Article by: Glen Falk
This January will celebrate the twenty-year anniversary of the North American Free Trade Agreement.
NAFTA was initiated to eliminate barriers to trade and facilitate the cross-border movement of goods and services across Mexico, the US & Canada. While NAFTA is still a hotly debated political issue amongst all three of these nations, there can be little argument that it has had great initial and on going success in eliminating trade barriers, increasing investment opportunities, and establishing a framework for the resolution of trade disputes.
Yet in spite of these early and on going successes, after the initial honeymoon period of NAFTA (1994 – 2000), a prevailing trend among many North American manufacturer’s was that ‘off- shoring’ operations to seemingly more competitive and lower cost options in the European Union, China and other emerging markets was the best way to cut costs and remain competitive. By 2007, China was recording a GDP growth rate in excess of 14% buoyed largely by the number North American companies ‘off shoring’ operations to Chinese soil.
Fast forward to today’s headline that reads “World Bank has cut its growth forecast for China amid warnings of slower but more stable global growth over the coming months”. What then, is contributing to China’s slowing growth rate?
One of the main contributor’s is ‘Nearshoring”.
Nearshoring quite simply is "the transfer of business or IT processes to companies in a nearby country, often sharing a border with your own country", where both parties expect to benefit from one or more of the following dimensions of proximity.
Nearshoring is fast becoming a significant strategic trend that is expected to continue for years to come. In North America, the same excitement NAFTA brought to Mexico nearly 20 years ago is re-emerging with the resurgence of organizations near shoring to Mexican soil. Organizations are realizing that there is a value in keeping outsourced work close to where the business primarily operates.
Nearshoring is not just a North American trend either.
While India is still a major off shore player, Indian companies have also been looking to extend their offshore opportunity to include nearshore strategies in many European countries.
Nearshoring can offer clients the advantage of outsourcing to a country whose cultural values and practices are more similar than offshoring destinations. This can be reflected through legislation, institutions, standards and trade practices. It is obviously difficult to convert cultural integration into quantitative terms; however it is generally agreed upon that effective communication increases productivity.
Advantages of Nearshoring
Nearshore destinations offer small time zone differences, which allow for a quick turnaround of projects among other similar benefits. For projects where online and regular telephone interaction is a must, this is a key advantage.
Travel costs are also reduced significantly. Easier project management and the reduction of time zone issues eliminate the need for extra work. Visas are not needed, training is less expensive and shipping is less costly and very simple. As a result of all of this, over time the real hourly rate difference between offshoring and nearshoring is a lot less than one would expect.
By focusing on expert service areas, as well as promoting geographical, cultural and long-term cost savings, nearshoring will continue to grow and become a viable and attractive alternative in the sourcing industry.