[Insight & Opinion] Nearshoring as a Solution to Global Supply Chain Challenges

Published 29 Jul.2022 13:25(KST)

[Asia Economy] The global supply chain, which has pursued efficiency over the past 30 years, was a symbol of globalization, but recently, changes have become evident. Three years ago, the British weekly magazine The Economist named this phenomenon "slowbalization" (the slowdown of globalization).

The global supply chain began to decline starting from the 2008 financial crisis, and this change has gradually occurred in three stages.

The first stage involved natural disasters such as the 2011 Great East Japan Earthquake and the Thailand floods, which severely damaged production facilities of Japanese companies, a major pillar of the global supply chain. This caused bottlenecks in the supply chain for parts such as automotive components.

The second stage, which worsened these bottlenecks, was the 2018 U.S. trade sanctions against China and the 2020 COVID-19 pandemic. The supply chain began to be disrupted, and due to movement restrictions, not only production but also transportation and distribution processes faced setbacks. In February of this year, an unexpected factor appeared with Russia's invasion of Ukraine. The energy and food supply chains went beyond disruption to a shock level. This added fuel to the inflation that arose in each country during the COVID-19 response process.

Governments and companies around the world, having witnessed a series of events such as natural disasters, pandemics, and geopolitical risks, have come to value resilience as much as efficiency, thinking that they must survive in any situation.

Leading multinational corporations facing supply chain disruptions are designing and implementing corporate strategies in two main directions. First, companies are relocating or adding production facilities to nearby countries close to consumer markets such as the U.S., Europe, and Asia through nearshoring strategies, moving away from an "all-in" approach on China.

Additionally, they are increasing inventory levels, signing long-term contracts, diversifying intermediate goods suppliers, and vertically integrating production processes from raw materials to intermediate and final goods. Along with nearshoring, these are overlapping investments but are necessary measures considering both efficiency and resilience. Now, many multinational companies are employing hybrid strategies to balance global supply chain efficiency with resilience to respond to crises that may arise at any time and in any form.

The trend of balancing efficiency and resilience strategies also highlights the need for us to diversify excessive dependence on specific countries.

Mexico, as the gateway to the North American market and linked by the United States-Mexico-Canada Agreement (USMCA), has the optimal nearshoring conditions in Latin America. Recently, the Inter-American Development Bank (IDB) predicted a nearshoring effect worth $78 billion in the Latin American region in the mid-to-short term. Nearly half of this, about $35 billion, is expected to benefit Mexico through increased exports.

American geopolitical analyst Peter Zeihan also emphasized the importance of the Texas-Mexico axis in his new book, The End of the World is Just Beginning, citing Texas's technology, Mexico's workforce, and the economic integration of the U.S. and Mexico as reasons.

Earlier this month, POSCO held a groundbreaking ceremony for a $100 million electric vehicle parts factory in Coahuila, northeastern Mexico. It is time for our companies to pay close attention to the nearshoring trend and formulate and execute concrete plans. Not only U.S. companies that have entered China but also Chinese companies are increasing investments in border cities like Monterrey to seize nearshoring opportunities.

▲Nearshoring: When companies find it difficult to relocate overseas production facilities back to their home country (reshoring), they move production facilities to neighboring countries.