Nearshoring in Europe: Advantages and Challenges

Nearshoring relocates business processes or production closer to a company’s home country. This strategy offers a middle ground between offshoring and reshoring, aiming to balance cost efficiency with improved supply chain resilience.

Just how important has nearshoring become in Europe?

• There was a 62% increase in nearshoring investment in 2022 and 2023 compared to 2018-19.
• The average capital expenditure for each project increased 3X to $131 million compared to 2019.

While nearshoring is an effective way to enhance supply chains and mitigate risks, this strategy has its own challenges.

What is Nearshoring?

Nearshoring refers to transferring business operations or manufacturing processes to nearby countries, typically within the same continent.

This strategy allows companies to maintain cost advantages while benefiting from geographical proximity, which enhances communication, reduces transportation times, and improves supply chain management.

Unlike offshoring, which involves moving operations to distant countries with significantly lower labor costs, nearshoring strikes a balance by choosing locations that are closer yet cost-effective.

Nearshoring vs. Reshoring

While both nearshoring and reshoring aim to address the complexities and risks associated with global supply chains, they differ fundamentally in their approaches:

Reshoring: Bringing production back to the company’s home country. This approach focuses on enhancing control, ensuring quality, and supporting domestic economic goals. It often involves higher labor costs but benefits from complete oversight and alignment with national policies and regulations.

Nearshoring: Relocating production to neighboring countries that offer cost advantages without the extensive logistical challenges of distant offshoring reduces lead times, improves responsiveness, and often involves similar cultural and time zone compatibilities.

For example, a German company might choose to nearshore to Poland rather than reshoring back to Germany, balancing lower labor costs with geographical proximity.

Nearshoring Advantages

Cost Efficiency: Nearshoring can significantly reduce operational costs compared to reshoring. While usually not as inexpensive as offshoring to Asia, Central European countries like Poland, Hungary, and the Czech Republic offer competitive labor costs and lower transportation expenses due to their proximity to other countries. This allows companies to maintain cost efficiency while improving supply chain reliability.

Improved Supply Chain Management: Nearshoring helps streamline supply chains by reducing lead times and transportation distances. Proximity to the home country facilitates more effective communication and coordination with suppliers and partners. This closeness can lead to quicker responses to market changes and demand fluctuations, which is crucial for industries with high demand variability.

Enhanced Responsiveness: Nearshoring allows companies to be more agile and responsive to market needs. This agility helps companies stay competitive and meet customer expectations more effectively.

Challenges of Nearshoring

Infrastructure and Capabilities: Not all nearshoring locations may have the advanced infrastructure or technological capabilities required for certain industries. Companies must carefully evaluate potential nearshoring locations’ infrastructure and logistical networks to ensure they meet their operational needs.

Quality Control and Standards: Maintaining consistent standards across different production sites is challenging. Companies must establish robust quality control measures and training programs to ensure that nearshored operations meet the same standards as those in the home country. This often involves regular audits and close collaboration with local partners.

Regulatory and Compliance Issues: Different countries have varying regulatory environments, complicating compliance efforts. Navigating these regulations requires a thorough understanding of local laws, labor practices, and environmental standards. Companies must invest in legal and compliance expertise to manage these complexities effectively.

Risk Management: While nearshoring reduces some risks associated with long-distance offshoring, it introduces new ones, such as political instability and economic fluctuations in the nearshoring country. Companies must develop comprehensive risk management strategies, including diversifying their supplier base and establishing contingency plans to address potential disruptions.

Nearshoring Examples

Automotive

One prominent example is the German automaker BMW, which has nearshored production to countries such as Hungary and the Czech Republic. This move allows BMW to benefit from lower labor costs while maintaining proximity to its main markets. The company’s plant in Debrecen, Hungary has seen more than 2 billion euros in investment.

Industrial Components

Bosch, a leading global supplier of technology and services, has nearshored part of its production to Hungary and Slovakia. By doing so, Bosch benefits from lower labor costs and efficient logistics networks in these countries.

Textile

Nearshoring has gained traction as companies seek to reduce lead times and improve supply chain transparency. Spanish fashion giant Zara has nearshored some of its production to Portugal and Morocco, allowing it to quickly respond to changing fashion trends and consumer demands. This strategy has been instrumental in Zara’s fast fashion business model.

The Future of Nearshoring

Nearshoring presents a strategic option for European companies, balancing efficiency with improved supply chain management.

 While it offers numerous advantages, it also poses infrastructure, quality control, regulatory compliance, and risk management challenges. Supply chain managers and logistics experts can make informed decisions that enhance their operations and competitiveness by carefully considering these factors and learning from successful nearshoring examples.