As political tensions rise between Western countries and the world’s dominant manufacturing hub, China, OEMs are actively seeking alternative cost-effective manufacturing options. In the last few years, nearshoring has gained popularity as a business strategy, driven by factors such as geopolitical instability, increasing labor costs in offshore markets, restrictive trade policies, quality control concerns and potential supply chain disruptions. In effect, the shift from offshoring to nearshoring reflects the desire for more stable and cost-efficient manufacturing solutions that de-risk supply chain disruptions through a diversified network of raw material and component suppliers.

Nearshoring or friendshoring offers a balanced, yet feasible compromise between offshoring and reshoring. By selecting a nearshore location, such as Mexico, OEMs benefit from the geographical proximity to their markets, achieving cost advantages that reshoring might not offer. According to Deloitte, industrials manufacturers are finding advantages in North American countries with Mexico now overtaking China to become the leading US trading partner accounting for 15.4% of their trade.

While nearshoring may not always deliver the same cost advantages as offshoring, it presents several compelling benefits, including improved operational efficiency, stability, reduced risks making it a more attractive option than reshoring.

Advantages of Nearshoring

• Reduced Transportation Costs and Faster Lead Times
  Closer proximity to the OEM’s market reduces transportation costs. Shorter distances also alleviate supply chain challenges, reduce potential disruptions and shorten delivery lead times making it easier to meet evolving market demands.
• Enhanced Collaboration
  With less time zone difference than offshore locations, nearshore partners facilitate smoother communication and collaboration during work hours. Timely communication is critical to effective collaboration and fosters faster iterations, shortening the time-to-market.
• Better Project Oversight
  Closer proximity to manufacturing facilities allows for more frequent site visits and better oversight of manufacturing operations. OEMs have stronger influence over the product process and ensure quality control more effectively
• Cultural Similarities
  Nearshore countries share more cultural similarities with North America, creating stronger business relationships and better working relationships due to aligned values and practices.
• Similar Political and Economic Environment
  Countries geographically closer to each other are more likely to share similar political and economic systems. This similarity facilitates smoother business transactions due to policy alignment, institutional and cultural compatibility, more predictability and shared best practices.
• Less Stringent Regulatory Environment
  Depending on the country, most low-cost nearby markets have less complex regulatory frameworks, which can reduce compliance costs and simplify the manufacturing process.
• Economic Incentives
  Some nearshore countries offer economic incentives, including tax breaks and tariff exemptions to attract foreign investment. Mexico, for example, offers favorable trade agreements under the USMCA that provides duty-free access to the US and Canadian markets for a number of Made in Mexico products while IMMEX offers a preferential, low-tax structure for many manufacturing businesses.

Disadvantages of Nearshoring

• Higher Production Costs (not the highest cost savings)
  While nearshoring offers better cost savings than reshoring, it may not match the cost savings of offshore facilities. Labor and overhead costs in nearshore countries can be higher and currency exchange rates may offer only limited financial advantages
• Limited Specialized Skills
  Decades of investment in China, established this offshore market as the leading manufacturing hub in the world generating a large pool of specialized labor with advanced manufacturing expertise. Nearshore markets will be far behind in their level of proficiency and expertise in manufacturing.
• Intellectual Property Protection
  While closer proximity to production may reduce some risks, IP (Intellectual Property) theft and counterfeit can still be a concern depending on the local legal environment. Some nearshore countries may not have legal protection for intellectual property and OEMs will have limited influence on legal enforcement in these foreign jurisdictions.
• Economic Disparities
  Misalignment due to economic disparities between less developed nearshore countries, such as Mexico, Brazil and Argentina, and OEMs from the US or Canada, can impact operational efficiencies.
• Varying Regulatory and Tax Compliance
  Despite similarities, regulatory and tax environments can still vary significantly between nearshore countries, posing challenges for compliance and financial planning.
• Quality and Reliability Concerns
  Despite the proximity of the production facility, quality and reliability of nearshore manufacturers can still vary, potentially affecting the consistency of product quality or service delivery.
• Limited Scalability
  Nearshore countries such as Brazil, Argentina and Chile, though emerging quickly as industrial manufacturing giants, still have more infrastructure to build to accommodate the growing demand. Mexico, on the other hand, still lacks the extensive local network of suppliers and infrastructure to support expansion and scalability.
• Political and Economic Stability
  Nearshore countries may still experience economic and political instability that can impact operations. For example, several Latin American countries, like Venezuela, have experienced some political instability arising from economic decline that could impact supply chain and manufacturing activities.

Evaluating your Optimal Solution

When deciding between offshoring, nearshoring or reshoring, compare the cost and benefits of each strategy and evaluate them based on the same economic, political, cultural and social factors. While nearshoring offers several cost advantages over reshoring (link to reshoring article), it may not offer a more lucrative return than an offshoring strategy.

Many OEMs are de-risking their business exposure by integrating nearshore suppliers into their offshore manufacturing strategies. Regardless, OEMs must strike the right balance by evaluating their priorities, risk tolerance and long-term goals to determine the most optimal manufacturing strategy for their business.

Download our manufacturing strategy document for a full analysis of the benefits and challenges of each manufacturing strategy.