Global Insights

Nearshoring:

An Alternative Sourcing Strategy in a Pandemic World

Of the many challenges posed by the pandemic, the biggest is sourcing materials, products, and other resources. Since the COVID-19 pandemic began, its impact on the global supply chain has led companies and countries to bring their supply chain closer to their headquarters or home country, a concept termed nearshoring, signaling a reversal of the offshoring trend that began in the 1990s. As a type of outsourcing, nearshoring embodies the current thinking that a shorter supply chain is more robust than extended chains.

Two regions stand to benefit most from nearshoring, including Latin America (plus the Caribbean) and Eastern Europe. With a focus on the former, this article analyzes nearshoring and its growing popularity, ending with recommendations for navigating the evolving shifting landscape.

Pros and Cons of Nearshoring

The benefits of nearshoring include cost-efficiency (i.e., shorter transportation routes), time zone compatibility, easier communication, and cultural closeness. Drawbacks to nearshoring include the fact that countries nearby may not enjoy similar manufacturing bases and investment environments as the original country. Many Latin American and Caribbean countries are positioned well for nearshoring operations, including Mexico, Colombia, Argentina, Brazil, the Dominican Republic (DR), Panama, and Costa Rica.

Examples of successful switches to nearshoring include companies like Whirlpool, Boeing, Nike, and Hasbro, which have successfully relocated part of their business operations from Asia to Mexico.

Fleeing from China

Concerning China, US companies were not the only ones to move operational locations. In 2020, a survey of 260 global supply chain leaders found that 33% of them had transferred their sourcing and manufacturing activities “outside of China or plan to do so in the next two to three years.” Though their departure from China is partly attributed to the increasingly strict state regulatory environment and trade tensions between the US and Chinese governments, this demonstrates a significant change in supply chain networks.

Firms in the HVAC and transformer industries were interviewed for a CSIS manufacturing report project, where they rejected bids to reshore due to high costs and lack of feasibility, instead favoring strategies of nearshoring.

FedEx is another example of a company reforming its international operational strategy. In December 2021, FedEx expanded its Express facilities two-fold at Miami International Airport, which acts as its gateway for North America to Latin America and the Caribbean. Further demonstrating the fact that nearshoring is increasingly on companies’ radars, a survey of supply chain leaders by McKinsey from May to June 2021 showed that 15% of respondents implemented structural changes like nearshoring of production.

Latin America’s Potential

As of 2019, China’s economy has tripled in size compared to Latin America. However, in the last ten years, costs in China have steadily risen, in large part because of the revaluation of the yuan, a rise in labor costs, and the US-China trade war. The US-China trade war that began in 2018 saw exports from China to the US fall by $90 billion in 2019 while countries in Latin America, notably Mexico, Colombia, and the DR, increased their exports.

The previous US administration encouraged greater development and use of north-south supply chains through the Back to the America’s initiative that aimed to move funds from the Development Finance Corporation towards companies moving from Asia to Latin America. The current administration has revealed little concerning its overall economic plan for the region. However, the Biden administration will likely shift towards a trade policy focused on multilateralism versus transactionalism. The administration’s efforts to improve its economic strategy in Latin America were evident after the US deputy national security adviser for international economics traveled to Colombia, Ecuador, and Panama to speak with high-level counterparts and business leaders.

Additionally, the US vice president’s Call to Action initiative to address migration issues in Central America has led to companies like Microsoft, Nespresso, and Mastercard revamping their presence in the region. Seven more companies, notably PepsiCo, Cargill, and Parkdale Mills, announced new commitments in December 2021, including, but not limited to, investments in infrastructure, manufacturing plants, and new routes to strengthen US supply chain resiliency.

While these are just some examples of the US and global companies’ transition towards nearshoring, the likelihood of increased interest in this strategy is high given the ongoing COVID-19 pandemic and tension between China, the US, and Europe.

Uncertainties Remain

We recommend that companies explore implementation of alternative structural changes like nearshoring. Knowing what to do to prepare for future interruptions is essential for companies. Supply chains remain susceptible to pandemic-related disruptions, with the new Omicron variant signaling a continuance of the global supply chain crisis.

The emergence of the new variant, along with the Winter Olympics and the celebration of the Spring Festival (Chinese New Year) planned in February 2022 in China, means the Chinese government is likely to maintain its ‘zero-COVID’ policy, which will only hinder the supply chain’s recovery. 

While the reimposition of tighter restrictions in countries across Asia is unlikely, regional and global exports will nonetheless be negatively affected. Implementing nearshoring changes to regions like Latin America or Eastern Europe is highly advised for companies looking to transition from a focus on China.

Interested in discussing nearshoring strategies for your company?