Nearshoring isn’t just a buzzword. The pandemic highlighted a dire need for supply chain resilience across the board.  

While supply shortages, bottlenecks, and crazy-long lead times hurt, they painted a clear picture of what your supply chain needs going forward. For many, that picture looked a lot like the map of North America.

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In this post, we’re dissecting the nearshoring trend. Keep reading to learn about the current state of nearshoring and why so many United States companies are shedding their reliance on Chinese supply chains. 

Contents: 

• What is nearshoring? 
• The current state of nearshoring 
• Where to nearshore manufacturing? 
• Nearshoring advantages 
• Nearshoring limitations 
• Nearshoring examples 
• Nearshoring best practices 
• Evaluate nearshoring strategy with network design 

What Is Nearshoring?

Nearshoring is a process where companies shift production from overseas to nearby countries that share a market, language, or time zone. While not a brand-new concept, the phenomenon recently gained momentum because of supply chain disruptions during and after the pandemic.  

The ideal nearshoring country has a qualified workforce, affordable labor costs, and a compatible time zone. This offshoring alternative gives companies the cultural and logistical benefits of manufacturing close to home, but at an affordable cost. 

Nearshoring doesn’t have to be a complete restructuring of the supply chain. While some companies are using this manufacturing method to facilitate a gradual shift away from reliance on China, others are building onto current supplier networks as a means for diversification. 

In fact, it’s been a common short-term solution to supply chain issues for many companies in recent years. Companies can use suppliers closer to home as a backup when their primary suppliers face disruption.  

The nearshoring process may start by adding on secondary suppliers or a contract manufacturer in Mexico while maintaining relationships with partners overseas.

What Is Reshoring? 

Reshoring (also called onshoring) is the antithesis of the long-beloved offshoring method. In other words, it’s the act of returning production and manufacturing to the company’s home country.  

Reshoring of manufacturing has its ups and downs. Returning production to the company’s home country can strengthen local economies by creating new manufacturing jobs, lowering unemployment rates, and balancing trade deficits.  

However, there’s a reason China has maintained its status as the world’s manufacturing powerhouse for so long. Labor has always been more affordable in China than in the United States, and they’ve built out a strong manufacturing infrastructure. Reshoring increases labor costs and may require more logistics planning to get the job done. 

Nearshoring vs Reshoring 

Nearshoring brings manufacturing close to home, but not all the way. Companies take advantage of low labor costs and manufacturing hubs like those in China, without the 30 to 40-day sea freight.  

The Current State of Nearshoring 

North American nearshoring is experiencing a manufacturing boom stronger than any since the move to China back in the 1990s, and Mexico seems to be the destination of choice. 

As of May 2023 data, Mexico leads the U.S. Census Bureau’s Top Trade Partner list, accounting for 15.9% of total trade. Canada is a close second at 15.7% and China takes the third position at 10.8%. 

Souring sentiment toward China seems to be the nearshoring boom’s main driver. China has been the world’s manufacturer for decades but is slipping out of favor due to a combination of new tariffs, unpredictable Covid lockdowns, and geopolitical tensions.  

China supply chain issues have continued to make offshoring more risky: 

• Long transportation distance  
• Language barriers and conflicting time zones complicate communication 
• The culture doesn’t always fit the market 

Consistent, clear communication and accurate forecasting are essential for complex supply chains.  

Since the start of the pandemic, the distance, communication struggles, and lack of insight into foreign governmental policies rendered transparency and accurate forecasting impossible. That tipped the cost-benefit scale into the negative for many complex supply chains offshoring in China. 

How Popular Is Nearshoring? 

According to the Uber Freight Q2 Market Update and Outlook Report, more than 400 companies will start business in Mexico in 2023. The country expects 25 new industrial parks (an investment totaling $25 billion).  

Currently, manufacturing exports account for 40% of Mexico’s $1.3 trillion economy. Nearshoring has the potential to boost Mexican manufacturing exports to the US from $455 billion to $609 billion in the next five years, which could raise Mexico’s annual GDP from 1.9% to 3%. 

