As businesses consider ways to shorten their supply chains and mitigate ongoing disruptions, many have begun to explore the feasibility of bringing production and logistics assets closer to home. For American companies, this goal can be achieved through either nearshoring or reshoring. Nearshoring moves assets from far-off destinations like China to closer countries, such as Mexico. Similarly, reshoring draws down offshored operations and reestablishes them on U.S. soil.
But which is better? Keep reading to explore the benefits and drawbacks of nearshoring and reshoring.
Nearshoring vs. Reshoring
In response to high tariffs and then the COVID-19 pandemic, a mass manufacturing exodus from China has been underway for a while now. While many of those manufacturers will undoubtedly go to Vietnam, Taiwan, or other lower-cost offshoring destinations, a recent survey of American manufacturing stakeholders showed that 83 percent of manufacturers say they want to reshore some part of their supply chain beginning in 2021.
Much of that effort will involve sourcing U.S.-based suppliers to replace disrupted overseas providers, while other organizations will undoubtedly seek to move physical operations into or near the United States. For companies looking to actually move manufacturing assets, the decision will come down to nearshoring vs. reshoring.
Pros and Cons of Nearshoring
Though some companies might choose Canada for specific reasons, nearshoring for American companies usually means locating operations in Mexico or points south. This method appeals to many businesses that still seek the cost reductions that pushed manufacturing overseas in the first place. Some of the benefits of nearshoring include:
- Lower skilled labor costs
- More convenient time zones for U.S. businesses
- Minimal culture barriers
- Reduced chance of intellectual property theft vs. offshoring
- Shorter travel distance/time for finished goods
- Mutually beneficial trade benefits for U.S./Mexico or U.S./Canada thanks to USMCA
Though nearshoring does offer many conveniences over offshoring, it also has a few notable drawbacks. For starters, finished goods still may have a long distance to travel. This can impact lead times and have a negative impact on environmental, social, and governance (ESG) initiatives. There will also still be a border between the manufacturing plant and American markets. Given that much of the interest in moving operations back to North America spawned from the COVID-19 pandemic and the inability of companies to receive goods from foreign suppliers, businesses exploring nearshoring options should consider how cross-border transit might impact their ability to resupply in a crisis.
Pros and Cons of Reshoring
The pandemic was not kind to the supply chain, and frequent disruptions still persist for companies trying to source materials, components, and finished goods from offshore suppliers. These difficulties have inspired many corporate leaders to prioritize efficiency over cost by establishing a firmer foothold within the borders of the United States as a means to mitigate future disruption. Reshoring production and logistics assets to the U.S. offers numerous benefits, including:
- Fast travel times for finished goods
- Significant savings on logistics costs
- Beneficial to local, regional, and national U.S. economies
- No culture barriers
- Higher general quality standards
- Minimal likelihood of intellectual property theft by U.S. suppliers
- Closer to American consumer markets
- Growing numbers of American consumers are willing to pay more to support “Made in America” brands
Reshoring has a few problems that may act as a deterrent for some companies. Labor costs in the United States are typically higher than companies have become accustomed to in their offshore arrangements. The skilled labor pool for manufacturing has also dwindled over the past several decades, which means that reshoring manufacturers need to invest in extensive automation or be willing to train inexperienced workers from the ground up.
Additionally, an ongoing e-commerce boom has made competition for industrial real estate extremely fierce for more than a year, which will present challenges for reshoring firms trying to find an appropriate facility to call home.
About Phoenix Investors
Founded by Frank P. Crivello in 1994, Phoenix Investors and its affiliates (collectively “Phoenix”) are a leader in the acquisition, development, renovation, and repositioning of industrial facilities throughout the United States. Utilizing a disciplined investment approach and successful partnerships with institutional capital sources, corporations and public stakeholders, Phoenix has developed a proven track record of generating superior risk adjusted returns, while providing cost-efficient lease rates for its growing portfolio of national tenants. Its efforts inspire and drive the transformation and reinvigoration of the economic engines in the communities it serves. Phoenix continues to be defined by thoughtful relationships, sophisticated investment tools, cost efficient solutions, and a reputation for success.