What is nearshoring and what benefits does it bring to companies?
Nearshoring is a practice that has become very popular among large corporations. Its implementation brings economic and operational benefits: bringing production to a closer location can offer peace of mind, as well as more opportunities from a strategic standpoint. But what exactly does it entail? Is it ideal for any organization?
What is nearshoring?
Nearshoring refers to the outsourcing of processes —mainly those related to IT— to a different company in a nearby country, generally one with a shared border.
This practice is born from an economic motivation, as processes are transferred to lower–cost companies, translating into savings.
This model represents the opportunity to bring operations closer, avoiding the practical problems of managing a unit in a distant geographical location. In this way, the parent company has increased control over its business and refines its decision making.
Benefits
These are some of the benefits of nearshoring:
- Cost reduction.
- Increased regularity of visits to the operations plant.
- Higher control over intellectual property.
- Culture and language become a lesser obstacle.
- Increased speed in access to market.
- Reduces digital disruption.
- Brings more control over the supply chain.
- Reduces travel expenses.
- Greater flexibility to adapt to changing market conditions.
- Opportunity to find specialists that are not available in the company’s country of origin.
- The work is done faster and more efficiently.
- The reduced time difference between the two locations facilitates decision-making.
- It eliminates or decreases the need for night shifts, improving staff retention.
Which businesses use nearshoring?
Businesses of all sizes have implemented nearshoring, from startups to multinational corporations. These are the sectors that have capitalized on nearshoring globally:
Software Development
These technology companies outsource programming tasks to increase efficiency and reduce costs. Some examples are IBM, Microsoft, and Oracle.
Manufacturing
This model also helps reduce costs and increase productivity in manufacturing. For example, Apple and Samsung have found nearshoring options in Mexico and China.
Business Processes
Accounting, customer service, and data entry are tasks that can be integrated into a nearshoring strategy. eBay and Amazon are among those that have transferred activities to countries like India and the Philippines.
R&D
Businesses transfer R&D operations to other locations to have access to specialized expertise and to achieve results in a shorter amount of time. Google and Facebook do so —or used to do so— in Ukraine and Finland.
How to know if this is a suitable approach for a company?
Nearshoring improves efficiency and reduces costs, but it is not an ideal solution for all businesses. These are the aspects that any company needs to take into consideration before committing to nearshoring:
- Available skills: Nearshoring requires a certain level of expertise on both locations to be successful. The partner needs to have employees with the right skills to achieve the tasks.
- Client expectations: This model helps accelerate delivery times. However, if clients expect immediate results, then nearshoring is not the best option, because they might take some time. In this case, near-sourcing is a better option. It is similar to nearshoring, but it also includes the partner’s help in executing the tasks.
- Partners: They must be trustworthy and experienced, and they also need to be capable of managing the work and delivering quality results consistently. There also needs to be a cultural compatibility between the two companies.
- Budget: Nearshoring will bring savings in the long-term, but there are costs that need to be considered when establishing a partnership. There must be a budget dedicated to covering the costs of setting up said partnership, as well as any other needs that might arise.
The Landscape in Mexico
Different companies have found in Mexico an ideal place to implement nearshoring. Raquel Buenrostro Sánchez, Secretary of Economy, declared recently that nearshoring investments amount to $19 billion dollars, and construction and real estate services will see the biggest benefits from this in the two upcoming years.
The exceptional market conditions derived from the COVID pandemic, the trade war between the U.S. and China, and the conflict between Russia and Ukraine have resulted in a surge of nearshoring practices in Mexico. U.S., Asian, and European companies have turned to Mexico to transfer their production processes.
During the inauguration of CONCAMIN’s Intelligence Center, Buenrostro Sánchez stated that industrial parks have been overflowed with requests to house foreign companies, and developers are looking to build more industrial warehouses and premises for these companies. The Secretary also pointed out that multinational corporations may come to Mexico and aid in job creation, while also looking to buy from Mexican suppliers.
Currently, Chinese, American, Canadian, and European companies are already operating through nearshoring in Mexico. Xinquan (plastics) set up operations in Aguascalientes, while NYX Plastics is already operating in Coahuila. Other projects are also in construction: Kurabe (automotive), Wistron (electronics), and Waldaschaff Automotive (autoparts) will soon begin production in Aguascalientes, Chihuahua, and Guanajuato, respectively. Lastly, companies like Capgemini (IT), Whirlpool (house appliances) and Lizhong (automotive) have announced their intentions to move part of their processes to Mexico. It is clear that the automotive sector is the most interested in operating in Mexico through nearshoring.
At Advance Real Estate, we carry different options of industrial spaces for logistics and manufacture operations. We evaluate our client’s needs and offer them the ideal industrial warehouse in strategic locations in the country. We are the perfect partner for global companies that plan to bring their operations to Mexico.
INFORMATION SOURCE
- https://www.ttec.com/glossary/what-is-nearshoring-definition-and-benefits
- https://blog.intekfreight-logistics.com/top-10-benefits-nearshoring
- https://connects.world/nearshoring/
- https://rightpeoplegroup.com/nearshoring-definition-benefits-examples-and-how-to-know-its-right-for-your-business/
- https://tallyfy.com/what-is-nearshoring/
- https://www.forbes.com.mx/nearshoring-mexico-estima-inversiones-por-19-mil-mdd-para-oficinas-y-servicios-inmobiliarios/
- https://www2.deloitte.com/mx/es/pages/finance/articles/nearshoring-en-mexico-los-numeros-detras-del-relato.html
