Nearshoring is the process of moving company operations closer to your consumers. For example, research has shown Mexico could benefit significantly from nearshoring because American companies prefer to produce goods in the neighboring country instead of across the world in Asia.
Moving manufacturing operations and distribution chains isn’t easy, so if Mexico is already seeing an increase in investment by American companies, this trend will likely continue. Other countries are also seeing boosts in manufacturing demand as their neighbors embrace nearshoring. Demand for factory space in Europe increased by 29% in 2023 because of nearshoring efforts.
Demand for overland transport and drivers to handle shipments will remain high — and even increase — because of nearshoring trends. Companies will need durable equipment now more than ever, like diesel systems and reliable engines, if they shift to more land-based supply chains. A quality engine is an investment that can support companies for a decade if it’s well-maintained.
Get to know the benefits and drawbacks of nearshoring to see how this trend could affect your company and your industry.
What Is Nearshoring?
Nearshoring involves moving your operations to closer countries instead of working with manufacturers across the world. For example, an American company would nearshore its operations by moving its factories from China and Vietnam to Mexico. Instead of managing production on a different continent, the goods are produced closer to home, which makes the oversight and shipping processes easier.
Any company can practice nearshoring, regardless of its location. A German company could move its operations to Hungary, Poland, or even Egypt and have an easier time managing the factories than if they were located in Asia. Nearshoring means bringing your operations closer, not necessarily choosing the closest location.
The Benefits of Nearshoring
There are several benefits of nearshoring, and more companies are discovering the value of moving their operations closer to home.
- Executives can easily manage factories: Calls are in the same time zone and they can visit within a day or two, reducing long-distance international travel.
- Shipping products to customers is easier: There’s less risk of bottlenecks in the supply chain and products can get to customers faster because they travel shorter distances.
- Streamlined shipping saves money: Companies can reduce distribution costs because products are traveling shorter distances.
- Companies can move to less politically volatile countries: The COVID-19 pandemic and tensions with China both contributed to nearshoring efforts in the United States.
Nearshoring can be a money-saving tool and a risk management opportunity. A German manufacturing executive can travel to Spain within an hour by plane and feel confident that their operations are secure within the European Union. Shipping products to different parts of the EU is also faster and cheaper than importing them from Asia.
Challenges Related to Nearshoring
Despite the benefits, there are drawbacks to nearshoring that shouldn’t be overlooked.
- Moving operations is expensive: Companies will need to relocate their equipment or invest in new machinery. They will also need to hire and train their staff.
- Nearby countries may have stricter labor laws: This is particularly true for companies nearshoring within the European Union, which is known for its worker protections.
- Your company will need to be familiar with your new country’s regulations: Cultural differences could also cause confusion at times.
Each company needs to do its own calculations to consider the short-term cost of relocating versus the long-term impact on your supply chain cost, stability, and operating budget.
Emerging Challenges in the Freight Industry
Industry leaders within the freight industry are watching the nearshoring trend while also working to address current challenges in the field. Nearshoring will affect freight traffic, creating opportunities that logistics experts need to be ready for. Here are a few challenges currently plaguing the freight industry:
- Port congestion: Busy ports slow the flow of goods. It takes longer for ships to clear customs and unload, preventing companies from accessing their materials and finished products.
- Staffing: Companies across the freight industry are struggling to find and train qualified employees. This is a significant problem for trucking companies.
- Equipment maintenance and availability: Companies need to find ships, trucks, and trains to transport their goods. Finding and maintaining these vehicles is challenging.
- Environmental impact: Shipping products across the globe releases significant carbon emissions. This creates challenges for companies that have decarbonization goals.
Nearshoring can help companies overcome many of these challenges. It can reduce their environmental impact while streamlining the supply chain as a whole. For example, it’s easier to find drivers who will bring goods from Mexico to California than to find a container ship to bring supplies from across the world.
How Nearshoring May Transform the Freight Industry
Nearshoring could be a good thing for the freight industry because it takes pressure off of freight companies and their customers. Goods can move faster and will be easier to transport because they are going shorter distances.
David Gantz, the Will Clayton Fellow in Trade and International Economics at the Baker Institute, says it takes three weeks or more for goods to travel by sea from China to California. It takes about three days for a truck to drive from Mexico to California. From a staffing perspective, it’s easier for companies to hire drivers for a few days than to find freighters traveling across the ocean for a month.
Nearshoring can also help companies hit their environmental sustainability goals. Not only will they eliminate the use of shipping routes and the carbon emissions that come with them, but they also have the potential to invest in electric heavy-duty vehicles in the future.
Companies can receive their goods sooner and reduce their impact on the planet as a whole.
The Future Outlook of Nearshoring
The experts at Harvard Business School say there could be a “great reallocation” as companies change where they produce goods. There could be a wave of nearshoring as companies opt for simpler supply chains that are faster and more responsive.
Political climates will also play a role in how supply chains are built. The term “friendshoring” refers to moving operations to countries that are friendly with the United States, which often means leaving China. Companies that maintain political and economic stability may benefit from this trend as companies opt for low-risk hubs for their operations.
The freight industry can take advantage of this trend by preparing for nearshoring shifts. Companies that are ready to meet nearshoring manufacturers’ freight needs can land lucrative contracts that bring shipping closer to home.
Alternatives
While nearshoring is a popular buzzword right now, there is an alternative that eliminates global shipping needs: domestic production. Many countries would still prefer companies to operate domestically, and there are several benefits to doing so. For example, legislatures are trying to incentivize companies to manufacture semiconductor chips on American soil instead of offshoring or nearshoring. Companies don’t have to worry about import taxes or supply chain issues with international shipping and instead can produce locally.
Macroeconomic trends like nearshoring can impact even small-scale freight companies. The freight industry is dependent on where its clients are, whether they are shipping from China, Mexico, or Arizona.
