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Nearshoring Gains Attention as Supply Chain Issues Linger

Jan. 31, 2023
Companies are taking a fresh look at where to locate—or relocate—manufacturing operations.

The lingering supply chain challenges have contributed to the year-long slowdown in American manufacturing output. It is forcing many manufacturers at all levels of the supply chain to look again at the idea of nearshoring manufacturing operations.

Fleet Owner, an Endeavor Business Media partner, reports on discussions at the recent Heavy Duty Aftermarket Week 2023 panel session in Grapevine, Tex. Rob Phillips, president and CEO of Phillips Industries, explained that 20 years ago, China was an ideal place to operate because costs were so competitive. Today, however, due to container costs that drive up the cost of freight, as well as tariffs between the U.S. and China, nearshoring manufacturing capacity to Mexico has made the most sense for Phillips.

“If I look back in my 20-year career, the decision to move to Mexico was probably the best in my career,” he explained during the HDAW panel session. “We’re very bullish on Mexico. I’m a huge fan of the workers’ level of experience from an engineering perspective. We don’t have labor issues; we have people that want to help.”

Nearshoring is hardly a new concept. It has roots in a number of industries, notably in automotive, where manufacturers build cars closer to the end consumer rather than all product from one central plant. Nearshoring also has gained followers by providing more control over quality, safety and environmental standards.

As Endeavor Business Media partner IndustryWeek noted in 2022 global conglomerate ABB polled 1,610 executives in the U.S. and Europe about their capital spending plans in the wake of the COVID-19 pandemic’s arrival, the resulting supply chain chaos and Russia’s invasion of Ukraine. Of the respondents, 37% said they plan to return production to U.S. shores, while a third said they would look to nearshore new operations.

Fleet Owner also reported about a third factor in play as the supply chain untangles: Foreign Direct Investment (FDI). For instance, largely encouraged by the U.S. CHIPS and Science Act, U.S. semiconductor manufacturers Intel, GlobalFoundries and Micron have announced plans to reshore fabrication plants in the U.S.

As for FDI in 2021, foreign companies invested more than $333 billion in acquiring, establishing or expanding U.S. businesses, an increase from $141 billion in 2020, with $121 billion of the 2021 amount invested in manufacturing, according to the BTS report. The report also points out that FDI in a country at the nation’s borders can also induce a shift in supply chains.

“Mexico, for example, has received $11.5 billion from its top five FDI countries in the first quarter of 2022 alone,” according to the report. “FDI flows from the United States are far and above the investments made by the other four countries—exceeding their combined investments. An upward trend in U.S. FDI can be observed around the timeframe of the USMCA’s signing and implementation in 2020.”

This article originally appeared in Machine Design, an affiliate publication to Power & Motion.

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