Is the next trend in Manufacturing "Nearshoring"?

August 20, 2013 at 11:21 AMHeidi Bragg

Rising wages in Asia and increased fuel costs have led many U.S.-based companies to re-evaluate the pros and cons of outsourcing to Asia. An article in Inbound Logistics magazine explains it as follows: “Once far-flung supply chains are contracting. U.S. manufacturers are bringing production back—not necessarily all the way back to the United States, but to the Americas.” This process is known as “nearshoring.”

Countries in the Western Hemisphere now offer attractive alternatives to Asian outsourcing destinations. In the past decade, many U.S. firms have built manufacturing facilities in Mexico. More recently, IT businesses are also moving parts of their operations south of the border. In addition to Mexico, Central and South American countries like Costa Rica and Chile offer significant benefits for U.S.-based companies that want to outsource. Besides their proximity to the U.S., Latin American firms are more familiar with Western business practices than their Asian counterparts, and are often only a time zone or two away from the companies they’re working for.

The following countries are some of the emerging outsourcing leaders in Latin American:

Mexico has already attracted a number of North American firms, and its location is obviously one of its major benefits. “Mexico has the advantage of being in close proximity to the U.S., allowing American companies to conveniently outsource their software processes to Mexican enterprises,” according to SourcingLine, a resource for top IT firms. For manufacturing companies that need to physically move product, multiple transportation and distribution methods are available at a much lower cost than from Asia. Mexico comes in at #22 on SourcingLine’s ranking of the top outsourcing countries in the world.

The North America Free Trade Agreement (NAFTA) offers many advantages to firms doing business in Mexico. Even the AFL-CIO states that NAFTA, “ ... Made outsourcing to Mexico much more attractive for U.S. companies.” Labor costs are lower than in the U.S., and according to a survey by Alix Partners, “Though security risks are a clear concern among respondents, relatively few have actually experienced supply chain disruption in Mexico. Moreover, executives appear moderately optimistic about the future of the country’s security problems; 50% expect at least modest improvement in safety and security issues.”

Costa Rica
Besides being in the same time zone as the central U.S., Costa Rica is a member of CAFTA, a bi-lateral agreement that expanded NAFTA to five Central American countries. Costa Rica has been a conflict-free democracy since 1949 and many professionals speak English. The Costa Rican-American Chamber of Commerce says that, “Over the last thirty years, Costa Rica has become an attractive country for foreign investment due to its stable government and educated population. The country has transitioned from an agricultural economy centered around bananas and coffee to more advanced sectors, attracting world-class companies such as IBM, P & G, Hewlett-Packard and Intel.”

Small-to-medium-sized businesses are enjoying the benefits of operating in Costa Rica, too. An article in Bloomberg Businessweek, entitled “Costa Rica: Cultural Similarities Make It An Outsourcing Favorite,” describes the experiences of Brian Stafford, president of a California-based software company. Stafford looked at various options in Europe and Asia before choosing to outsource his $4 million company to Costa Rica. He says:  “Costa Rica wasn't even on our radar. But they've been very easy to work with, and this allows us to get products to market much quicker." SourcingLine ranks Costa Rica #21 in its list of top outsourcing countries.

Though it may not be one of the first countries that comes to mind when someone mentions outsourcing, Chile is #11 on SourcingLine’s list. One benefit the country offers is its generous immigration policy. “In Chile, immigration rules are strikingly different than nearby nations like Brazil,” says Narayan Ammachchi, news editor for Nearshore Americas. “And IT companies can bring in as many skilled professionals from overseas countries as they want. Jobseekers from across the world are arriving by thousands and filling up the vacant positions in all sectors of the economy.”

Chile has also created educational initiatives to help meet the demand for greater numbers of well-prepared workers. “After we came the conclusion we were short, especially on ITO workers, we launched a campaign in 2009 called ‘Tu Naciste Para Ser Grande’ or ‘You Were Born to do Something Big,’” remarked Gordana Stojkovic, a Chilean investment promotion executive interviewed by Nearshore America. “(This) not only targeted massive educational institutions, but also the students themselves.” In an article by Jon Tonti, Stojkovic describes how English language programs, technical learning centers, and professional institutes work together to create well-trained graduates who are ready to meet the needs of local and international employers.

When most people hear the word outsourcing, they usually think of a factory somewhere in China, India, or Southeast Asia. Latin American countries, however, are working hard to change that stereotype. They want U.S. companies to realize that excellent outsourcing opportunities exist much closer to home.

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