Where to Nearshore Manufacturing? 

The best nearshoring country will depend on your priorities. Answering these questions will help you narrow down the country that best fits your needs. 

Questions to answer: 

• What are you producing? 
• How much are you willing to pay for labor? 
• How important is free trade? 
• What type of talent do you need? 
• What infrastructure do you need? 
• Are you concerned about intellectual property rights? 
• What are your supply chain sustainability objectives? 
• What distribution channels will you use? 

Currently, the United States has comprehensive free trade agreements with 20 countries, many of which are geographically close enough to be nearshoring candidates.  

• Mexico 
• Canada 
• Costa Rica 
• El Salvador 
• Guatemala 
• Honduras 
• Nicaragua 
• Dominican Republic 
• Chile 
• Columbia 

These countries don’t have free trade agreements in force, but may still offer nearshoring opportunities: 

• Uruguay 
• Brazil 
• Venezuela 
• Argentina

 

 

Nearshoring in Mexico 

Mexico is being heralded as the new China. Here are a couple reasons why our neighbor to the south is currently most popular nearshoring destination:

Proximity 

Mexico is a lot closer to the United States than China, which means manufacturing in Mexico shortens the supply chain. 

Get products to the US-Mexico border, and you can distribute them throughout the entire United States. Close proximity to the supplier opens up additional exportation channels. Transportation is faster, less expensive, and the export logistics carry fewer risks.  

Maquiladoras (manufacturing plants near the border, often with a foreign parent company) and their infrastructure are growing quickly, further incentivizing US companies to reduce their reliance on China. 

United States-Mexico-Canada Agreement (USMCA) 

Implemented in 2020, the United States-Mexico-Canada Agreement carries duty-free incentives for companies manufacturing in North America. The trade incentives made it possible for manufacturers in North America to compete with low-wage countries like China without compromising factors like safety and economic protection for workers.  

Auto manufacturers, for example, must certify that 75% of their steel and aluminum originates from Canada, Mexico, or the United States to quality for duty-free trade. The UMSCA also requires at least 70% of a vehicle’s steel and aluminum to originate from North America.  

They must also adhere to the Labor Value Content (LVC) requirement that states a certain percentage of a finished product must be manufactured by workers earning at least $16/hour.

Nearshoring Advantages 

Here are the most notable nearshoring benefits influencing companies to restructure their supply chains:

• Trade agreements: Countries like Mexico and Canada have better trade agreements than China, which broadens market access.
• Tax incentives: Manufacturing in Mexico or Canada is less expensive from a tax perspective. The lower tariffs can compensate for the labor cost disparity between North America and China. Additional tax incentives are available for companies nearshoring in Special Economic Zones (Mexican regions in need of economic investment).
• Labor access: Mexico has both a younger worker population and lower labor costs. In 2020, China’s median age was 38.4 and Mexico’s median age was 29.3. Labor costs per hour were $6.50 per hour in China and $4.82 per hour in Mexico. Additionally, China’s population dropped by about 850,000 people in 2022. Demographic modeling by the United Nations predicts the population will continue to decrease to 1.313 billion by 2050 and below 800 million by the year 2100.
• Communication: Manufacturers can develop close supplier relationships, which helps prevent future shipping delays. The proximity also makes it much easier to visit on-site.
  
  Time zones differ by two or three hours rather than 18, meaning communication can happen in real time. And since most of North America speaks English or Spanish, language barriers aren’t as intrusive.
• Sustainability: Shorter supply chains are more sustainable due to lower energy costs, transportation costs, and emissions.
• Resilience: The fewer intermediaries, the easier it is to identify errors and rebound post-disruption. Overall, shorter supply chains can be more resilient, flexible, and innovative.
• Diversification: Having suppliers overseas and close to home protects the supply chain from potential disruptions. When one fails, the other can carry its weight.
• Shipping costs: Shipping is much easier by land than by sea, and nearshoring means the travel distance isn’t too far. Typically, transporting a 53-foot trailer from Central Mexico into the United States costs less than half the price of shipping a 40-foot container from Shanghai.
• Speed: Nearshoring facilitates a faster speed to market. Products are transported from manufacturers to customers at a faster rate. For example, typical offshoring lead times are estimated in weeks or months, especially since the pandemic. Mexican lead times are measured in days.
• Intellectual property rights: Mexico and Canada offer stronger protection of intellectual property rights than China.
• Currency: Currently, the Peso offers less volatile currency fluctuation for foreign direct investment than the Yuan.  

