If you haven't heard of nearshoring, you're probably familiar with offshoring, the practice of shipping jobs like manufacturing and assembly overseas to lower-cost markets like China, India, or Mexico. The practice, a form of outsourcing, gained momentum in the 1970s and 1980s, hollowing out once-strong U.S. industries like steel and textiles.
These days, there may be more talk about nearshoring, which is a cousin of offshoring. Rather than outsourcing jobs to distant countries, nearshoring refers to outsourcing jobs closer to home, in nearby countries.
What is nearshoring, exactly?
Nearshoring is the practice of bringing jobs closer to the home country of the employer and to the end consumer. The central idea is similar to offshoring. Jobs are being outsourced, but the company sends them to a nearby country rather than one across the world.
For example, in the U.S., nearshoring could refer to moving jobs from China back to Mexico, a low-cost country that is much closer to the U.S. than China. It could also mean simply directly outsourcing them to Mexico.
Companies that practice nearshoring tend to do so around the world. If they operate in Europe, they may outsource to a neighboring country and adopt a similar practice in other parts of the world.
Why are companies nearshoring?
Nearshoring has arisen in response to some of the challenges with offshoring, in particular those that came up during the COVID-19 pandemic, such as supply chain delays.
Supply Chain
The gap in labor costs has also narrowed since the first wave of offshoring in the 1970s, and ocean freight costs have gotten more expensive as well, further incentivizing the return of manufacturing and assembly jobs.
Nearshoring gives a company more control over its workforce, the ability to manage the work in question, and the cost of other factors of production, whether it's manufacturing or something else.
For example, it's easier for a manager in the U.S. to visit Mexico than China. The distance to ship between the two countries is closer, and while cultural and language barriers still remain between the U.S. and Mexico, they are lower than with China.
Additionally, the similarity between time zones makes communication easier, and China's regulatory environment has become more challenging for U.S. companies.
What kinds of jobs are being nearshored?
The types of jobs that are being nearshored are similar to the same ones that were taken offshore. Information technology jobs, for example, are among those being nearshored, including semiconductor manufacturing.
Logistics and supply chain management is another example of a job that is being nearshored as companies look to avoid the earlier supply chain delays that cost businesses billions of dollars.
Finally, there are also some manufacturing jobs being nearshored as companies see more benefits to bringing production closer to home, where they can save on shipping and better oversee manufacturing and assembly since it's closer to home.
The trend is likely to continue in the wake of the pandemic as companies look to avoid the uncertainty around outsourcing to faraway locations where they are exposed to more risk and have less control.
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One example of nearshoring
GXO Logistics (GXO +1.22%) is the world's largest pure-play contract logistics provider.
The company has almost 1,000 facilities around the world, handling storage, shipping, and returns for customers who represent a wide range of industries, including e-commerce, consumer packaged goods, tech, healthcare, and industrial goods.
GXO has benefited from the nearshoring trend as its customers are increasingly looking for a partner close to home that can help with their supply chain needs.
The company recently announced an expansion in Germany, citing the acceleration of nearshoring in that market. Nearshoring has also been a driver of its growth in countries like the U.K. and the U.S.
Nearshoring could continue to be a significant trend as the next bull market could be underway, so it's worth taking a closer look at GXO and other stocks that stand to benefit from nearshoring.
This is likely to be a long-term trend and one that could affect a large portion of the business world.
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