Remy Garson, CEO of brake codebrings its expertise in global logistics to gotechbusiness.com with monthly industry insight articles.
The Covid-19 pandemic has exposed the fragility of global supply chains, with many companies experiencing shortages and delays disruptions. As a result, logistics service providers continue to look for ways to mitigate the impact of supply chain disruptions and find new sourcing options.
A turn to reshoring
As companies around the world grapple with the lingering effects of the pandemic on supply chains, one possible solution has emerged: reshoring. This practice of returning production and supply to domestic markets has gained popularity in recent years despite obstacles such as cost, time and other constraints.
As part of this turnaround to reshoring, many supply chain operators have already expanded into Latin America, providing an Asian alternative and a viable backup should supply chain disruption resurface.
The New York Times recently reported on this development. According to economists at Mexico’s central bank, Chinese companies are looking for opportunities in the country setting up factories and research centers in large frontier cities such as Monterrey.
Investments in nearshoring
An example of a company that has successfully implemented this strategy is Foxconn, which produces components for Apple’s iPhones; she facilities opened in Ciudad Juarez, Mexicoand this enabled Apple to limit disruption during the pandemic as their Chinese suppliers experienced delays due to strict lockdown measures.
Foxconn isn’t alone either; other tech giants like HP, Dell, IBM, Microsoft and Huawei have it all invested heavily in Latin American countries such as Mexico in recent years as part of their reshoring strategies. Recently, Tesla just announced plans to open a new gigafactory in Monterrey.
Reshoring can be costly and time-consuming for businesses, but it is a potential solution to avoid further disruption from global supply chain issues. The long-term economic benefits of partnering with Latin American countries provide an attractive alternative for many companies trying to adapt to the current environment.
Helping companies diversify procurement
Today’s logistics providers can help companies diversify their sourcing and reduce reliance on a single country. With an extensive network of suppliers and logistics partners in Latin America, moving to this region can provide companies with access to products and services at competitive prices and a much shorter transit time.
While probably impossible to separate completely, growing tensions between the US and China have begun a gradual decoupling process of the two economies. Some believe that tensions will arise in the future over issues such as Taiwan and a rising superpower in China. Diversifying your supply chain to South America could pay off.
According to The 2020 Reshoring Initiative data report, 69% of companies cited supply chain disruptions as the top driver for reshoring, with Covid-19 further highlighting the vulnerabilities of global supply chains. According to JP Morgan’s global outlook for 2023while Latin America’s “economic growth is poised to slow significantly”, nearshoring and other valuations remain supportive.
Three hurdles to overcome
With the potential long-term benefits of nearshoring, here are some hurdles and how I think businesses can respond.
The quality of products made in Latin America is often not always comparable to that from abroad. In my experience, the Latin American manufacturing market generally operates with different quality standards than the US market, and China, through decades of serving the US market and its larger scale of operations, maintains a higher standard of consistent quality. When purchasing a nearshore facility, you want to keep a close eye on the quality and consistency of the products.
Asian manufacturing infrastructure has been designed and built over decades to serve markets outside of Asia, while Latin American manufacturing infrastructure in many cases has only recently begun serving customers outside their own local markets. As such, there is more limited capacity available to export to the US, so importers must plan in advance to secure factory line time allocations.
Raw materials are the building blocks of production and in the past I have seen Latin American markets struggle to obtain enough material to produce their goods. If raw materials have to be imported from the US or Asia, it becomes more difficult to maintain competitive prices.
Ultimately, if you find that a significant portion of your production process relies on offshore, particularly raw material imports, then it may be best to avoid the nearshore option for now as the benefits (safety, lead time and price) will be . reduced or erased at the first sign of problems in the supply chain.
Weighing long-term benefits against short-term benefits
Here are some aspects to consider when it comes to the potential long-term benefits of nearshoring:
Companies must assess the availability and quality of talent in the target location, including factors such as language skills, technical skills and cultural fit.
Local business environment
Be sure to also consider the political, economic, and regulatory environment of the country or region where you plan to nearshore. Evaluate the risks and opportunities associated with doing business in that specific market.
Long term strategy
Most importantly, nearshoring should be part of a broader long-term strategy that takes into account factors such as market growth, competition and customer needs. Use predictive models and other tools to ensure that nearshoring becomes a sustainable and beneficial practice.
Encouraging nearshoring as an option
My advice as someone who lives and breathes supply chain is to encourage your suppliers and distributors to give you pricing and options for a nearshore option in Latin America.
While you may find that it makes no sense to switch now, the price and efficiency advantages China has created over the decades mean there may be long-term benefits and values to make Latin American options ready. if something in the supply chain breaks again or you need to reduce weeks of transit time.
After all, it’s always better to be prepared; if the past three years have taught us anything, it’s to expect the unexpected.