Nearshoring 2.0: what is nearshoring in the new global supply chain?
Nearshoring is happening. The shift away from China is steadily gaining traction, moving forward albeit at a snail’s pace. But is the definition of nearshoring changing? As the world grows smaller through improved logistics networks, technology, and processes, how is nearshoring keeping up with change?
In the first article of this series, we managed to establish that China is gradually losing its position as the world’s factory. As Xi Jinping doubles down on China’s zero covid policy, decision-makers across the world who manufacture the majority of their goods in China are most likely signing executive orders to start changing the landscape of their supply chains.
The image of a Hong Kong protestor being dragged into the Chinese consulate in Manchester this weekend and physically assaulted is just another event on the evergrowing list of “reasons why we need to reduce dependency on China”. But that’s beside the point of this article.
The question now is: is nearshoring a real option as we transition towards a new era of global supply chains?
What is nearshoring in the traditional sense?
A simple Google search will provide nearshoring definitions along the line of “transferring business operations (such as manufacturing) to a nearby country”. As a subset of offshoring, the definition of nearshoring would usually be accompanied by notions of “working with a foreign company but geographically close”.
Although not wrong, this view of nearshoring is… not adapted to the current reality of global supply chains. You see, concepts like offshoring and nearshoring came about when the trend was to offshore service or manufacturing to cheaper third parties. This trend led to the creation of a different foundation. Not making sense?
- Before the democratisation of offshoring, the foundation was based on local economies and local manufacturing
- Offshoring basically removed the majority of the industry, manufacturing, and a fair amount of services from the national market (true for NA and EU)
- Although some services have been brought back home (unless you’re a French Internet Service Provider or Mobile Phone Network provider in which case your call centres are most likely in the Maghreb)
- Today’s base or foundation is offshored manufacturing with a focus on China, the world’s factory
How is this important or relevant? Because even if we’re not bringing manufacturing back home, it is still nearshoring, just in its modern form.
Nearshoring 2.0: near to where?
If the start point is the current place of manufacturing, rather than the consumer, is it still nearshoring? Yes.
We’re seeing the move from China to other potential manufacturing hubs happen right now. In fact, it has been happening since pre-Covid 19, however recent events such as China’s “zero Covid” policy, Russia’s invasion of Ukraine (aka Putin’s war), and the whole ocean carrier gold rush have accelerated the process.
Beneficial Cargo Owners (BCOs or Shippers) are realizing that the apparent gains from manufacturing in China have dwindled and that logistics is now a key part of the manufacturing process. The problem is, a large number (if not all) of shippers still see logistics as a cost centre. But this is another subject for another article, and one that I know will attract some scrutiny (bring it on). When China went full-on dictatorship during their Covid outbreaks, shutting down the ports and causing issues across global supply chains that we’re still feeling today, it was a bit of a wake-up call to the dangers of having all your eggs in the same basket. There’s more of course:
- Increasing labour costs in China
- Finding trustworthy partners to work with in China has proven more difficult in recent times: “money talks”
- Foreigners seem less welcome since the pandemic
- An unpredictable leader who could “pull a Putin” overnight is not good for business
- The US/China trade war is heating up, with chips being the latest weapon of choice (in every sense)
- Did I mention the carriers gorged themselves on extremely high rates that were in part due to China’s handling of the supply chain during covid outbreaks?
Nearshoring to SEA makes the most sense, for now.
Is it easier to move a shipping lane from NY/Shanghai to NY/Cat Lai in Vietnam, or to NY/Santos in Brazil? That’s a great question to which I do not have a clear answer. There are many different things to take into account, and the main shipping leg is just one part of the puzzle:
- How cheap and available is labour?
- What’s the infrastructure like?
- Are any potential local partners ready to get started and do business?
- Cost of building a manufacturing hub in said location?
- Ease of doing business from an administrative point of view?
- Customs requirements and tariffs?
What we can say with a reasonable level of confidence is that both Central and South America, along with South East Asia, are viable alternatives to China. Just not at the scale needed to forgo China completely.
Not happy with this answer? It’s the truth, and the best illustration of this is the ocean carriers and how they are spending their “hard-earned” profits from the gold rush. MSC, Maersk, Hapag, CMA are names we’ve seen associated with port and infrastructure investments across SEA and South America. They are hedging their bets and getting ready for the new global supply chain. The only investment I struggle to comprehend is the MSC acquisition of Bollorés African operations. Not only was it an expensive deal, Africa is clearly tipping into heavy Chinese and Russian influence. That will of course bring opportunity, but may also cast a shadow over MSC in the future, and its potential for business with the EU and the USA.
Modern-day nearshoring is no longer near the consumer
But near China.
As China cemented itself as the manufacturing hub extraordinaire, it changed the global manufacturing landscape, upon which the global logistics map was drawn. Key lanes are established from China to the EU and both US coasts, but not only. China has spent decades building an intricate web of infrastructure, resources, and knowledge.
Today, that map is changing, but rebuilding this web is the biggest challenge. Some countries such as India and Vietnam are screaming “we’re ready” and pushing for more. They’ve enticed the likes of Apple and Samsung in tech, as well as Hasbro and Adidas, just to mention something outside of tech.
It’s slightly more complicated in South America right now. Chile is a prime location for nearshoring (in the traditional sense this time around), as would Brazil. Both countries are going through some patchy times right now, and in Brazil’s case, trading one dodgy politician for another may not be the path many manufacturers want to take.
Stability and predictability are going to be the two determining factors of this new global supply chain. Nearshoring 2.0 is in Alpha testing right now, but things can move quickly in the supply chain, and without a doubt, the next decade will be eventful, to say the least.
