Stability Issues Impact Nearshoring Destination Choices - Global Trade Magazine
  September 2nd, 2015 | Written by

Stability Issues Impact Nearshoring Destination Choices

Sharelines

  • Manufacturers considering locating to Mexico are taking a second look, thanks to stability issues.
  • Nearshoring: Moving manufacturing closer to markets to lower freight costs and improve time to market.
  • Eastern Europe’s popularity as a nearshoring destination may change if workers can command higher labor rates.

Manufacturing executives around the world continue to consider nearshoring—moving production from a far-off overseas location to a closer site—but there is evidence that the trend is slowing, according to research released by Alix Partners.

One thing is clear from the research: manufacturers considering locating to Mexico, North Africa, and the Middle East are taking a second look, thanks to stability issues in those regions. Eastern Europe emerges as a big winner in that scenario, at least for now.

A recent Alix Partners survey of manufacturing and distribution companies serving North America and western Europe shows that 32 percent have already nearshored or are in the process of doing so to meet end-market demand. Of the company leaders surveyed, 48 percent said nearshoring activities are likely within the next one to three years.

The benefits of nearshoring have been clear since the trend developed: companies move manufacturing closer to consumption markets in order to lower freight costs, improve time to market, and raise customer service levels. “But…levels of enthusiasm are tempered by concerns about stability and security in both established nearshoring locations—such as Mexico—and emergent regions, such as North Africa and the Middle East,” said the report.

Eastern Europe benefits as the preferred nearshoring destination for Europe-bound goods. That situation may change if eastern European workers can command higher labor rates, as occurred with China’s popularity as an inexpensive manufacturing destination.

If that scenario plays out, companies will have to accept a higher degree of risk if they choose to locate in Mexico, North Africa, or the Middle East.

The nearshoring concept retains its appeal, according to Alix Partners. Seventy-five percent of Alix Partners global survey respondents said they expect they’ll need greater capacity to meet foreign and domestic demand. But there is a discrepancy between North Americans and Europeans in their consideration of nearshoring: 42 percent of European respondents said they see moving manufacturing closer to their domestic markets, while only 31 percent of North American manufacturers said the same. That’s down from a 49 percent positive response among North Americans in 2013.

“It may be because American manufacturers have already carried out their nearshoring operations,” said the report, “though the decline could also point to heightened security concerns about Mexico.

Only 42 percent of survey respondents in the 2015 survey expected improvement in Mexico’s situation, down from 55 percent last year.

“A deteriorating security situation in Mexico will have major implications for US companies with Mexican operations, as well as for companies that are considering the practice,” said the report.