Although the potential benefits are substantial, the case for reshoring or nearshoring may not quite be as clear as it was earlier this year. Now, especially following China’s devaluation of the yuan, companies need to be more strategic than ever as they make decisions about manufacturing sourcing. The key to making those decisions is to focus on case-by-case analysis and tight project management, according to the results from a study.
Global business advisory firm AlixPartners conducted a survey of almost 250 senior-level executives in North America and Western Europe from manufacturing and distribution companies across 15 industry groups. A total of 32 percent of the executives in North America (U.S. and Canada) and Western Europe say their companies have recently nearshored manufacturing production or are in the process of doing so. Furthermore, 40 percent of North American business leaders said their company has done so.
Interestingly, among North American respondents, 55 percent cite the U.S. as the most attractive nearshoring destination, up from 42 percent in last year’s survey, when the U.S. first achieved that ranking. Mexico—long cited as the nearshoring favorite by respondents to this survey—came in second place, cited by 31 percent of the respondents as the most attractive nearshoring destination. That number is up from last year, but down dramatically from when it was cited as the most attractive nearshoring destination by 49 percent of the survey’s respondents three years ago.
The survey results also cite reasons for the rise in U.S. locations being seen favorably. Respondents consistently cited incentives offered by U.S. states, cities and community development corporations, says Foster Finley, managing director of AlixPartners and head of the firm’s Operations Practice in the Americas. Common incentives include tax abatements, subsidized utilities, free worker training and access to old or abandoned buildings.
One of the points I find interesting is that a few years ago, companies were hesitant to source production in Mexico, despite its wage advantage over the U.S., due to a lack of efficient transportation options going north. Today, says Finley, the quality of Mexico’s intermodal and rail system is greatly improved, and border crossings are easier as well.
Today, however, it appears executives have concerns certainty regarding safety and security issues in Mexico. According to the survey findings, only 42 percent of North American respondents expect improvement in those areas in Mexico. That number is down from last year’s survey, when 55 percent of the North American respondents expected safety and security improvements in Mexico.
I was also interested to see that when making sourcing decisions, the availability, or lack thereof, of skilled labor was the key concern for both North American and European respondents. Indeed, 48 percent of Europeans and 42 percent of North American respondents cited the challenge.
In all though, the benefits of properly addressing and working through nearshoring issues can be significant because there is so much cost-saving potential stemming from lower prices for local raw materials, labor and plant overhead, as well as cheaper transportation and a lack of currency-exchange expense. For instance, in the study, the average estimated savings from nearshoring cited by all respondents was 8.5 percent, with 13 percent of the respondents saying they expect their company to save 20 percent or more from nearshoring. Among North American respondents, the average estimated savings was 8.3 percent, which is up from 6.4 percent in last year’s survey.
When it comes to sourcing, there are no easy or permanent solutions to be found. Finley from AlixPartners sums it all up well by saying, the world of manufacturing and supply chains is in constant flux, and there is no substitute for deep, strategic, case-by-case analysis and tight project management.
What are your thoughts on reshoring or nearshoring?