Shaping in trade: leveraging nearshoring, friendshoring and reshoring to overcome rising  uncertainties

Long-distance manufacturing’s hidden costs

For years, companies have opted to locate their manufacturing operations overseas. Lower costs – of labor, inputs or energy – are a primary reason for doing so. Production in another country sometimes comes with regulatory incentives, too. Access to the local market or its trade partners can be an added benefit. For example, China was viewed for years as ‘the factory of the world.’ Today, production costs are rising there, but companies may decide to continue manufacturing there for access to its growing middle-class consumers, or its trade partners.

But offshore manufacturing comes with downsides. Costs for transporting goods across long distances are climbing, in part due to disruptions at shipping choke points like straits and canals. Quality control issues, including counterfeiting and intellectual property threats, can pose reputational risks. Furthermore, transportation-related resource consumption and emissions have environmental repercussions.

And the greatest risks of offshore production are related to supply chain structure, according to the Allianz Trade 2024 Global Survey. One structural concern for polled organizations is the concentration of production in one or two locations, which risks disruption if geopolitical conflicts block trade there. At the opposite end, an overly complex chain spanning numerous facilities and countries makes monitoring difficult. The second biggest risk, according to our survey respondents, is geopolitics, followed by the importance of ensuring supplier sustainability.

Three strategies for moving manufacturing

Faced with the risks that come with long-distance manufacturing, companies are increasingly looking for new production locations to diversify their supply chains. This reconfiguration is primarily a hedge against increasing geopolitical uncertainty, which for some companies may mean reducing their dependence on China. Three strategies for doing so are nearshoring, friendshoring and reshoring.

1. Nearshoring involves setting up manufacturing close to the final market, such as a German company producing goods in Poland.
2. Friendshoring entails locating production in a country allied with the exporter’s own nation, like a Norwegian company sourcing goods from geopolitical ‘friends’.
3. Reshoring means manufacturing in the company’s home country, such as a French company sourcing goods made in France.

Supply chain diversification holds numerous advantages. Namely, it may mitigate the top risks to supply chains like overconcentration, supplier sustainability and, especially, geopolitics. High tariffs and trade barriers can be avoided by sourcing goods from a ‘friendly’ country or the home country. Companies that bring production closer to home through nearshoring or reshoring also enjoy the benefits of a shorter supply chain. These include a faster time-to-market, reduced transportation risks and costs, enhanced visibility and communication, and improved sustainability. With reshoring specifically, companies are able to operate in their own country’s familiar regulatory and cultural environment.

The top choices for new production locations, for companies responding to our latest Global Survey, are Western Europe or Asia Pacific. Survey respondents prefer moving manufacturing near the final market or within the initial offshore region. This is evidenced by US and Chinese companies that prefer setting up production in new countries in Asia Pacific. Looking at efficiency, connectivity and trade potential, we identified the top 25 next-generation trade hubs among emerging markets and found that many are located in Asia and fast-growing mid-size countries with already established manufacturing or logistics hubs (e.g. Malaysia, Vietnam, Indonesia, the Philippines, the UAE etc.). Meanwhile, Western European companies favor nearshoring within their region – thanks to the European single market, nearshoring and reshoring are almost synonymous in this region.

These manufacturing strategies are not a cure-all. For all their benefits, reshoring and nearshoring can also entail higher costs, tougher regulation, and shortages of labor and suppliers – risks that are brought up by respondents of our Global Survey. And on the whole, adding suppliers in a new country increases supply chain complexity by introducing more facilities and another regulatory environment to monitor. Our supply-chain complexity index , which takes into account shifts in trade flows, geographic distance, geopolitical alignment and our country risk ratings, shows that supply-chain complexity in 2023 has risen 2x compared to 2017, or 6x compared to the pandemic years.

Diversification, not overhaul

It’s important to note that the trend is toward diversification – not overhaul – of manufacturing strategies. This shift does not mark the end of globalization. Notably, companies often keep their original offshore facilities while opening additional ones elsewhere.

An apt example is China. Rather than stopping production there, many Western companies are now opting for diversification by adding manufacturing in one or two additional countries (sometimes called a China+1 or China+2 strategy). There is no sign at present of a decoupling from China, which remains the world’s critical supplier, often accounting for the majority of imports of a particular product.

Guided by long-term analysis

Companies today are becoming more selective in how they trade, increasingly prioritizing geopolitical alliances and ESG concerns. Supply chain decisions now involve evaluating factors such as the environmental impact and labor practices of suppliers. Cost optimization is no longer the sole basis for manufacturing strategy; effective strategies now consider long-term risks, reputation and geopolitical trends.

Allianz Trade helps companies navigate geopolitical uncertainty with predictive intelligence from our global team of macroeconomists and sector analysts. We enable customers to anticipate market changes and shape new opportunities ahead of competitors.

In our Global Survey 2024, we asked over 3,000 companies in China, France, Germany, Italy, Poland, Spain, the UK and the US about their outlook for global trade in the year ahead.