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Business News/ Opinion / Columns/  Nearshoring is the real deal in global manufacturing

Nearshoring is the real deal in global manufacturing

It has trumped ‘friendshoring’ and shows how a calculus of realism will drive this kind of world trade

Photo: BloombergPremium
Photo: Bloomberg

The products and services of foreign direct investment (FDI) are everywhere around us. Yet, our understanding of it is often woolly and abstract. It took Thomas Friedman’s opening chapter of The World is Flat to pole-vault what was then Bangalore to global fame as the world’s back office. Friedman noticed the large buildings of multinationals that loomed large on the Bangalore skyline and were visible from the golf course as he tee-d off. Infosys’ Nandan Nilekani then helped the New York Times columnist understand the significance of this enormous shift in services work.

Decades later, another NYT global economics journalist, Peter Goodman, this year experienced a similar eureka moment while coming to grips with the speed and scale of ‘nearshoring’. Visiting the Texas border town of Laredo, Goodman was astounded to hear the then mayor say that more goods bound for the US were crossing the border from Mexico into Laredo than through the ports of Los Angeles and Long Beach combined. In a kind of replay of Friedman’s meeting at Infosys with Nilekani, Goodman was invited to visit the Mexican town nearby that had become an industrial hub for Chinese companies moving en masse to Mexico to get around supply chain hurdles being erected to slow Chinese imports into the US. Goodman drove across the border to a a place in the desert an hour north of Monterey. As Goodman told the NYT podcast, his voice filled with wonder, “At a very blank spot in the map, suddenly there’s this enormous construction zone (and) a lot of heavy equipment. There’s a gate marking the entrance to the Hofusan Industrial Park, where these 28 Chinese companies are erecting factories."

One of them was a Chinese sofa and mattress maker named Man Wah, founded in 1992 in Hong Kong, which had hitherto concentrated its production in southern China as well as Tianjin in the north. Sensing that the company needed a base close to the US and within the North American Free Trade Agreement zone, Man Wah decided to build a $300 million factory in Mexico. One of its senior managers, Bill Chan, spoke with one of the marketing people for the industrial park in Mexico. Their conversation was like a speed-dating game that took place over WeChat. Goodman recounted some of the questions: “How are the roads there? ‘Not that great, but they’re getting better.’ Are there any real Chinese restaurants around? ‘Absolutely none’." When Chan heard that 27 of the 28 parcels of land had been snapped up by other industrial investors, he signed a letter of agreement to set up a factory there before he had even boarded the plane from Shanghai. Chan had never been to Mexico, but having seen southern China leapfrog to industrial dominance in the past 30 years, he was sensitive to the shift in manufacturing momentum.

As industrial supply chains are reconfigured drastically to respond to weaknesses revealed by disruptions of the covid pandemic, nearshoring, as symbolized by this Chinese maker of 1.32 million sofas a year shifting to Mexico as a layover en route to the US, is certain to be the most practical model for companies seeking to move manufacturing bases. Onshoring results in being closer to the customer, but the labour costs of developed-world home markets make this a difficult model to adopt. Friendshoring makes for good headlines when visiting government grandees have little else to talk about, but businesses cannot be coerced to invest in a country simply because it is an on-again, off-again partner in diplomacy. Like countries, but even more so, companies are influenced by a calculus of realism. Nearshoring thus makes much more sense when companies in East Asia can take advantage of lower labour costs, say, in Vietnam, which is part of the Regional Comprehensive Economic Partnership grouping, or when firms in Europe look for manufacturing bases in EU fellow member Turkey, despite its periodic economic and physical earthquakes.

The 35-year-old governor of the Mexican border state of Nuevo Leon has been at Davos this year, touting the proximity of industrial parks in his state to the US border—just a two-hour drive away—and his determination to improve highway connectivity. Nuevo Leon claims to be receiving half of all foreign investment coming into Mexico to build factories. Since October 2021, when the young governor took office, the state has seen $7 billion in foreign investment, the highest in the nation after Mexico City. Almost a third of that investment was from Chinese companies, while 47% was from American companies. This is how nearshoring makes a mockery of friendshoring.

Companies need to build resilience in their supply chains or respond to campaigns such as Make in India or the subsidies offered by the US government to make green-energy products at home, and these incentives are already having an effect. But, for many products, the dominant trend in manufacturing will be nearshoring rather than onshoring. Last month, about a fortnight before US commerce secretary Gina Raimondo said all the right things about building alliances and friendshoring on a visit to New Delhi, the Financial Times reported on grave difficulties of quality control at an Apple supplier factory on the outskirts of Bengaluru. The FT report said that just half the components made at the factory were good enough to send on to Foxconn. This omen may prove as significant in charting the trajectory of India’s faltering manufacturing as Man Wah’s lightning-fast move to build a massive furniture factory is a positive sign for Mexico.

Rahul Jacob is a Mint columnist and a former Financial Times foreign correspondent.

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Published: 29 Mar 2023, 10:55 PM IST
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