Nearshoring Limitations 

While the change is happening fast, there are bound to be growing pains. Experts predict troubles relating to environmental regulations, skilled labor access, and infrastructure quality. Companies planning to nearshore should pay attention to the following potential drawbacks: 

Energy infrastructure 

Energy infrastructure is the most significant limiting factor, as Mexico has underinvested in the electricity sector and needs to improve grid capacity. This would require $40 billion in incremental spending to build enough generation capacity to power the nearshoring-driven expansion.  

Switching costs 

Restructuring the supply chain can require a few years of work upfront, mainly due to the switching costs. Even introducing a new supplier to the network can get expensive. 

Switching costs to be aware of: 

• A safety net of extra stock to maintain production throughout the transition 
• Redesigning supply chains  
• Onboard new suppliers  
• Offboarding old suppliers 
• Ramping up new facilities and suppliers 
• Validating new suppliers, materials, and products

Trained labor 

Because offshoring has been the norm for decades, knowledge and capability are now concentrated in Asia. Some are concerned that skilled talent will be hard to find elsewhere.  

As technology evolves, manufacturers need employees who specialize in technical fields like AI, IoT, 5G, and blockchain. A global talent shortage could complicate sourcing these vital employees. 

“Nearshoring will happen over time, not overnight.”–Fernando D. Sedano, Morgan Stanley’s Latin America Economist.

Nearshoring Examples 

Audi, Baic Group, BMW, Stellantis (made up of FCA and PSA Group), Ford, General Motors, Honda, Hyundai, Jac by Giant Motors, Kia, Mazda, Mercedes Benz, Nissan, Toyota, and Volkswagen are all established passenger vehicle manufacturers in Mexico. 

Tesla is slated to join that list. In March of 2023, they announced plans to build a new factory in Monterrey, Mexico, about 135 miles from border city Laredo, Texas. Elon Musk said “We’ll continue to expand production at all of our existing factories. So this is not moving output to anywhere, from anywhere. This is supplemental production.”  

According to Apple’s 2022 supplier list, two suppliers have primary manufacturing locations in Mexico: Skyworks Solutions Incorporated and Molex Incorporated. Major iPhone manufacturer Foxconn also established a headquarters in Mexico in early 2023. 

Nearshoring Best Practices 

Deciding to nearshore won’t solve all your supply chain issues overnight. A successful nearshoring strategy requires careful planning, efficient communication, and the right technology. Before acting, consider these best practices: 

Make reliable cost estimates 

When calculating the business case for nearshoring, it’s easy to miss the mark. The first step is to calculate total landing costs (or the total cost of manufacturing and delivering the product to the customer). That includes production, transportation, customs duties, handling, currency conversions, insurance, etc. Still, landed costs don’t paint the full picture– the calculations stop once the product reaches the distribution center.  

This is why the cost-to-serve number is key to assessing the cost-benefit ratio for nearshoring. Tacking on this KPI introduces factors like the cost of sales, service, and last-mile logistics to the equation. Nearshoring tends to lower the total cost-to-serve, which can balance increased labor costs.  

Consider supply chain segmentation 

Be picky with your nearshoring strategy. It may make sense for some of your products or materials, but not all. And remember– diversification is one of the main benefits. If you shift all production from overseas to Mexico, you’ll be taking all your eggs out of one basket and plopping them in another. It may be a better basket, but you’re still stuck relying on it to never face disruption.  

