What Are Near-Shoring and Friend-Shoring and Why They Matter For Western Multinationals

We All Know What Offshoring Is! But, Do We Know What Near Shoring and Friend Shoring Mean?

The term Offshoring is well known for business and management professionals. It denotes the practice of locating manufacturing facilities outside the home country of firms for cost related or efficiency related reasons.

Offshoring can also entail the practice of procuring goods and services made by third party firms from abroad to meet domestic demand as well as to actualize cost savings.

Indeed, Offshoring as a concept became very popular since the early 1990s, coinciding with the globalization wave. However, in recent years, two other terms have entered the lexicon of jargon of corporate and executive professionals as most firms that operate globally are looking for ways to be innovative with their supply chains in the post pandemic world.

These terms are Near-Shoring and Friend-Shoring, about which we would be discussing at length subsequently.

First, to define the terms, Near-Shoring refers to the practice of locating manufacturing facilities in neighboring or in the vicinity countries of the home nation of the global firms.

Friend Shoring, on the other hand, refers to the practice of locating such facilities or procuring goods and services from friendly nations of the home country.

Why Have Near Shoring and Friend Shoring Become So Important For Western Multinationals

Now that we have defined the terms, let us look at why these two terms have acquired so much importance for Western multinationals. First, many Western multinationals are facing problems with their plants or subsidiaries in China due to its erratic and nonsensical Covid lockdowns.

Moreover, even procuring goods and services from Chinese exporters has become a challenge as “clogged” supply chains and increased costs have made such Offshoring unattractive. Third, the United States is no longer so enamored of China and has in fact, moved to label it as the biggest threat to its position in the coming years.

Next, increasingly there are concerns in the West as well as among consumers about the human rights and other aspects in many countries, which traditionally were the suppliers to the former.

Last, there is also a growing realization that it is better to offshore to locations nearby, rather than take the risk of having shipments delayed or worse, never arrived.

So, these and other reasons are making Western multinationals turn to Near-Shoring and Friend-Shoring as an alternative to Offshoring to distant locations. Apart from the significant cost savings, the resultant “peace of mind” is another plus for anxious Western executives.

How Near Shoring and Friend Shoring, In Conjunction with China plus, Are the Future of Outsourcing

Having said that, this does not mean that Offshoring to China would simply disappear. On the contrary, the Chinese are “opening up” after months of draconian Zero Covid lockdowns and in the process, enticing more Western firms with attractive incentives. Next, despite all the concerns discussed in the previous section, the West is not yet “done with” China and this is an important reason why China would not “go away”.

However, it is also a fact that the “China Plus” strategy where Near Shoring and Friend Shoring complement Offshoring to China is emerging as the preferred mode of outsourcing. This is the reason why Mexico (Near Shoring) and Vietnam (China Plus) and India (Friend Shoring) are appearing on the radar of Western Multinationals in recent months.

The pandemic has forced many changes on all of us, including the West, which is now reevaluating its business and corporate strategies.

With pressure to have reliable and dependable supply chains, we predict that Near Shoring and Friend Shoring would go on to become the dominant business strategy in the years to come.

Of course, there is a caveat here and that is China Plus would continue to be the driving force for Westerners.

Xi’s “Losses” Can Become Modi’s “Gains”! How Can India Benefit From These Offshoring Trends

How can India gain from all these changing priorities? For one, it is already benefiting from the China Plus strategy where leading Western firms such as Apple are now exporting more iPhones from India compared to China.

Next, the Modi Government, with its PLI (Production Linked Incentive) and the Make in India policies are subsidizing Western firms in their China Plus and Friend Shoring strategies.

Third, as the Indian Economy grows, it can also become a market for consumption as well as a place to make stuff and export the goods.

Moreover, the Indian IT (Information Technology) Industry has already established itself as a Global leader in Offshoring and hence, this is another area of Synergistic advantage for all stakeholders. Indeed, if India can get its leverage from its Demographic Dividend right, then can make the most of this opportunity where China’s “losses” can become India’s “gains”.

However, it must first try to out compete Vietnam, which has become a serious competitor in the Asian region.

In addition, Indian firms expanding overseas can also benefit as well as it’s very successful Diaspora can become its cultural and business brand ambassadors to aid the Near Shoring and Friend Shoring business strategies.

Conclusion: Innovating Out of Crises

Last, management theory talks about the waves of innovation following any crisis. The post pandemic world is now confronting this as firms globally reevaluate and remake their strategies and approaches to business.

The world is now at an inflection point where the next round of innovation would see us through the remainder of this decade.

This is where Near Shoring and Friend Shoring become important for all stakeholders, because they represent “fresh” thinking which along with the China Plus strategy, becomes a “derisking” move as well. To conclude, outsourcing is yet to dissipate and is recharging itself for the future.