Bringing businesses back to the U.S. (reshoring) allows manufacturers to lower costs, be closer to their customers, and avoid political turmoil. That effort, supported by recent moves by the U.S. government to financially aid in building manufacturing plants in the semiconductor segment, is prompting substantial activity.
Another approach that is rapidly gaining traction to bring manufacturing closer to home is optimizing operations and supply chains.
The ‘Shoring’ Options
There are three ‘shoring’ possibilities, offshoring, reshoring, and nearshoring, as follows:
Offshoring was the direct response to reducing operating costs and gaining scalability. India, China, and Russia saw a boon in offshoring as U.S. companies tried to improve their bottom line. It is a cost-effective solution with lower hourly rates reflecting the lower local living cost. The downside, however, is that cultural barriers, time zone issues, cyber security, political stability, and even an understanding of deadlines can substantially impact results.
Just how precarious this option can be was seen with the COVID-19-based surge in demand, closures, and restrictions that caused unprecedented delays.
Reshoring involves bringing back manufacturing to the home country, eliminating cultural barriers and delays, time zone and language issues, and promoting real-time collaboration. Although portions of the U.S. have lower labor costs, labor is still higher than with an offshore option. There is also a legal system regarding IP and data security that is in place.
Nearshoring is close offshoring. Companies, in this case, partner with suppliers and manufacturers within an easily accessible supply chain nearby. For instance, Mexico instead of China.
Nearshoring Increasingly Attractive
As global supply chains are slowly recovering post-pandemic, they still face cross-border trade challenges, especially with businesses in Asia. As a result, they are investing heavily in building plants in Mexico, for example, to service customers in the U.S. and Canada.
According to an Aljazeera article, U.S. companies will invest $40 billion in Mexico between 2022 and 2024. Specifically, medical, automotive, aerospace, and appliances have a strong presence in Mexico.
Mexico has many benefits, including a lower manufacturing cost, proximity, USMCA tariff advantages for Mexican-made products, and regionalization of supply chains. It also means that U.S. companies can avoid increased costs and disruptions in Asia, U.S. labor shortages, and political conflicts.
The automotive industry is benefiting as mid-2023, USMCA rules of origin are changing. They will require greater regional content to qualify for beneficial tariffs ranging from 62.5% to 75% of total content value. The Inflation Reduction Act specifies tax benefits for people buying electric vehicles manufactured in North America, not just the U.S.
Nearshoring has its challenges, however. Language and cultural considerations exist, there is political turmoil, there are a lot of regulations including NOMs, IMMEX, Outsourcing/Federal Labor Law, CCP & CFDI, B/C initiatives, and there is still an “us vs. them” stance between U.S. and Mexico. Cybersecurity and IP protection are still issues—although not on the scale seen elsewhere.
Whether companies choose offshoring, reshoring, or nearshoring depends on their circumstances. Keeping control of results is paramount, as we saw during the pandemic. All have benefits and downsides. However, the trend in 2023 is to get manufacturing as close as possible to the customer base and to avoid the multiple risks inherent in doing business in politically unstable regions.