Geopolitical Shifts and Capital Challenges: Navigating the Rise of Nearshoring with Supply Chain Finance

Geopolitical Shifts and Capital Challenges Navigating the Rise of Nearshoring with Supply Chain Finance

By Simon Allen • Published April 9, 2024 • 5 minute read

Since the 1990s, the concept of nearshoring has steadily made its way into the strategic playbook of businesses. Initially, it emerged as an appealing alternative to traditional outsourcing and a solution for the challenges encountered, such as diminished quality and agility. It wasn’t until the 2010s, however, that nearshoring really gained traction. And then, in 2020, it exploded. 

The global lockdown, especially in manufacturing hubs like China, exposed the fragility of extended supply chains, transforming existing vulnerabilities into critical liabilities. This led many companies to pivot towards regional suppliers, seeking the benefits of redundancy, flexibility, enhanced efficiency, and notably shorter delivery times. The resurgence of global commerce post-pandemic didn’t dampen the enthusiasm for nearshoring. If anything, it reinforced the commitment among business leaders to bolster the resilience of their supply chains.  

As new crises in the geopolitical landscape emerged, the hastening has continued. The war in Ukraine, China trade tensions, conflict in the Middle East, and Houthi attacks in the Suez Canal have underscored why so many companies are turning to nearshoring. In a recent study conducted by INVERTO, part of Boston Consulting Group, over 90% of respondents see nearshoring and reshoring as key ways of safeguarding their supply chains. Nearly 70% of industrial companies intend to increase regionalization in the next five years. In a separate survey by Capterra, 88% of supply chain professionals said they have plans to switch at least some of their suppliers to ones closer to home, with 45% saying they plan to switch all of them. 

Nearshoring Activity Across PrimeRevenue’s Global Customer Base

Nearshoring activity across PrimeRevenue’s customer base echoes what’s being reported in the broader market. Globally, there is an increase in the number of companies leaving China and nearshoring suppliers and operations closer to home. In the U.S., we’re seeing more business go to suppliers in Mexico, Canada, and Central America. For European supply chains, Eastern Europe has become a major hub – particularly, Turkey. 

Nuances vary, but the overall drivers of this nearshoring activity come down to four things: 

  1. The need for shorter lead times. Fluctuations in demand have put pressure on supply chains to be more flexible and more responsive. Competitive labor costs, smaller time-zone differences, and quicker delivery make it easier for companies to be more responsive to fluctuations in market demand.  
  1. The need to rein in transportation costs and expedite logistics. Freight rates are surging amid disruptions in the Suez Canal – close to 175% for Asia-N. Europe rates. Add in other factors like port congestion and general risks of sea travel and the case for having suppliers closer to home is clear.
  2. The need for easier ESG standard adherence. ESG has become part of the business and supply chain culture – especially in Europe. Nearshoring allows for businesses to work with suppliers that have similar labor, health, environmental, and other standards, and gives them more control on how they meet their targets.
  3. The need to lower production costs. According to the INVERTO Nearshoring Study, production costs were rated as a strong or very strong influence for 82% of companies restructuring their supply chains.

Easing the Working Capital Pressures of Nearshoring

As a business strategy, nearshoring is a long game. Successfully defining and executing a nearshoring initiative takes time and a significant outlay of capital up front. For larger-scale nearshoring projects, the time to ROI is often five years or more. Having a strategy in place to minimize the initial cost impact of nearshoring is vital. 

Supply chain finance is one way companies are easing the financial burden of nearshoring. A basic implementation of supply chain finance has the potential to unlock hundreds of millions in working capital by extending supplier payment terms and giving suppliers a way to be paid early without adding debt to the balance sheet. These funds are then used to absorb the cost of nearshoring initiatives.

But there are other increasingly strategic ways to leverage supply chain finance. We are seeing customers fully nearshore operations away from China to places like Turkey and Mexico. In some scenarios, they are using supply chain finance as an instrument of payment to pay nearshored suppliers based on meeting certain milestones as they develop the required infrastructure and labor forces. This paves the way to faster time-to-benefit and ROI. 

Supply Chain Finance – A Financial Solution for Nearshoring Success

Nearshoring has evolved from a trend to a necessity, driven by the imperative for more resilient supply chains. However, the transition is fraught with very costly challenges, from infrastructural developments to regulatory hurdles and skilled labor development. These risks highlight the importance of having tools like supply chain finance in place to mitigate financial risk.

At PrimeRevenue, we’re going above and beyond to help our clients achieve their nearshoring objectives. That means helping companies discover creative ways to leverage supply chain finance as part of their nearshoring journey. While each journey is profoundly unique, the need to alleviate working capital pressures and accelerate ROI is consistent. That’s the work we’re doing – all while fostering strong supplier partnerships that will pave the way for a more resilient, responsive, and efficient supply chain.