Nearshoring is a supply chain diversification strategy where certain business processes are outsourced to external companies in nearby countries or locations. It has gained significant traction in recent years due to the global spike in labor costs. In the European Union (EU), for example, hourly labor costs increased by 5.1 percent in the euro area and 5.5 percent in the EU within the first quarter of 2024 alone.

In addition to rising labor costs, the world has experienced several geopolitical tensions in recent years, triggering food shortages and price inflations that inevitably impact supply chains.

Thus, nearshoring has been deployed to combat these issues, serving as a crucial means for businesses to build supply chain resilience and minimize disruptions. Given the importance of nearshoring to supply chains, it is imperative to understand the strategy, how it works, and how it impacts your business and customers.

What does nearshoring mean? What is nearshoring in supply chain management?

In supply chain management, nearshoring is the process of outsourcing manufacturing or service operations to geographically nearby countries. Unlike offshoring, where operations are offloaded to distant locations, proximity is key to nearshoring. For example, a company based in the U.S.A. would choose to nearshore to Mexico to enjoy time savings, lower operational costs, and greater efficiency.

Malaysia is one prime destination for nearshoring, with businesses from the electronics and electrical (E&E), aerospace, and medical device sectors setting up operations in this country to reinforce the Southeast Asian segments of their supply chains.

Who is most likely to use nearshoring?

While nearshoring benefits many industries, manufacturing is the likeliest to deploy this strategy.

This is especially true in the wake of the Covid-19 pandemic, where the manufacturing lines of many companies were severely disrupted. Established brands like Apple and Honda were not spared, with many of their offshored factories in far-flung locations in China ceasing operations.

This has prompted manufacturing businesses and companies with manufacturing arms to nearshore as a mitigating strategy. According to a 2020 Gartner survey report, at least 33 percent of interviewed business leaders moved their manufacturing and sourcing operations out of China or planned to do so in the following two to three years. As Gartner senior director analyst Kamala Raman shared in the report, many of these businesses began exploring regional manufacturing as an alternative to build network resilience.

Aside from manufacturing, logistics, and supply chain management companies are also highly likely to nearshore operations to reduce costs. Due to strict regulations that imposed travel and entry bans, international imports and exports were disrupted. This prompted the logistics industry to explore supply chain diversification techniques like nearshoring.

Why is nearshoring becoming desirable?

Many factors have contributed to the rise in nearshoring’s popularity. Key among these is the Covid-19 pandemic, which exposed the fragility of long-distance supply chains—particularly those where all or some of their components were nearshored. Nearshoring mitigates this issue by ensuring supply chains remain operational with minimal disruptions during crises.

Rising labor costs are another contributing factor that has taken root in traditionally low-cost manufacturing hubs like China and India. Nearshoring combats this issue by positioning businesses in countries with lower labor costs. Mexico is one such country, where the average fully burdened hourly wage is US$4.90 (€4.48).

Geopolitical tensions have further pushed businesses to remap their supply chains through nearshoring. To illustrate, the ongoing Russia-Ukraine war has spurred nearshoring close to Europe, with over US$82 billion (€77.43 billion) pledged to foreign manufacturing projects in 15 nearshoring locations in central and Eastern Europe and North Africa between 2022 and 2023.

How are changes in the economy driving nearshoring?

While Covid-19 accelerated the adoption of nearshoring and other supply chain diversification strategies, other global issues have also driven this trend. These include wars, trade tensions, protectionist policies, and spiking fuel costs.

Furthermore, the consumer market has also seen a trend toward faster delivery and greater transparency, necessitating businesses to bring their sourcing operations closer to their target markets.

What are the advantages of nearshoring?

Apart from increased profits, the businesses enjoy many advantages, given that nearshoring positions their operations in locations that drive costs down.

1. Reduced lead times

Nearshoring closes the geographical gaps between different segments of the supply chain, shortening the distance traveled by goods and components. This leads to robust supply chains that clock faster deliveries and respond swiftly to market demands.

2. Greater transparency and control

A perennial problem businesses face when they outsource their operations is reduced visibility and control over their operations in the destination country. 

