As global supply chains continue to optimize and reshuffle, nearshoring, the process of relocating manufacturing and other business operations closer to home markets or regional hubs, has emerged as a growing strategy. While the economic and logistical benefits of nearshoring often outweigh its cons, in the wake of a flourishing trade economy and job opportunities being created, nearshoring’s impact on labor dynamics and social aspects within communities deserves a deeper examination.

The success of nearshoring initiatives depends heavily on opting for industrial hubs that are already well-established and equipped for nearshoring operations in their relevant industries. Selecting a country with the availability of skilled labor and an appropriately robust infrastructure can improve factors such as operational efficiency and cost-effectiveness, leading to more favorable business outcomes.

Vietnam vibes: Electronics surge in the Southeast

Having emerged as a key electronics manufacturing hub in Asia, Vietnam’s participation in the Regional Comprehensive Economic Partnership (RCEP) has enhanced its attractiveness for nearshoring. Major electronics manufacturers like Samsung, LG, and Intel have significant production facilities in Vietnam. The country’s increasingly skilled labor force, coupled with supportive government policies like corporate income tax breaks for the high-tech sector, or for those working in underdeveloped zones, have facilitated the rapid growth of the electronics manufacturing sector, contributing 17.8 percent to its manufacturing sector. These factors have led to Vietnam's electronics exports reaching US$142 billion (€130 billion) in 2023, showcasing its vital role in the global supply chain.

India takes the lead in IT, BPO, and pharmaceutical

India is renowned for its IT and Business Process Outsourcing (BPO) sectors, which are currently valued at US$40 billion, making it a preferred nearshoring destination for technology and service-related industries, with cities like Bangalore, Hyderabad, and Pune serving as major hubs. Other factors to consider when weighing nearshoring options is the availability of a highly skilled English-speaking workforce, on top of having a supportive infrastructure. India’s possession of both has attracted companies like Infosys, TCS, and Wipro to expand their operations.

The government’s recognition of the need for and its subsequent investment in appropriate infrastructure has led to tremendous improvements in its connectivity, power, and technology, with the nation tapping on renewable energy, the Internet of Things (IoT), and 5G technology to enhance communication networks. These investments have led to India's IT-BPM industry being valued at US$194 billion (€178 billion) in 2023, an impressive year-on-year increase of 2.3 percent.

India’s pharmaceutical industry is another well-established sector. With a strong base of skilled scientists and technicians, the country has become a major exporter of generic drugs. Companies like Dr. Reddy's Laboratories and Cipla have leveraged India's industrial capabilities to expand their global presence. In FY2024, India’s pharmaceutical exports rose to US$27.9 billion (€19.2 billion), reflecting the return of its government’s investments in its infrastructure and skilled workforce, important factors that should be taken note of when considering nearshoring.

A cost-effective and skilled approach in Mexico

Mexico stands out as a prime destination for nearshoring. Its robust technical education system is closely linked to the private sector, particularly in industries such as automotive, electronics, and manufacturing. In 2021–2022, over 400,000 technical graduates entered the workforce, with significant concentrations in programming, computer support, electromechanics, and the automotive sector. This alignment ensures that companies can access talent with the precise skills needed for advanced manufacturing and innovation.

One of the most significant benefits of nearshoring to Mexico is cost savings. Despite recent increases in minimum wage, Mexico’s labor costs remain substantially lower than those in the U.S., Western Europe, and even China. This cost advantage, combined with a workforce that is not only skilled but also culturally and linguistically aligned with North American business practices, enables smoother integration and communication for nearshoring operations.

(Socially) responsible nearshoring

Ensuring favorable working conditions includes providing safe and healthy workplaces, fair wages, reasonable working hours, and adequate rest periods. When relocating operations, businesses often encounter regions with different labor standards and practices. While nearshoring has led to the establishment of numerous manufacturing facilities, companies must also address the social impacts, such as the strain on local infrastructure and resources.

It has also raised concerns about workplace safety and fair labor practices, ensuring that companies are not just capitalizing on affordable labor. The success of nearshoring initiatives hinges not only on economic factors but also on how well companies address the social aspects of their operations.

The risk of worker exploitation can increase if proper labor rights are not enforced, especially in countries with less stringent labor laws. Companies must adopt policies to protect workers' rights, including the right to unionize and access healthcare coverage. Ensuring fair treatment and preventing discrimination and harassment are also essential.

Companies moving to these regions should invest in improving workplace safety standards, providing necessary protective equipment, and ensuring that working hours do not lead to employee burnout. Communication with local communities and stakeholders to build trust and ensure that their operations positively impact the surrounding areas is also essential.

Additionally, community engagement and Corporate Social Responsibility (CSR) initiatives can help mitigate potential resistance to new developments. By supporting local education and healthcare programs, businesses can contribute to the overall well-being of the community, strengthening their social license to operate. Before investing in nearshoring options, businesses must factor these considerations in as part of their potential costs. Businesses should also invest in upskilling their employees to ensure that their skills stay relevant in this rapidly changing and digitizing economy.

The potential for cultural shifts and communication barriers also significantly shape working conditions in nearshoring destinations. Cultural differences and language barriers can lead to misunderstandings and conflicts between management and workers, adversely affecting workplace harmony and productivity.

Effective communication and cultural integration are essential to address these challenges. Companies must provide cultural training for their managers and create inclusive policies that respect local customs and practices. Providing cultural sensitivity training and fostering an inclusive workplace for businesses nearshoring to culturally tangential nations will smoothen the navigation of a diverse cultural landscape and varied work cultures, enhancing employee satisfaction and reducing turnover rates.

Adding the human touch to nearshoring

While nearshoring brings undeniable economic benefits and growth opportunities, it also presents a nuanced landscape that requires careful navigation.

From selecting the right industrial hub to ensuring robust labor rights and fostering cultural integration, companies must balance their pursuit of efficiency with a commitment to social responsibility.

After all, in the grand tapestry of globalization, it is not just about moving operations closer to home—it is about weaving a sustainable and harmonious future where economic and social fabrics are strengthened in tandem.