Global realities have shifted dramatically in recent years after decades of relative stability. There are clear impacts on international supply chains, the worldwide labor market and costs of raw materials and logistics. CEOs of manufacturing firms need to act urgently to ensure the future security and success of their organization. After years of outsourcing low-cost production to distant countries, they are now encouraged to look closer to home.

The post-World War II trend towards global trade and international business continued for decades until the political landscape started to shift. From 2017, the Trump administration with its decidedly protectionist stance, and world leaders in the EU and beyond steered their countries increasingly towards nationalist policies. Then, in 2020, the Covid-19 pandemic raised questions on the world’s reliance on China as a manufacturing hub. Oscar Silva Eguibar, Head of Industrials, Roland Berger Mexico, explains, “The lockdown of China for several months paralyzed supply and production chains. This forced manufacturers to reassess their reliance on one country through fear of further disruption.” Furthermore, the ongoing tense trade war between the US and China and cybersecurity concerns are aggravating the situation. Adding to this unsavory mix of circumstances are conflicts at risk of escalation in Ukraine and Gaza and political unrest elsewhere in the world.

All of this has clear implications for the list of countries businesses choose to invest in. Clearly, “all eggs in one basket” decisions will not work in the face of such global instability. Some countries have already started adjusting policies around foreign direct investment, trade and climate protection. Manufacturers are rethinking value chains to safeguard their business for the next couple of decades. Reshoring their operations from distant continents to neighboring lands is a viable option for this.

It is imperative to establish alternative production sites when key partner regions are sources of potential major business disruption. Eguibar says, “Companies are starting to realize that a balanced supply chain with more centers of gravity is more resilient than the situation they had before. They have started reshoring some of their production closer to their end markets.” In addition, companies continue to seek the best bang for their buck and the volatile oil prices of recent years have dampened the appeal of long shipping routes for frequent logistics contracts.

The US is enjoying closer ties with neighbors Mexico and Canada, Western Europe is seeking wider partnerships with countries in Central and Eastern Europe, and Mexican companies are forming new cooperations with Central America. China, too, is more cautious post-pandemic and is finding ways to bypass trade tariffs by outsourcing some production to plants in Vietnam, Thailand and Cambodia. Some advantages of reshoring production to a nearby territory are that managers can rapidly address any inventory, shipment and quality issues: More frequent face-to-face meetings and factory visits are possible when your workers are based, relatively speaking, just around the corner.

Some firms still find options further afield to be the most cost-effective to fulfill large orders, but many are now turning to Vietnam and other nations. Eguibar explains, “China remains a manufacturing powerhouse. However, after decades of receiving international investment, the country has enjoyed a lot of progress. This has pushed up labor costs.” And this, in turn, is deterring overseas business partners who love a bargain.

Globalization continues, but nearshoring is gaining in popularity worldwide among nations and organizations who prefer to play it safe in uncertain times by widening their options for production sites.

CEOs of manufacturing businesses must consider all variables at macro and sub-regional levels before choosing nearshoring partners. Factory overheads and material costs are not the only major concerns. Labor, energy and logistics costs can vary massively between nations and are all subject to continual fluctuation, a major factor impacting reshoring decisions. Eguibar adds, “It is crucial to assess risks, besides costs. It makes no sense to just choose the cheapest country. There must be clear laws in place to protect your major investment.” Even when investments are secure, a solid infrastructure and stable supplier base must be established for acquiring raw materials prior to any production planning. Trade tariffs must be added to these branches of the decision tree.

Every country differs in terms of the benefits and drawbacks of setting up business there. Local knowledge and networks are extremely valuable for navigating the specifics of any destination under consideration, especially regarding bureaucracy and the relevant government departments. Eguibar says, “It pays to work with a partner who can share their insights into the local market.” Insiders can share details of the labor supply and costs. They will know about the depth of local supply chains and the energy and transportation infrastructures of certain areas.

International and interpersonal relationships play a huge role in securing reshoring business deals. Awareness of cultural differences within a business context, for instance, can impact the overall efficiency of reshoring projects. Due diligence into local regulations is also necessary, and how these apply to a specific nearshoring project can depend on whether a production premises is to be built from scratch or if a company would move into an existing industrial location.

One might presume that a greenfield site is the way to go as it is an opportunity to build the ideal production site from scratch, without any roadblocks. Eguibar, however, believes that greenfield does not necessarily mean green lights along the road to instant business. “A greenfield site allows you to fine-tune your preferences, but a factory might already be set up and ready for production on a brownfield site which could allow a quicker time to market,” he says, adding, “It all depends on multiple factors, including the specific industry and the timing of your project.” The need for a long-term living infrastructure and commuting options near manufacturing plants can also form a part of this complex puzzle.