Nearshoring mitigates this problem, as the proximity to their destination countries translates into more frequent site visits, improved communication and alignment of business expectations, and tighter control over crucial processes.

3. Mitigated risks

Diversifying a business’ range of supplier locations and combining it with other supply chain diversification techniques reduces reliance on single sources. This builds supply chain resilience, ensuring businesses remain operational even during global disruptions like trade wars and natural disasters.

4. Greater cultural compatibility

By sharing time zones and potentially similar cultural backgrounds with the nearshored country, businesses are better equipped to communicate and collaborate with their vendors and suppliers, driving greater alignment on objectives and expectations across units.

5. Reduced carbon footprint

Nearshoring shortens transport distances significantly. In some cases, it eliminates the need for air and sea freight. This naturally leads to reduced carbon emissions, enabling businesses to be environmentally sustainable.

How do nearshoring, offshoring, and reshoring differ?

While all three terms refer to supply chain diversification strategies, the location is the key differentiator.

Offshoring takes outsourcing further, extending business processes off the shore to a different country. This strategy is traditionally deployed to lower production costs.

Nearshoring is the opposite of offshoring, bringing outsourcing nearer to the source country by transferring processes to geographically close countries.

Finally, reshoring reverses all outsourcing activities, returning them to their source market.

What companies are most likely to use nearshoring or reshoring?

Companies that closely collaborate with their suppliers or mitigate tariffs levied on imported goods are primed to nearshore or reshore.

Logistics businesses prioritizing swift delivery times and directly controlling their production lines are also likelier to nearshore or reshore.

What is the likely outcome of nearshoring or reshoring?

Nearshoring and reshoring will create resilient supply chains primed to weather disruptions. Apart from being diversified, these supply chains are also geographically near or within their source countries to facilitate greater efficiency and lower costs.

These two strategies also encourage regional collaborations, closer economic ties, and stronger trade partnerships.

What types of policy measures do governments implement to incentivize nearshoring activities?

To build favorable nearshoring environments, governments can consider implementing incentive policies.

Tax incentives are among the primary tools used to encourage companies to nearshore their operations in Asia. For example,  under the Regional Comprehensive Economic Partnership (RCEP) agreement, participating countries across Asia can benefit from reduced tariffs and streamlined trade rules, which are expected to lower costs for businesses that meet the agreement’s origin requirements. This is particularly attractive for manufacturing and assembly operations aiming to serve multiple markets in the Asia-Pacific region.

In addition to tax breaks, governments in Asia are investing in infrastructure projects to improve connectivity. Indonesia’s government, for example, has allocated significant resources toward expanding its maritime and logistics infrastructure, including upgrading port facilities in major cities.

Finally, simplifying customs processes and cutting down regulatory complexity are approaches that governments in Asia are adopting. In India, for instance, the government has introduced the Make in India initiative, which includes regulatory reforms to ease customs procedures, streamline approvals, and reduce operational bottlenecks. This program offers tax incentives for companies establishing manufacturing hubs in India, facilitating quicker access to the Indian market and encouraging nearshoring.

Which companies should try nearshoring their operations?

Companies that have been impacted by global downturns, or are looking for cheaper alternatives for production should nearshore their operations. While the U.S. and a number of EU countries have been actively nearshoring, global businesses have also been moving their operations to markets with lower operations costs, from China (to India) and Singapore (to Malaysia and other Southeast Asian countries).

What role do trade agreements and government measures play in promoting nearshoring initiatives?

Trade agreements and government measures intertwine to facilitate nearshoring activities by breaking down trade barriers and establishing fair trade practices.

Such initiatives also simplify regulations to make it easier for companies to conduct cross-regional trade.

Finally, they clearly outline the parameters of a stable and predictable regulatory environment, giving businesses the confidence to conduct cross-regional collaborations.

In today’s volatile global market, nearshoring has become a cornerstone strategy for businesses seeking to diversify and stabilize their supply chains, ensuring resilience and continuity. Beyond a trend, it is a transformative approach shaping the future of supply chain management that is here to stay. Understanding and leveraging nearshoring is no longer optional but essential for companies seeking to adapt and thrive.