Is Nearshoring a Diplomatic Compulsion or a Strategic Choice? 08 Apr 2015

Is Nearshoring a Diplomatic Compulsion or a Strategic Choice?

To a large extent, the business questions surrounding nearshoring vs offshoring are similar to questions when a company decides whether it wants to do business locally or not — in the end, you should focus on what is “best” for your company.

What is nearshoring? It is outsourcing to nearby countries. But there are mixed opinions about whether nearshoring is actually cost-effective or adopted due to political pressures. In this article, Back Office Pro lends its extensive experience to an exploration of nearshoring and outsourcing in general.

Nearshoring Trends

Recent statistics reveal that during the period 2005 to 2010, Mexican production costs decreased to 75 percent of U.S. costs while Chinese manufacturing costs increased to 87 percent of American costs. In many cases for U.S. manufacturers, it is now cheaper to nearshore to Mexico than to outsource to a distant country such as China.

But in an increasing number of instances, there is both economic and political pressure to “re-shore” to the home country. For example, the extra challenges of a global supply chain can make long-distance outsourcing much more problematic than keeping outsourcing more localized. Of course, the trends for outsourcing of services still tend to favor offshoring to more distant locations such as India — where the headquarters for Back Office Pro is located.

Why Nearshoring May Be a Diplomatic or Political Compulsion

Here are several points that reflect why pressure for nearshoring is often due to “diplomatic moves” rather than what is best for individual companies.

Electoral Issues — The U.S. Presidential campaign in 2004 is often cited as a key example of electoral issues surrounding outsourcing. John Kerry (then Senator and now Secretary of State) promoted removal of tax incentives for companies moving jobs overseas.

While these issues have subsided somewhat since that election, they are almost always in the background of any discussions regarding outsourcing and employment. For example, Paul Samuelson wrote an article that is often incorrectly interpreted as economists supporting less free trade.

Intense Media Attention — In political campaigns, it is not unusual for the media to focus their attention on one or two issues that appear to have “traction” among viewers and voters. Both in 2004 and more recent American elections, the issues of unemployment and outsourcing have often been linked together.

For example, during 2004 “outsourcing” was mentioned more than 1,000 times in four major newspapers — this compares to 300 during the previous two years. In many cases, 2004 is often used as the “patient zero” for the media’s focus on outsourcing, and the media continues to devote somewhat disproportionate attention on offshoring and outsourcing.

Public Debates about Job Losses — In the United States as well as many other countries, there has been a rapidly changing mix of jobs available to workers as the result of technological advances. But job losses have also occurred due to offshoring as well as manufacturing developments. Some companies have received substantial criticism from politicians when assembly-line jobs are outsourced to other countries.

Starting with a faltering labor market in 2003, the issues of declining employment opportunities and rising outsourcing have been regularly intertwined. Even when businesses make the most cost-effective choices for their customers and investors, it is not unusual for them to be targeted by various interest groups as well as politicians.

Why Nearshoring May Be a Strategic Choice

You should not assume that nearshoring is simply adopted by companies due to political and diplomatic. Here are four key examples of strategic reasons that businesses consider nearshoring and re-shoring:

  • Rising Labor Costs — While attractive labor rates in China often created a cost benefit that was hard to ignore by many companies, current wages for Chinese labor are rapidly increasing at annual rates of 15-20 percent.
  • Better Quality Control — Quality should always be a primary goal whether companies are re-shoring or outsourcing to a distant country. As supply chains become increasingly complex, a quality “failure” can rapidly reach unacceptable levels that are simply more difficult to monitor and control as distances increase.
  • Lower Freights Costs — This factor can change as energy costs go up and down. But even with a recent reduction in oil and gas prices, transportation costs are not yet displaying a similar trend for most manufacturers. The clear solution for many companies is to shorten the distance involved in the logistics equation.
  • Improved Intellectual Property (IP) Rights — IP theft and counterfeiting have been ongoing concerns for businesses that offshore manufacturing to Asia. Better IP enforcement and protection can help to remove this strategic reason for re-shoring and nearshoring.

Is Nearshoring the Ultimate Answer to Every Outsourcing Issue?

If you are looking for a “one size fits all” answer to outsourcing questions, nearshoring is not likely to pass many important tests and qualifications. You must still examine your own situation carefully to see what the “smartest” solution is for your company. One of the most effective outsourcing strategies will continue to be finding the “right outsourcing partner.” Companies like Back Office Pro have been actively engaged as outsourcing service providers for more than a decade.

However, the arguments against outsourcing are not likely to go away any time soon. Economists, politicians and the media seem to be focused on the job creation issues involved in international trade. This often leaves company owners and executives scratching their heads when it is time to make a labor decision that can increase profits — or damage the bottom line.

Our advice is to focus on the strategic benefits of outsourcing for your company — Back Office Pro can save you time and money while helping you to improve your bottom line.

What do you think about nearshoring and outsourcing? Please leave a comment below and share your views by using the social media icons.

– BackOfficePro

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