Considering we face a volatile economy, record-breaking weather events, and geopolitical uncertainties, you’re probably better off growing your supplier network. 

That’s where supply chain segmentation enters the picture. It’s the process of varying your sourcing and production strategy according to different customer groups, products, or distribution channels. Supply chain segmentation takes a granular approach by defining customer/product segments that could perform better under unique circumstances.  

Historically, nearshoring is ideal for high-margin products and customer segments that require responsiveness. Now that we’ve faced unprecedented supply chain disruptions for multiple years, there may be certain products and materials that are safer produced closer to home. 

Think long-term 

Focus on building lasting resilience rather than simply addressing present-day disruptions. Factors like customer demand and geopolitical tensions are bound to change and shouldn’t be the foundation of your nearshoring decision. Instead, focus on understanding the supply chain’s strengths and weaknesses and how nearshoring will impact them in the long run. 

Invest in the right technology 

Real-time communication is vital to supply chain agility no matter how close you get to the suppliers. Complex supply chains must have digital integration across all supply chain nodes. Technology drives the communication, transparency, and forecasting necessary to overcome potential disruptions.  

Companies need real-time data on demand trends and potential disruptions. Without it, they could end up like the automotive manufacturers who responded to low demand by halting chip orders, only to be SOL when vehicle demand skyrocketed soon after. 

In addition to facilitating communication and transparency, supply chain network design technology enables rapid modeling of thousands of scenarios so companies can quickly rebound when disruptions occur.  

Evaluate Nearshoring Strategies with the Cosmic Frog Supply Chain Network Design Platform 

Optilogic Cosmic Frog supply chain network design plays a crucial role in supporting near-shoring supply chain decisions.  

Use Cosmic Frog to look at your supply chain network holistically. You can look beyond just finding the cheapest sourcing option and evaluate different scenarios to see how they will impact your supply chain design at a larger scope with total cost and resiliency. 

By combining and incorporating cost, supply chain simulation, and risk into your decision-making, Cosmic Frog can help you identify the best possible sourcing solution within a single platform.  

Here are a few ways network optimization can help with near-shoring supply chain decisions: 

• Transportation and Distribution Costs: Network optimization models can analyze the transportation costs associated with different supply chain configurations, including various near-shoring options. By considering factors such as distance, transit times, fuel prices, tolls, and customs duties, the optimal distribution network can be determined, minimizing transportation expenses.
• Inventory Management: Near-shoring may require adjustments to inventory levels and locations. Network optimization can assess demand patterns, lead times, and regional demand variations to determine the appropriate inventory placement and quantities. This can lead to reduced inventory carrying costs while ensuring sufficient stock availability.
• Risk Mitigation: Network optimization models can assess supply chain risks, including geopolitical risks, natural disasters, and disruptions in specific regions. By spreading production and sourcing across multiple near-shore locations, the supply chain becomes more resilient and less susceptible to single-point failures.
• Lead Time Reduction: Near-shoring can often lead to shorter lead times compared to sourcing from distant offshore locations. Network optimization can analyze the impact of these reduced lead times on the overall supply chain and help businesses make informed decisions to expedite the flow of goods.
• Service Level Improvements: By optimizing the network and bringing production closer to the customer base, businesses can improve their service levels, meeting customer demand faster and more efficiently. This can lead to increased customer satisfaction and loyalty.
• Regulatory Compliance: Different regions may have specific regulatory requirements, tariffs, and trade agreements. Network optimization can help navigate these complexities, ensuring that supply chain decisions are in compliance with relevant regulations and trade policies.
• Environmental Impact: Near-shoring can potentially reduce the carbon footprint associated with transportation compared to long-distance sourcing. Network optimization can assess and compare the environmental impact of different supply chain configurations, helping organizations make environmentally responsible decisions.
• Collaboration with Suppliers: Near-shoring often involves working closely with local suppliers. Network optimization can facilitate collaboration and coordination between suppliers and help identify opportunities for mutual benefits, such as shared transportation or storage facilities.