Nearshoring: what's behind this trend?

In offshoring, production is relocated to distant foreign countries. Asia and South America are particularly popular in Europe, as manufacturing costs there are comparatively low. It now appears, however, that this advantage is accompanied by uncertainties and shortcomings in transport. For this reason, many companies tend to relocate their manufacturing operations back to their own country or to a nearby country.

What do companies expect from nearshoring?

Through nearshoring, companies primarily want to regain more control and low dependence on external circumstances, since the reliability of the supply of goods is higher. Nevertheless, production prices are also rising, yet these can be offset by lower transport costs. Increased energy prices in particular are another driver for why companies are looking at re- and nearshoring. As with everything in life, this comes with advantages and disadvantages, some of which we'll explore below.

Benefits of nearshoring

Let's look first at some of the benefits that nearshoring offers.

1. Communication is easier

When a company relocates its manufacturing operations to a nearby country, communication usually improves as well. This is because you are located in a much closer, if not the same time zone, and the language barrier is usually lower as well. In other European countries, people generally have a very good command of English while in Asia, not everyone is as proficient.

2. Easier to reach and more transparency
Another advantage of nearshoring is that both the transport of goods and the processes are more transparent and companies are easier to reach. In many cases, it's much easier if the products can be transported by truck or train rather than by ship. In addition, it’s more convenient for company representatives or buyers if they do not have to travel for hours or even days to visit the operations.

3. A common understanding

Of course, each country has its own culture, yet the differences in the European area are not as drastic as compared to Asia or South America. This results in fewer misunderstandings and there is generally a common cultural understanding in nearshoring.

4. Protecting the environment

Climate change and the resulting sustainability movement have raised consumer awareness and increased demand for environmentally friendly products and services. Many people are increasingly paying attention to where products come from along and their transport routes. Companies are also increasingly paying attention to their environmental footprint, which can be significantly reduced through nearshoring. The shorter transport distances resulting from nearshoring thus protect the environment.

Nearshoring disadvantages
Let's now flip the coin and look at the disadvantages that nearshoring can involve:

1. Overcoming obstacles

When companies plan to relocate large production facilities or other operations to a new country, then significant changes are involved. Especially in the beginning, there will be a number of obstacles to overcome and lessons to be learned, which can sometimes be time-consuming and costly.

2. Delays in operations

In case the company is unable to set up production in the new market before operations in the current country cease, then there may be delays in operations. Nearshoring thus requires careful and precise planning to ensure that everything runs smoothly.

3. Finding new partners

When a company moves operations from one country to another, then old business relationships are terminated and new ones established. This means that the necessary trust has to be developed, which requires close cultivation of the new relationships, especially in the early days.

4. Shortage in skilled workers

The shortage in skilled workers does not stop at our doorstep; many other countries are also struggling with the same situation. Thus, finding the right skilled workers for the work required in a new market can be a major challenge.

Conclusion

Nearshoring comes with both benefits and shortcomings. It is well suited to making supply chains more resilient and stable, but it does require thought. For this reason, I recommend that companies evaluate in advance whether offshoring, nearshoring, or reshoring is best for them. You are also very welcome to discuss this with me in a personal meeting.

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English translation by Nelly Thomas
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