemic were felt by customers, distributors, and manufacturers alike. And, for companies ever striving for resilience in the face of adversity, the pandemic was enough of a wake-up call to rouse many companies into exploring neighboring nations for their manufacturing needs.
Another key reason for this shift toward nearshoring is labor costs. In China, foreign business interests, higher death rates than birth rates, and ongoing issues surrounding labor ethics and workers’ rights have all created high labor costs, which disincentivizes ongoing manufacturing in the nation. Political tensions and issues surrounding trade agreements continue to complicate offshoring in China and impact the U.S.’s willingness to establish manufacturing infrastructure there.
Nearshore development in Mexico, on the other hand, appears to be a likely replacement for many U.S. companies. The U.S.’s southerly neighbor holds abundant resources, a large labor pool, and the capacity to fill the gap left by China.
In July of 2020, the United States-Mexico-Canada Agreement (USMCA) entered into force, effectively serving as a modernized substitute for the North American Free Trade Agreement (NAFTA). This agreement laid the groundwork for a mutually beneficial arrangement for all parties involved and paved the way for the rise in nearshoring.
Benefits of nearshoring
Nearshoring hosts a wide variety of benefits for U.S. companies, including sustainability, cost, shipping speed, and flexibility.
In the era of increased awareness of the effects of man-made climate change, sustainability is one key factor motivating the shift toward nearshoring. Less shipping, or shipping across shorter distances, equals a smaller carbon footprint than shipping overseas. As we move closer toward emission goal deadlines, there is a clear incentive to reduce carbon emissions.
Finances also play a part in the shift away from offshoring. Shorter shipping distances means that U.S. companies can save on transportation costs. In addition, companies stand to gain higher customer retention rates, as they can provide increased transparency and greater data visibility in the supply chain.
Shipping transportation cycles are also a factor. When shippers are closer to customers and suppliers, materials can arrive faster. This incentive appeals to the collective need for shorter turnaround times across the supply chain.
Nearshoring also improves supply chain flexibility. When the supply chain is in one general region, and distribution routes are shorter, freight handling becomes more manageable and quality control improves. Greg DiPalma, VP Sales Executive at XPO, a freight and logistics company, said on the matter: “With the rise of cross-border shipping, [less-than-truckload shipping] has become an attractive solution.”
And lastly, nearshoring creates more jobs for both the U.S. and Mexico. The U.S. benefits from the process with cheaper supply chain costs and increased efficiency. Mexico, on the other hand, receives a boost in job creation rates and more national economic growth from fulfilling U.S. companies’ manufacturing needs.
GlobeCon is here for your supply chain needs
When comparing nearshoring versus offshoring, it’s clear that many companies feel it’s no contest at all. Nearshoring appears to be the way of the future for many U.S. companies.
But while nearshoring and reshoring are on the rise, transferring your business’s operations can be a big risk and a massive undertaking.
Thankfully, no matter where your manufacturing operations are based, GlobeCon is your partner at the ports of Long Beach and Los Angeles. With over 35 years of experience, we can help you with your supply chain needs, including freight transport to anywhere in the United States, Canada, and Mexico.