Is Near-shoring Good for EU Companies?
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The COVID-19 pandemic and the Ukraine war have highlighted some of the vulnerabilities of global value chains, and the need to diversify and strengthen them. Near-shoring is one solution that is on the increase in 2023 in the EU.
Near-shoring in 2023 has become more common. Before we look at the advantages and disadvantages of near-shoring. We need to understand what is near-shoring and the differences between anchoring, offshoring, reshoring and near-shoring. All three are forms of outsourcing.
Onshoring: Onshoring, also known as domestic sourcing or reshoring, involves bringing business operations or activities back to the home country or the country where the company is based. It typically involves relocating operations that were previously outsourced to another country back to the company's home country. Onshoring is often driven by factors such as cost considerations, quality control, supply chain disruptions, or a desire to maintain closer proximity to customers and markets.
Offshoring: Offshoring refers to the practice of relocating business operations or activities to a foreign country, often one with lower labour costs or specialised expertise. In this model, a company establishes a presence or partners with a service provider in another country to carry out specific tasks or processes. Commonly offshored activities include call centres, software development, manufacturing, and back-office operations. Offshoring can offer cost savings, access to specialised talent, and potential 24/7 operations due to time zone differences.
Near-shoring: Near-shoring is a strategy that involves outsourcing business activities to a nearby or neighbouring country, typically in the same region or time zone. Companies opt for near-shoring when they want to benefit from certain advantages of offshoring, such as cost savings and access to talent, while also maintaining closer proximity, cultural similarities, and better collaboration due to reduced language and time zone barriers. Near-shoring is often chosen by companies in countries that share borders or are geographically close to each other.
Reshoring, also known as insourcing or back-shoring, is the practice of bringing previously offshored or outsourced business activities back to the company's home country or a nearby location. It is the opposite of offshoring. Reshoring typically occurs when a company decides to relocate its operations or production facilities back to its home country due to various reasons.
Near-shoring can have both positive and negative effects on the EU economy. Here are some potential benefits and drawbacks when a company is considering near-shoring.
For example of near-shoring in the EU: A company in Germany or Switzerland, may hire someone in Serbia to do their software development. There are many IT companies in Serbia that are very good at what they do. They will be considerably cheaper than in Switzerland or Germany, they are close to either country and can deliver top quality.
Near-shoring has brought considerable positiveness to the EU economy.
Benefits of Near-shoring for EU companies:
Regional Clusters: Near-shoring has led to the development of regional clusters, where companies from related industries establish themselves in close proximity. This promotes collaboration, knowledge sharing, and efficiency gains. For example, in the automotive industry, a cluster of manufacturers, suppliers, and service providers may emerge in a neighbouring country, creating a specialised hub that attracts further investment and fosters trade within the region.
Supply Chain Resilience: Near-shoring is increasingly driven by the need for resilient supply chains. Companies are diversifying their production bases to mitigate risks associated with global disruptions such as natural disasters, political instability, or trade conflicts. By moving manufacturing operations to nearby countries, businesses can reduce lead times, transportation costs, and dependency on a single production location, thus enhancing supply chain resilience.
Cross-Border E-commerce: Near-shoring can facilitate the growth of cross-border e-commerce. When businesses set up operations in neighbouring countries, they gain proximity to new markets, enabling them to offer faster and cheaper shipping options to customers across borders. This leads to increased trade in consumer goods, improved market access for small and medium-sized enterprises (SMEs), and the creation of new online marketplaces that cater specifically to cross-border trade within a region.
Knowledge Transfer and Innovation: Near-shoring fosters knowledge transfer and innovation between countries. As companies establish operations in nearby locations, they bring not only capital and jobs but also expertise and technological know-how. This knowledge exchange between countries can fuel innovation, stimulate entrepreneurship, and contribute to the development of local industries. Over time, this can create a positive feedback loop, attracting further investment and driving trade growth.
Sustainable Trade Practices: Near-shoring can support sustainable trade practices. By shortening supply chains, companies can reduce carbon emissions associated with long-distance transportation. Proximity to production sites also enables better oversight of environmental and labour practices, ensuring compliance with international standards. This increased focus on sustainability can enhance the reputation of companies and the regions they operate in, attracting environmentally conscious consumers and promoting trade based on ethical principles.
Cost savings: Near-shoring can help companies reduce labour and operational costs by moving their operations to countries with lower wage levels and operational expenses. This can enhance the competitiveness of European businesses and potentially lead to increased profitability.
Proximity and cultural similarity: Near-shoring allows for closer geographical proximity between the home country and the outsourcing destination, which can facilitate better communication, collaboration, and coordination. Additionally, countries within the EU often share cultural similarities and regulatory frameworks, making it easier to navigate business operations.
Job creation: Near-shoring can contribute to job creation both in the home country and the outsourcing destination. While some jobs may be relocated, others may be created in areas such as management, coordination, and higher-value activities.
Enhanced supply chain resilience: By diversifying their operations across multiple countries within the EU, companies can reduce their dependence on a single location or region. This can improve supply chain resilience and mitigate risks associated with disruptions, such as natural disasters or political instability.
However, as with all strategies, there are also drawbacks. It is important to note that the impact of nearshoring on the EU economy can vary depending on various factors, such as the specific industry, country, and economic conditions. Policy measures, such as investing in education and upskilling programs, fostering innovation, and promoting a favourable business environment, can help mitigate potential drawbacks and maximize the benefits of nearshoring.
Drawbacks of Near-shoring for EU companies:
Job displacement: Near-shoring can result in job losses in the home country, particularly for low-skilled or repetitive tasks that can be easily outsourced. This can lead to social and economic challenges, such as unemployment and income inequality.
Brain drain: Near-shoring may exacerbate the problem of brain drain, as talented individuals may choose to move to the outsourcing destinations in search of better job opportunities or higher wages. This can potentially deplete the talent pool in the home country and hinder innovation and economic growth.
Regulatory and legal challenges: Near-shoring involves navigating different regulatory frameworks, labour laws, and intellectual property rights across multiple countries. These complexities can pose challenges for businesses, potentially leading to increased costs and legal risks.
Offshore competition: Near-shoring may expose EU businesses to increased competition from outsourcing destinations, as companies in those countries can offer similar goods and services at lower prices. This can put pressure on European businesses to remain competitive and innovate.
Near-shoring in the EU is very good for some countries and less good for others. Poland, for example, benefits substantially from near-shoring whilst Germany may lose from near-shoring. Whether an EU country suffers or gains from near-shoring depends on its economy and how they adapt to near-shoring in other countries. If the near-shoring allows them to scale rapidly and profitably, it may allow them to employ more managers and /or launch new products which in turn would create more employment.
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