Bringing it all back home – reshoring and nearshoring’s resurgence

New terms were introduced to the supply chain lexicon during the past decade: “reshoring” and “nearshoring” refer to the shifting of supply sources to home or nearby countries in an effort to shorten, de-risk and build more resilient supply chains. The trend was interrupted by the pandemic but is on the rise once again.

“Post-pandemic realities and shifting trade dynamics have rejuvenated nearshoring and reshoring strategies,” says Alan Dickson, business consulting, supply chain and operations partner at EY. “Companies are leveraging these strategies to enhance resilience, responsiveness and agility whilst capitalising on sustainability benefits.

“While factors like improved responsiveness, greater control, shorter lead times and a positive environmental impact accelerate the adoption of these strategies, companies should be cautioned to balance these factors against potential increases in operating cost and local workforce skill availability. Achieving this balance will ensure that companies develop financially viable supply chains that offer optimal levels of resilience and agility with a reduced impact on the environment.”

PwC Ireland procurement and supply chain director Mark McKeever also sees evidence of a resurgence.

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“We are continuing to see a significant increase in nearshoring as manufacturers seek to reduce their dependence on China and the Far East primarily due to a combination of geopolitical and supply chain concerns,” he says. “For example, in our forthcoming 2024 PwC Global Supply Chain survey we found that 40 per cent of companies have initiatives ongoing to regionalise supply chains and 11 per cent have already implemented these plans. More than a quarter of European companies say relocation is highly important now and will increase over time.”

The survey also found that for critical components and materials, companies are diversifying supplier bases by dual or multiple sourcing, revisiting make-or-buy strategies and adapting new inventory strategies like risk-adjusted inventory sizing to minimise risks.

This is having a real impact on investment decisions, says McKeever. “We have noted a significant increase – 29 per cent, in demand for new factories across the European region,” he adds. “Specifically, the survey noted a major investment in eastern Europe where labour is relatively cheap. Similarly, US companies are increasing nearshoring. For example, last July Mexico passed China as the biggest source of imports into the US. Indeed, since 2018, China’s share of total US imports has declined from approximately 22 per cent to around 14 per cent.”

It is not a wholesale shift, however. “We are seeing companies bring some production closer to home while still maintaining global manufacturing operations in Asia and so on,” says McKeever. “This is enabling companies to be both global and local – even if it adds complexity to their supply chains. This provides companies with flexibility. For example, when required they can shorten supply chains in order to be more responsive to changes in consumer demand. In other cases, they can focus on low cost production.”

Numerous factors are at play, according to Pauline O’Flanagan, director of Ibec industry association Engineering Industries Ireland.

“Irish and European businesses continue to contend with uncertainty and diversification of both export and import markets is essential,” she says. “The frequency of external disruptions to the global value chain, including pandemics, natural disasters, conflicts, trade route blockages, protectionist trade policies, geopolitical tensions and cyberattacks, is rising.

“Supply chain disruptions have declined as China reopens to the world and Europe diversifies its energy supply away from an overdependence on Russian oil, in the context of the war in Ukraine. The rise in geopolitical rivalry between the US and China could have a big impact with one of Ireland’s largest trading partners and is a cause of concern for business.”

Reshoring could play an important role at the interface between green transition policies and geopolitics, O’Flanagan adds.

“Companies are assessing their exposure to certain markets, mitigating risks and reorganising supply chains. Businesses are also considering reshoring or dual supply to reduce their carbon footprint by addressing transport emissions. The green transition in response to the climate crisis will likely lead to shorter and more regionalised value chains.”

Geopolitical pressure continues to mount too. “We are increasingly seeing the term ‘friendshoring’ being used – when governments encourage businesses to shift production away from geopolitical rivals to friendly countries,” McKeever notes. “However, there is a word of caution here. Switching production based on friendshoring as opposed to profit motive, can lead to increased costs. A recent study by the IMF concluded that friendshoring may lead to real GDP losses of up to 4.7 per cent in some economies.”

According to O’Flanagan, state interventions that are geopolitically motivated and affect firms’ investment decisions have intensified particularly in the United States and the European Union and may impact Ireland.

“In some sectors, where the US have committed a huge amount of funding, as they have done with the Infrastructure Investment and Jobs Act and the Inflation Reduction Act, there is some evidence of production going back to the US from Ireland. However, Ireland and Irish business have made and continue to make important contributions to securing positive transatlantic relations.

“Improving EU-US relations in recent years is a step in the right direction but more remains to be done. Developing a new trade partnership with the UK is still a work in progress following its decision to leave the EU. For economic prosperity and social cohesion it is essential that we get this right from both an Irish and EU perspective.”

Dickson believes the trend towards nearshoring and reshoring will continue, although not on the dramatic scale that some fear.

“Whilst a complete reversal of offshore operations remains improbable, there are signs that suggest that nearshoring and reshoring of company operations will persist. This trajectory is driven by the need for greater resilience, control and agility, as companies navigate their way through a vastly changed global landscape.”