Key takeaways:
- Nearshoring can help protect against supply chain disruptions
- Certain industries benefit more from nearshoring than others
- Moving production and operations to a new country is expensive and complex
- Banks can help facilitate local vendor and financing connections
Nearshoring, the practice of bringing business operations closer to home, has become a tempting prospect in recent years. Supply chain disruptions caused by COVID-19 lockdowns, geopolitical tensions, and natural disasters have pushed nearshoring even further top of mind for businesses operating abroad. One 2022 global study by McKinsey & Company found that 44% of surveyed supply chain leaders have or are planning to regionalize their supply chain†.
Companies are drawn to nearshoring because it could offer lower labor costs and shorter lead times. However, moving supply chains and production closer can be much more complex and expensive than it might seem. Companies should consider how they’ll obtain financing, build new relationships, and overcome unexpected barriers before pursuing nearshoring.
What benefits does nearshoring offer companies?
Nearshoring is one solution to help companies protect against disruptions. Bringing operations closer to home could reduce risk without affecting a company’s ability to grow.
“Companies want to sell in increasingly more markets than they are right now, but they want to do it in a way that doesn’t create a lot of supply chain and production links,” says Andy Arduini, SVP, Senior Managing Director, Global Advisory & Working Capital Finance, at Huntington. “Nearshoring can bring core operational functions closer to their home base and reduce the number of links in their supply chain.”
Lowering risk in the supply chain isn’t the only potential benefit of nearshoring. Geographic proximity allows closer collaboration between a U.S. company and its manufacturing teams. Being in the same or comparable time zones could reduce communication delays, leading to swifter decision-making and problem-solving.
Shifting manufacturing to emerging markets with similar labor costs to southeast Asia, such as Mexico, could offer a cost-savings benefit. Shipping from Mexico to the U.S. takes an average of four days, compared with three to five weeks from southeast Asia‡. Companies moving to these low-cost areas may remain price competitive in their domestic market and shrink the geographic divide.
However, despite its many benefits, nearshoring isn’t the right choice for every organization.
When nearshoring isn’t the right move
Certain industries can benefit more from nearshoring, such as goods manufacturing, customer support, healthcare, and retail distribution. Even so, customer location is a significant consideration. “Depending on where you’re selling, nearshoring might not make sense,” says Arduini. “Companies selling in Southeast Asia, for example, wouldn’t benefit from moving manufacturing out of that area. You couldn’t remain competitive by doing that.”
Supply chains dependent on other suppliers also might not benefit from nearshoring. Companies relying on unique components that can only be manufactured in specific places could incur far greater costs moving part of their supply chain.
Even when it makes sense for a company to move operations, nearshoring doesn’t always reduce supply chain friction as expected. There are some situations where nearshoring could create new supplier disruptions. Depending on where a company moves its operations, it might have access to a limited number of suppliers for specific products or components. Delays from those suppliers or components could create problems for a company still gaining its foothold in a new market.
Challenges with financing and building connections in a new market
Determining whether nearshoring is right for your company is the first step. From there, the next consideration is funding. Moving production and operations to a new country is expensive and complex, and funds are not always easy to secure.
“Raising funding in an emerging market like Mexico’s can be a significant hurdle,” says Arduini. “If banks in the U.S. and local financial institutions don’t want to finance their operations, business owners are forced to use their own money and equity to do it.”
Nearshoring requires investments in facilities, equipment, training, and labor. If a company lacks the equity needed to keep up with these investments, as is the case for many, maintaining its bottom line might be a struggle. Operating in a new country with different currencies could expose companies to foreign exchange risks, such as currency fluctuations or exchange rate volatility. Companies will likely need to allocate funds to hedge against these risks or develop strategies to mitigate their impact.
Developing local relationships with suppliers and partners is also vital to nearshoring. But making those connections in the first place is a barrier, as most of these companies have yet to be in these markets before.
“When customers come to us, they already know they want to pursue nearshoring. They’re looking for experienced professionals and contacts in this new market to help them,” says Arduini. “They need those connections to be successful.”
Financial institutions with global capabilities can often help forge those connections. Companies that plan to enter a new market can work with their financial institutions to establish local bank relationships, connect with suppliers, and build partnerships.
What to expect in the future
Many companies seeking nearshoring are doing so to reduce risk, says Arduini. Though the current focus is on shrinking the supply chain to minimize bottlenecks, the pendulum could swing in the other direction.
“In the long term, we might start seeing investments into those largest growing markets again,” he says. “Investments won’t be chasing lower cost of production. It will be chasing growth.”
If nearshoring makes sense for your company, it can offer many benefits in lower costs and shorter supply chains. However, the decision shouldn’t be made lightly.
