What is nearshoring, and why should new business owners take the time to find out? Finding suppliers and outsourcing certain services to faraway countries can be a real hassle. Nearshoring is one convenient approach to business operations that will allow you to get that help.
The Global Sourcing Association describes nearshoring as the practice of moving business operations to a nearby country, instead of to a far-off nation. When using this strategy, businesses will enjoy shorter transit times for supplies, cheaper import costs, and improved communication with the foreign partner they chose.
We’ll explain what nearshoring is, how it works, and how it will help your business with the services that it requires.
Nearshoring is a business strategy that involves relocating business processes to nearby countries, rather than distant ones. This approach is often contrasted with offshoring, where companies outsource processes to distant countries, usually to capitalize on lower labor costs. It’s a great method that businesses can incorporate into their strategic plan.
Many businesses realize that some processes are better handled by someone else. There’s nothing wrong with admitting that and fortunately, there are numerous third parties out there that can assist with a company’s needs.
This approach to allows businesses to hand over certain services to a third-party company that is geographically close to them, rather than one that is far away.
It may also mean establishing a branch of a business, perhaps one dedicated to manufacturing or customer service, within a nearby nation.
Nearshoring has been used to establish bases for:
There are plenty of third-party companies with skilled workers who can perform any of these tasks. Businesses that may not want to outsource any of their processes to a foreign country, may still consider sourcing their products there from others that do. . Many manufactures operate close to U.S. shores and can provide the goods these companies need.
For instance, a number of major automotive companies have established operations in Mexico. They include Ford Motor Company, General Motors, Toyota, and others. A U.S.-based company that sells auto parts is very likely to find a manufacturer or supplier for their inventory.
They are likely to save on shipping costs and get their inventories replenished faster when compared to sourcing from a supplier in China or Europe.
Outsourcing business processes and supplies to faraway nations can be full of challenges. Fortunately, nearshoring can provide an assortment of solutions to overcome these problems.
Benefits of nearshoring to an area within the same geographic region include:
We’ll provide in-depth descriptions of these advantages.
China is home to suppliers that businesses around the world utilize. Unfortunately for the U.S., sourcing goods from China has become an inconvenience. Due to the distance it takes goods to travel, and the fact that some cargo ships are spending months anchored off the coast, shipments from China are taking longer and longer.
Sourcing suppliers from nearshore companies is a great alternative to the long transit times of Chinese shipments. Countries in South and Central America make for great places to source suppliers from, as well as Canada.
Shipments from these countries won’t take nearly as long and, in some cases, won’t have to travel by water at all. Since nearshore companies in these nations are closer geographically, transit times are much shorter.
Finding a supplier in a nearshore country will make things a lot cheaper when it comes time to import goods. Canada and most of the countries throughout Central and South America share Free Trade Agreements (FTAs) with the U.S. that remove or reduce duty rates for most products.
Some FTAs the U.S. has with Canada and countries within Central and South America are:
Importing goods from these countries is cheaper because they’re much closer, which means other related shipping costs, like fuel, won’t have as much of an impact. This holds true even if it’s a country the U.S. doesn’t share an FTA with.
In the case of manufacturing or other outsourced services leading to an imported product, countries within Central and South America also have far fewer tariffs to navigate. That’s a major benefit considering the vast number of tariffs that have been placed on products from China due to the ongoing trade war.
Another benefit of nearshoring is the reduced barriers to conducting business. As we stated above, the U.S. has numerous free trade agreements with both of these countries, which makes conducting business a little easier. FTAs are indicators that two or more countries have good trade relations, which make importing and exporting from them less difficult.
Canada and Mexico are prevalent countries that the U.S. imports goods from, making them prime candidates for nearshoring. The table below reflects data on U.S. imports from Mexico and Canada.
|Total Imports From Mexico
|Vehicle Imports From Mexico
|Total Imports From Canada
|Machinery Imports From Canada
From a business perspective, it makes sense to source from these countries since the U.S is geographically close. The USMCA also reduces many barriers to trade between these nations.
In fact, recent nearshoring efforts in Mexico have led it to becoming the number one trading partner with the U.S. in 2023, surpassing China.
One essential component of conducting business is efficient troubleshooting. Choosing a nearshoring partner that is in the same geographical area allows organizations to solve problems a little faster.
The closeness provides benefits like:
With these benefits, businesses can more easily set expectations with their suppliers and business partners. Problems can get solved quickly and both sides benefit.
From a business perspective, communication is extremely important. Fortunately, language barriers are much less severe or non-existent in nearshore countries.
Many Central and South American countries are Spanish-speaking, Brazil being the main exception. While that might be a problem at first, finding a translator in the U.S. should be easy since Spanish is the second most common language in the country.
Because of their proximity to the U.S., there is also a rising number of English-speakers within various nations of Central and South America.
English is the primary language in Canada, which means U.S. businesses can find a nearshore supplier they can easily understand. As mentioned, time zones are another factor that lead to easier communication.
Since nearshore suppliers are located in similar geographic areas. This means they operate in the same time zones, which makes it easier for U.S. businesses to contact and collaborate with providers.
While there are clear benefits to using nearshoring, this business approach might not be the best for everyone. Fortunately, there are some other outsourcing methods that companies can use that might be better suited to your needs.
The first outsourcing alternative to nearshoring that you can use is onshoring. As the name implies, onshoring is when companies outsource certain aspects of your business operations to a third party within your own country. Onshoring has many of the same benefits as nearshoring as well as top-tier talent and infrastructure.
Logistically speaking, onshoring is also a superior option to nearshoring or offshoring. That’s because moving goods within the borders of a home country is easier. Companies won’t have to worry about import costs and all the regulations that come with receiving goods from a supplier when they onshore.
Another way of letting a third party take care of some of certain business operations is to use offshore outsourcing. Offshore countries are much further away geographically compared to a nearshore company.
There can be numerous benefits to using this approach to outsourcing, such as:
Many countries are eager to have foreign businesses invest and conduct their business endeavors within their borders. If a company hires an offshore company, chances are the host government of that company will offer tax breaks as an incentive. The cost of labor may also be much cheaper depending on the country’s economic standing
Developing nations will often have lower labor costs, but also fewer highly skilled workers. Depending on what processes a business is outsourcing, the exchange is worthwhile.
Nearshoring is a great way to reduce your costs and improve efficiency in your business. That said, you’ll need transportation if your third party provider is producing physical products for you. At Product Distribution and Strategy, we help you with this process during a consulting session.
At Product Distribution Strategy, we’re committed to helping your business thrive in the global marketplace. Schedule your consulting session or contact our team at (855) 863-7672 if you have any questions.