Geography and orography also add to the practical considerations: Not all stretches of land are conducive to manufacturing sites. Distribution routes which wind around mountainous or rocky terrain prolong every journey. Sites near high-risk flood zones, seismic fault lines, volcanic activity and other naturally occurring hazards will likely demand higher insurance premiums. Local knowledge is power – contacts and research into official records and legal frameworks can help navigate the limits of unfamiliar territory. The security of a country, or specific region, is another issue to factor in. Regional crime rates and areas affected by local tensions have implications on the safety and security of the workforce and the production facilities. This may even impact a company’s ability to secure talent there.

Prior to deciding on where to reshore production, thinking about labor is imperative. Securing skilled employees is becoming increasingly hard all around the world. Roland Berger conducted an analysis into countries’ working populations worldwide which will continue to expand up to 2050 – and the list is not long. The US, Mexico, South Africa, India, Vietnam, Thailand and Bangladesh, and a few Eastern European countries are still seeing growth, sometimes due to migration. Across most of Europe, the economically active population is diminishing rapidly.* “Labor is a key factor. You have to ensure there’s a stable influx of skilled workers. And, once you have decided on your sources for this, you must allocate sufficient time for training the workforce on the relevant manufacturing processes,” says Eguibar.

In an era of new smart technologies, manufacturing itself is increasingly being automated and thus the types of skills sought in the labor market are also changing. One facet of this is that any move from traditional manufacturing of critical parts towards robotic, automated mechanisms can impact the number of operational workers needed on a plant. Another is that, as end products become smarter, technical skills are needed more than ever – intelligent parking systems and predictive maintenance are just some examples. So, whereas the critical and tangible components could be produced in one country, tasks involving software development, data analysis and algorithm design might need to be outsourced to another that offers workers with this know-how or those capable of being upskilled.

Stabilizing production operations: Although some disruption is unavoidable when reshoring manufacturing, measures can be taken to minimize business loss.

Strategic decisions around reshoring must ensure business continuity for the next couple of decades, not just a few years. It is therefore vital to consider all the pros and cons of business partnerships with several neighboring lands – and this takes time. Companies are advised to assess markets of interest, including competitive environments, over a period of six months to fully understand their dynamics. A sound decision on where to set up or move to, however, would typically take around three years, for instance, for an average automotive OEM. For large-scale factories, establishing the right reshoring project can take up to seven years.

Nearshoring projects must be planned precisely to avoid long spells of production downtime or gaps in order fulfillment. There will always be some disruption, but transition phases would allow for a gradual decrease in production at the original location. Eguibar says, “It’s just not possible to shut down the old factory and then start producing in the new one. You have to account for the financial impact of closing long-term contracts with your suppliers.” Although the main goal is to stabilize business, it might also be possible to offset these costs or generate new cashflow by selling assets before eventually closing operations on the former distant premises.

Not all factories and their surrounding storage and distribution areas were built equal and direct one-to-one reshoring moves are rarely possible. A slow-paced expansion of operations in the new location allows for a smooth learning curve regarding the physical premises and related partnerships. This helps to ensure there are no surprises which could force sudden or lengthy plant shutdowns or other business interruptions.

Manufacturing companies must secure their business and their services to end customers now and for the future, especially in times of global instability. Before choosing sites and partners for nearshoring, it is vital to consider an entire matrix of variables, factors subject to volatility and complexity, as well as situations and setups specific to certain countries or local areas. Eguibar summarizes by saying, “The world is changing. Companies must adapt, but focusing on just one aspect, whether it’s costs, tariffs or politics, will not lead them to the right decision. Multidimensional analysis is essential for this.” Once all the facts and data have been explored holistically, the end decision of where to put down roots for future long-term business can finally be made. An incremental approach to executing a reshoring project is then crucial to allow for adaptations along the way, for the smoothest production and distribution processes possible. And, of course, future business growth.

Case study: Driving US automotive manufacturing towards Mexico?

In recent years, America has been reshoring automotive production to their neighbor Mexico. In fact, over the past decade, Mexico has become the leading provider of light vehicles and assembled auto components to the US. While wages have seen sharp increases in countries like China, the growing Mexican workforce remains affordable. Since global oil prices soared over the past few years, value chains took a hard knock for shipping raw materials and components for weeks at a time. Shorter journeys by land between the US and Mexico are much more cost efficient – and kinder to the planet. Mexico’s energy prices are also lower than their competitors in China. Furthermore, under the 2020 United States-Mexico-Canada Agreement, automotive OEMs must source 75% of their steel and aluminum from these nations to qualify for duty-free trade.

Leading auto firms have already secured contracts with Mexico and 78% of automotive OEMs surveyed by Roland Berger have confirmed they are considering reshoring production to the Mexican market.