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Nearshoring strategies: Crafting government plays for domestic manufacturing

The nuanced interplay of economic policies, trade agreements, and regulatory reforms is driving supply chains to nearby shores.
The nuanced interplay of economic policies, trade agreements, and regulatory reforms is driving supply chains to nearby shores.
When optimizing supply chain logistics, nearshoring is a strategic move to mitigate market volatility, geopolitical uncertainties, evolving consumer preferences, and other complexities.
25 October 2024 •

When optimizing supply chain logistics, nearshoring is a strategic move to mitigate market volatility, geopolitical uncertainties, evolving consumer preferences, and other complexities.

The proximity of manufacturing operations to domestic markets contributes to the agility and competitiveness of the supply chain. This strategic realignment minimizes supply chain disruptions, enhances speed-to-market, and fosters closer relations and collaborations between production and consumption centers. As a result, companies can respond more quickly to shifting market trends.

Cost considerations, such as labor expenses, transportation costs, and currency fluctuations, play a role in deciding nearshoring practices. Market proximity, supply chain resilience, quality control, and intellectual property protection also play a part.

Government policies contribute significantly to incentivizing domestic production and fostering economic growth through nearshoring. Across Asia-Pacific, governments have implemented several policy interventions to attract nearshoring investments and enhance the competitiveness of local industries.

Proximity pays off: the pros of nearshoring in a volatile market

Singapore’s strategic location makes it an attractive nearshoring investment site, but its rising costs may act as a deterrent. In response to potential inflation due to nearshoring, and the Organisation for Economic Cooperation and Development (OECD)’s global minimum corporate tax rate of 15 percent, which takes effect from 1 January 2025, Singapore announced the Refundable Investment Credit scheme, with a refundable cash feature. This scheme offers tax credits to be offset against payable corporate tax. or companies to set up or expand existing manufacturing operations in Singapore, contributing to its economy. Companies are eligible for 10 years; thereafter, unused credits will be refunded to the companies in cash.

Tax incentives are a key policy lever utilized by governments. These incentives may include tax breaks, credits, exemptions, or reduced tax rates for nearshoring companies.
Tax incentives are a key policy lever utilized by governments. These incentives may include tax breaks, credits, exemptions, or reduced tax rates for nearshoring companies.

This encourages businesses to invest in new capabilities while expanding or developing their operations within Singapore, boosting domestic production. They can expect to receive support for capital expenditure, manpower costs, training costs, and the like, with the cash refunds helping to cushion expenditures. With a focus on high-value and advanced activities, this scheme aims to increase Singapore’s edge in innovation and technology.

Within Malaysia, the Federation of Malaysian Manufacturers has also encouraged the nation to set its sights upon nearshoring to shift its dependence somewhere closer to home, amid import and export challenges due to the shortage of shipping containers as a result of the Red Sea conflict.

Over the years, multinational corporations (MNCs) like DexCom and Bosch Group have flocked to Penang, the Silicon Valley of the East, to establish manufacturing capabilities for medical technologies, automotive components, and the like. Malaysia has set up its Reinvestment Allowance initiative to support the manufacturing sector’s growth. Under this scheme, companies could pay as little as 0 percent tax for 10 to 15 years, should they have elected to invest a minimum of MYR 300 million (€63.9 million) or MYR 500 million (€106.5million) respectively in the manufacturing sector.

Companies that relocate their manufacturing facilities to Malaysia could also pay 0 to 10 percent tax for up to 10 years. While the application period ended in 2022, companies can apply to extend their allowances for an assessment period up to 2024. This encourages modernization and productivity enhancements, ensuring traditional sectors remain competitive.

Government gambits

Countries also draw on trade agreements to promote nearshoring initiatives. Regional trade pacts and bilateral agreements shape the flow of goods, services, and investments across borders. Because such trade agreements help to foster favorable trade conditions, with reduced tariffs and consistent regulatory standards, nearshoring companies face fewer barriers to entry. Implementing such agreements also creates economic synergies that enhance the competitiveness of APAC countries in the global marketplace.

The Regional Comprehensive Economic Partnership (RCEP) Agreement is the world’s largest Free Trade Agreement (FTA). A collaboration between 15 countries in the APAC region, the RCEP contributes to about 30 percent of global GDP. Vietnam, in particular, benefits immensely from this FTA, as reduced tariffs and duties on goods and services grants the country increased access to regional markets.

