23008_Nearshoring Report

SO, WHAT ARE THE FACTORS THAT ARE ACTUALLY DRIVING NEARSHORING?

CAPITAL DEPLOYMENT

GEOPOLITICS

SUSTAINABILITY

In the face of rising economic challenges and geopolitical tensions, governments are becoming more protectionist about their own and their allies’ economic development – as well as restricting others. Trade ‘wars’, particularly between the US and China, have created challenging working conditions for businesses, particularly in Europe where business arrangements with partners in one country may impact their opportunity to work with companies in others. Governments are now increasingly focused on economic development (even protectionism) including productivity improvements and are increasingly coalescing their support around manufacturing as a “solid” form of growth, jobs and economic benefit. As a result, governments have been establishing more investment friendly policies, have been offering grants and tax incentives as well as creating hurdles or barriers for imported goods to be moved into their countries, particularly where there is potential erosion of domestic economic or technological industrial advantage.

As sustainability has become far more important for businesses and consumers, the impact of long, transport-heavy supply chains is shaping the locational choices that businesses are making. This is now increasingly in focus for businesses, particularly as the offset of low costs of production in farther away locations may be the loss of revenue through customers choosing to contract with or investors invest in competitors with more sustainably-minded practices. This will become even more important when the EU’s Carbon Border Adjustment Mechanism (CBAM) is introduced. This new initiative aims to “put a fair price on the carbon emitted during the production of carbon intensive goods that are entering the EU, and to encourage cleaner industrial production in non-EU countries”. The gradual introduction of the CBAM – with the transitional phase starting in 1 October 2023 and full implementation from 1 January 2026 – will mean that importers will need to pay for CBAM certificates corresponding to the the quantity of goods imported into the EU in the preceding year and their embedded greenhouse gas emissions.

Companies have also become increasingly focused on how their working capital is deployed. Having capital tied up in inventory moving over long distances over long periods of time can mean significant ‘hold time’ for cash outlay to suppliers compared to the receipt of funds from customers. This means that working capital ‘float time’ is extended. From a lean perspective, moving the point of production or sourcing closer to the location where the goods are needed means that the time between capital outlay to revenue receipt is reduced and can be beneficial to businesses’ financial strength (for example, by increasing working capital on balance sheet which can improve lending conditions).

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