Industry Voices | Nearshoring and Managing Global Uncertainty

Major global disruptions have exposed vulnerabilities in the automotive supply chain in recent years. From natural disasters and geopolitical conflicts to semiconductor shortages, many concerns have heightened industry uncertainty. Efforts to tame that uncertainty have sparked a rising trend toward regionalization and subsequent interest in nearshoring.

Nearshoring, the process of moving production and supply chains closer to their primary destination market, was once considered solely a cost-reduction tactic. Today, it’s increasingly appreciated for its ability to enhance supply chain resilience and mitigate risk. Still, it’s not without its own set of drawbacks. Like any strategy, suppliers must carefully balance the pros and cons.

When assessing nearshoring options, suppliers should carefully consider several key factors.

Understand the Shifting Landscape

Over the past few decades, offshore production (i.e., moving production far from the intended market to capture lower manufacturing and/or labor costs) gained wide popularity – especially as OEMs attempted “global vehicle” product strategies. As the industry begins to revert to a more regional structure, a critical question arises: How will the supply chain adapt to this shift?

Trade and geopolitical friction have significantly impacted the risk/benefit equation. They include factors such as tariffs between the U.S. and China that began in 2018, as well as increased regional value content requirements in force since July 2020 through the US-Mexico-Canada Agreement (USMCA). Such examples of encouragement to nearshore to North America are among the many deliberations contributing to the industry’s increasing regionalization.

Extra considerations arise when electric vehicles are part of the calculation, since many countries are trying to build and protect their own EV value chain. One example: a tariff of up to 100% on Chinese EVs has recently been added to the existing 25% tariff on various goods imported from China into the U.S.

Indeed, a global supplier that ships to North America must also assess factors such as:

In addition to recognizing nearshoring’s international trade significance, suppliers must also understand how shortening the supply chain could enable suppliers to:

Plan Strategically

While nearshoring may be a good opportunity for some suppliers, neither the decision nor its execution is simple. Critical analysis and a solid plan are necessary to achieve the desired goals, so suppliers must first do two things:

The overarching goal is to weigh potential nearshoring benefits against any costs left on the table (e.g., the total cost of existing investments and their expected ROI timeframe) in addition to the cost of rebuilding assets. How will the total cost of goods change? What production volumes will be needed to recoup costs?

For example, if the workforce in a potential new location lacks a necessary skill set, a supplier might want to consider initiating a training program. Conversely, nearshoring might address existing talent issues. For instance, one Japanese company with U.S. sales recently explored nearshoring to mitigate the talent risk associated with the aging Japanese workforce.

The reality is that nearshoring decisions are typically made without 100% of the information one might wish to have. Therefore, suppliers should also be aware of their propensity for risk as they chart their course forward.

Don’t Blindly Follow the Herd

The decision to nearshore is no longer just a matter of fiscal economy; it is also a strategic risk-reduction measure. The current trend toward supply chain regionalization may help some companies adapt to the industry’s ongoing disruptions and uncertainties.

Like any trend, however, nearshoring will not be right for everyone. Each supplier must examine its specific business, know its total landed cost of goods and make a solid business case for shortening the supply chain – or moving in a different direction. The challenges of nearshoring are quite real and consequential; they must be as carefully studied and planned for as its benefits.