Due to added cost-efficiency, increased export opportunities allow Vietnam to diversify its revenue streams through an expanded customer base.
Due to added cost-efficiency, increased export opportunities allow Vietnam to diversify its revenue streams through an expanded customer base.

Because guidelines are clearer, Vietnam can also improve supply chain participation, and regional integration becomes easier. This has led to higher complexity investments in the country’s technology sector, shaping it to be a key player in nearshoring plans.

As countries and companies look to diversify beyond China for their supply chain demands, Vietnam poses an attractive choice, its strategic location further bolstered by the RCEP. In the long run, this will also allow the country to expand its clientele beyond RCEP countries, strengthening its economic independence.

The Australia-India Economic Cooperation and Trade Agreement (ECTA) has made 96 percent of Indian exports to Australia tariff-free, and this number is slated to increase to an astounding 100 percent by 2026. It has also allowed over 85 percent of Australian exports to India to be tariff-free, and this number is expected to rise to 90 percent by 2026. The collaboration allows Australia access to India’s market of 1.4 billion people, presenting a myriad of opportunities for trade diversification.

In turn, as India continues to develop its infrastructure, it will be able to tap on Australia’s agriculture, critical minerals, skills training, and healthcare resources. On top of that, these lower tariffs lead to reduced cost of importing raw materials and intermediate goods from India to Australia and vice versa, making it more fiscally attractive to relocate production plants closer to target export markets, to maximize reduced costs.

With nearshoring, closer economic ties are fostered through bilateral trade, decreasing dependence on distant markets, and leading to a more sustainable supply chain that is resilient and less subject to geo-political tensions and other disruptions.

Success in the sandbox

Regulatory reforms aimed at streamlining business processes and enhancing the ease of conducting business are also instrumental in attracting nearshoring investments. Governments may enact reforms to streamline licensing procedures, expedite permits, and reduce bureaucratic hurdles for companies establishing operations domestically. By creating a conducive regulatory environment, innovation and entrepreneurship are fostered, and investment inflows increased, thereby catalyzing economic growth and job creation.

The Regulatory Sandbox Initiative in South Korea creates an environment where businesses can experiment with innovative products and services without the constraints of existing regulations. This flexibility can attract companies to shift their operations closer to home, encouraging businesses to relocate or establish their R&D and manufacturing operations in the country. This reduces their reliance on foreign production sites, leading to more domestic production.

An innovative environment has attracted tech companies and startups, leading to the development of advanced manufacturing and technology hubs in South Korea.
An innovative environment has attracted tech companies and startups, leading to the development of advanced manufacturing and technology hubs in South Korea.

The initiative also speeds up the process of bringing new products and services to market by simplifying regulatory approval processes, reducing time-to-market for innovations and products, establishing South Korea as an attractive location for businesses that prioritize agility and quick deployment of new technologies. This quick turnaround incentivizes companies to move operations closer to this supportive environment.

Scaling nearshoring's Great Wall

China's New Foreign Investment Law (2020) creates a more favorable and predictable business environment for foreign investors, simplifying the process for foreign companies to establish and operate businesses in China. The policy ensures that foreign-invested enterprises receive the same treatment as domestic companies. In addition, aligned with the global sustainability trend, companies focusing on sustainable production and green technologies are encouraged to establish operations in China.

This reduces the administrative burden on foreign investors, making it easier and more attractive for companies to set up manufacturing and other operations in China, as companies look to streamline their supply chains and reduce logistical complexities.

With the new Foreign Investment Law also comes stronger protections for intellectual property rights to reassure foreign companies that their innovations and technologies will be safeguarded. This promises companies security over their innovations and intellectual property when they move their R&D and high-tech manufacturing operations to China, ensuring that they can be closer to the growing market while protecting their proprietary technologies.

Eliminating barriers that might have previously deterred foreign companies from establishing operations in China, the new legislation levels the playing field for domestic and foreign players. It creates a more favorable investment climate with stronger legal protections and encourages more foreign companies to consider nearshoring their production to China.

Nearshoring on the horizon

As a future-proof strategy that aligns with evolving economic and geopolitical conditions, nearshoring presents a timely opportunity for companies to increase resilience and agility in an ever-evolving global landscape.

As governments refine their policies to attract investment, businesses that embrace nearshoring will find themselves better positioned to adapt and compete in the global market.


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