Introduced in the 1960s, offshoring became a primary cost-savings business strategy for industries to outsource manufacturing operations to Asia. However, as supply chain constraints intensified within the past couple of years, many businesses have considered transferring operations back to nearby countries. This practice, known as nearshoring, has emerged to create a buffer against supply chain disruptions.
As a result of offshoring, the US now only domestically manufactures 12% of the chips it designs. Comparatively, Taiwan manufactures over 60% of the world's chips. The lack of varied resources within the electronic component industry has caused bottlenecks within the global supply chain. Diversifying resources would add necessary support and reduce the impact of shocks and shortages.
According to an April 2020 Thomas survey, 64% of North American manufacturers reported they are likely to bring manufacturing production and sourcing back to the Americas. Latin America, specifically Mexico, is poised to profit the most from this developing trend. More recently, Latin America saw a 156% increase in hiring from foreign companies, particularly for software engineers.
European, Middle Eastern and African companies have been looking to neighboring countries in Central and Eastern Europe and North Africa as nearshoring options. In response to COVID-19, Ernst & Young conducted flash research and found that in Europe, 88% of respondents were contemplating nearshoring over low-cost areas outside of EMEA. Sixty-one percent were seeking to reduce reliance on dominant source countries like China.
Despite its attractiveness, nearshoring is costly, and it will take years to move operations. The total cost for US and European companies to move manufacturing out of China would come to $1 trillion over the next five years. Relocating to a new country also adds pressure to the local economy. If a company were to withdraw just one percent from China and nearshore to a country like Poland, Poland would have to increase its production by 25%. The cost, compounded by how long these changes could take, is enough to make some companies wary.
Even with the concerns associated with nearshoring, many companies have already begun transitioning their operations closer to home. A prime example is Samsung Electronics, which has set the goal of becoming the world's biggest semiconductor firm by 2030. To assist the growth of its business, Samsung has prioritized local partnerships with domestic parts manufacturers and local material suppliers. With moves like this, Samsung and others that opt for a nearshoring business model will bolster their local economies and offer essential flexibility in the supply chain.
Nearshoring has emerged as a strategic answer to lack of diversified resources caused by offshoring
Photo: Fusion Worldwide
