In recent years, major global disruptions have exposed the fragility of the automotive supply chain. From natural disasters and geopolitical conflicts to semiconductor shortages, numerous concerns have heightened industry uncertainty. In response to this uncertainty, the trend of regionalization has been increasingly emerging, and nearshoring has consequently gained more attention.

Nearshoring, the process of relocating production and supply chains closer to key target markets, was once viewed purely as a cost-reduction measure. Today, its ability to enhance supply chain resilience and reduce risk is increasingly valued. However, this strategy is not without its own drawbacks. Like any strategy, suppliers must carefully weigh the pros and cons.

When evaluating nearshoring options, suppliers should carefully consider several key factors.

Understanding the changing landscape

Over the past few decades,offshoreproduction (i.e., moving production away from target markets to obtain lower manufacturing or labor costs) was widely prevalent—especially when original equipment manufacturers were experimenting with "global vehicle" product strategies. As the industry begins to return to a more regionalized structure, a key question emerges: How will supply chains adapt to this shift?

Trade and geopolitical frictions have significantly impacted the risk-reward balance. These factors include US-China tariffs that began in 2018, and regional value content requirements that took effect with the United States-Mexico-Canada Agreement (USMCA) in July 2020. Such measures encouraging nearshoring to North America are among the many considerations driving the industry's increasing regionalization.

When electric vehicles are factored into the equation, additional considerations arise, as many countries are attempting to build and protect their own EV value chains. One example: The United States recently imposed tariffs of up to 100% on Chinese EVs, on top of the existing 25% tariffs on various goods imported from China.

Indeed, global suppliers shipping to North America must also evaluate the following factors:

Beyond recognizing the international trade implications of nearshoring, suppliers must also understand how shortening their supply chains can enable them to:

  • Simplify logistics. By supporting more "just-in-time" production, nearshoring may help minimize inventory exposure to unforeseen supply chain disruptions—such as container shortages or recentUS dockworker strikes(which could reoccur in mid-January 2025) and other labor disputes. It may also reduce exposure to geopolitical conflicts.
  • Reduce costs. This hallmark advantage of nearshoring has not disappeared. Shorter supply chains may mean lower transportation, manufacturing, and labor costs.

Strategic planning

Although nearshoring may be a good opportunity for some suppliers, both the decision and its execution are not easy. To achieve the intended goals, critical analysis and a solid plan are necessary, so suppliers must first do two things:

  • Build a solid business case.Effective nearshoring decisions involve complex evaluations requiring extensive accounting and risk management analysis. Key areas of expertise that should be readily available include real estate, tax, permitting/approvals, supply chain, cross-border manufacturing, and operations. Additionally, it is important to seek guidance from individuals with deep knowledge of the supplier's specific market segment.

The overall goal is to weigh the potential benefits of nearshoring against legacy costs (such as the total cost of existing investments and their expected return on investment timeframe) and the costs of rebuilding assets. How will total cost of goods change? What production volume is needed to recoup the costs?

  • Understand the challenges and prepare accordingly.Challengeswill inevitablyhinder any nearshoring strategy. The key is to identify the challenges and be fully prepared.

For example, if the workforce at a potential new location lacks the necessary skills, suppliers may consider launching training programs. Conversely, nearshoring may solve existing talent issues. For instance, a Japanese company with sales in the US recently explored nearshoring to mitigate talent risks arising from Japan's aging workforce.

The reality is that nearshoring decisions are often made without 100% of the required information. Therefore, suppliers should also understand their own risk appetite when planning the way forward.

Don't blindly follow the trend

The decision to nearshore is no longer purely a financial economic issue; it is also a strategic risk mitigation measure. The current trend of supply chain regionalization may help some companies adapt to ongoing disruptions and uncertainties in the industry.

However, like any trend, nearshoring is not suitable for everyone. Each supplier must examine itsspecificbusiness, understand its total landed cost, and build a solid business case for shortening the supply chain—or moving in a different direction. The challenges of nearshoring are real and significant; they must be studied and planned for as carefully as its benefits.

About the authors

Mark Barrott
Partner, Mobility and Automotive Practice, Plante Moran
Mark Barrott is aPlante Moranpartner in the Mobility and Automotive Practice. He builds strong relationships with global automotive clients, helping them define future strategies, develop actionable plans, and achieve long-term goals.
Alejandro A. Rodriguez
Partner, Global Services Practice, Plante Moran
Alejandro Rodríguez is aPlante Moranpartner in the Global Services Practice. He focuses on helping clients—from innovative startups to industry-leading multinational corporations—successfully explore, establish, launch, and operate business ventures globally.