Onshoring: Understanding the Concept, Industries that Benefit, and Disadvantages

In international business, the terms "onshore," "offshore," and "nearshore" are often used to describe the location of operations relative to the company's primary market, headquarters, or strategic interests. Onshoring involves locating business operations or manufacturing processes within the same national borders as the company’s home base. It can also involve relocating a domestic company to another spot within the same country. It's a strategy that presents numerous opportunities, as well as challenges, for businesses in almost every industry.

In this article, we will discuss the core principles of onshoring, explore the industries that reap its benefits, and many more. 

What Is Onshoring?

Onshoring is a business strategy that involves setting up production within national borders. It involves keeping production or operational processes in the same country where the products are consumed or services are provided, regardless of the country's location. Onshoring is often implemented to enhance responsiveness, reduce shipping times, and align with consumer preferences for locally produced items.

Onshoring can mean one of many things. In the first scenario of this business strategy, a company collaborates with a vendor or manufacturer located within the same country as the target market for their goods or services, in other words, domestic outsourcing. In the second scenario, onshoring can refer to any direct investment into the domestic marketplace by a domestic company. This means that it doesn’t necessarily have to be outsourced to third-party vendors. Finally, onshoring could also mean relocation of activities to a lower-cost location within the national borders. All of these scenarios form part of the umbrella term ‘onshoring’. 

The main thing that all these onshoring ‘scenarios’ have in common is that the operations take place in a domestic location (within national borders). However, when a company that was formerly located in a foreign country, brings business operations back within national borders, this is not seen as onshoring, this is seen as reshoring. 

How Does Onshoring Work?

Onshoring works by setting up onshore subsidiaries or partnering with local service providers for tasks such as app development, payroll processing, or manufacturing. The key principle is that all business activities remain within the same legal and regulatory environment, subject to the laws and regulations of the company's own country. There are three common forms of onshoring:

1. Onshore Company: Operates within the same legal and regulatory framework as your business, within your own country. This can be a separate legal entity or a division/factory belonging to your company.
2. Onshore Outsourcing: Partnering with external companies situated within your home country to perform various services, such as app development or payroll processing, or manufacturing products or parts, like car parts, for example. 
3. Relocating Business Operations Within National Borders: Relocating a company that is already within national borders to a new lower-cost location within the same country. 

What Are Examples of Onshoring?

Onshoring can take different forms in different industries. Here are three examples of onshoring within different industries:

1. Domestic Manufacturing: A company decides to produce its goods or products within its home country rather than outsourcing production to foreign facilities. This approach allows the company to maintain control over quality, avoid shipping costs, and support the local economy.
2. Local Customer Support Centers: A company establishes customer support centers within its home country to provide services to domestic customers. This ensures clear communication with customers in the same language and time zone.
3. In-House Software Development: A business chooses to develop software applications, websites, or IT solutions internally or by hiring local development teams. This approach provides greater control over the development process and intellectual property while leveraging local expertise.
4. Relocating Business Operations:  Moving existing operations within the same country is also an important aspect of onshoring, and it can apply to various industries beyond manufacturing, customer support, and software development. Companies may choose to onshore their call centers, data centers, logistics operations, and more to reduce costs or improve operational efficiency within their home country. 

What Factors Influence Companies' Offshoring Decisions?

Several factors influence companies' decisions to onshore their operations or activities. These factors can vary depending on the specific industry, company goals, and market conditions. Some of the key factors include:

1. Cost considerations such as:abor costs, taxes, regulatory compliance costs, and other expenses associated with domestic operations.
2. Quality control over production processes, quality assurance, and adherence to industry standards. Close proximity to the target market can lead to shorter lead times, reduced shipping costs, and better responsiveness to customer demands.
3. Concerns about intellectual property theft or data security such as research and development or proprietary manufacturing processes.
4. If customers have a preference for domestically produced goods or services, companies may opt for onshoring to align with these preferences and enhance brand reputation.
5. Enhance supply chain resilience by reducing exposure to international risks
6. Acquire specific skills that are readily available locally.
7. Onshore customer support or sales functions to ensure effective communication and cultural alignment with the domestic market, specifically for customer-facing roles.
8. Can align with sustainability goals by reducing carbon emissions associated with long-distance transportation, and by promoting local economies.
9. Some governments offer financial incentives or tax breaks to encourage onshoring.

What Industries Use Onshoring?

Onshoring is a business strategy that aligns with national economic interests and can be applied to many industries, such as:

1. Manufacturing

The trend in manufacturing and business strategies have evolved over the years, and there has been a notable shift towards onshoring or reshoring in recent times. This shift is driven by various factors, including changing economic conditions, supply chain vulnerabilities highlighted by global events (such as the COVID-19 pandemic), and the desire to gain the advantages of local production. In onshoring scenarios, manufacturing enterprises choose to establish or relocate their local production facilities within their home countries to gain proximity to consumers, reduce shipping costs, enhance quality control, and respond quickly to market demands.

2. Customer Support and Call Centers

Onshoring customer support and call center operations allows for improved communication with customers, reduced language and cultural barriers, and enhanced customer satisfaction due to timely and efficient support. Onshoring customer support to the same country as the target market also eliminates the hassle of time zone differences between countries. 

3. Information Technology (IT) Services

Onshoring IT services involves locating software development, IT support, and other technology-related functions within the same country as the client or customer base. This can lead to better collaboration, reduced time zone differences, and increased control over intellectual property.

4. Data Security and Privacy

Industries dealing with sensitive data, such as financial services and healthcare, often onshore data security and privacy operations to ensure compliance with local regulations and maintain a high level of control over data protection.

5. Agriculture

Onshoring is also relevant in agriculture, where local sourcing and production can promote food security, reduce supply chain vulnerabilities, and support domestic agriculture.

6. Apparel and Fashion

The apparel and fashion industry may onshore manufacturing to maintain greater oversight of design and production and improve quality control. Improved quality control in the apparel and fashion industry when onshoring manufacturing typically relates to the advantages of proximity, communication, responsiveness, and visibility that come with manufacturing facilities located closer to a company's headquarters or design teams. This setup allows for more frequent quality checks, smoother communication, quicker issue resolution, and direct oversight of the production process, enabling companies to better monitor and maintain adherence to quality standards. It also aligns with consumer preferences for locally made and ethically produced fashion items.

7. Energy Production

In the energy sector, onshoring can involve the localization of energy production facilities, such as power plants and renewable energy installations, as opposed to relying heavily on importing and exporting electricity to neighboring countries. This strategy enhances energy security, reduces transmission losses, and creates domestic job opportunities by ensuring a more self-reliant and resilient energy infrastructure within the country.

8. Pharmaceutical and Medical Supplies

Onshoring pharmaceutical and medical supply production ensures the availability of critical healthcare products within the country, for example the U.S., especially during emergencies. It can also facilitate adherence to stringent regulatory standards and quality control.

9. Automotive Industry

In the automotive sector, onshoring manufacturing operations can lead to shorter supply chains, reduced lead times, and production that is more responsive to consumer demand. Onshoring manufacturing operations in the automotive sector offers advantages in terms of responsiveness to consumer demand, although it's not the sole factor at play. While it's true that companies can communicate with overseas production facilities to adjust output based on demand fluctuations, onshoring often provides a more agile and flexible approach. This is primarily due to shorter lead times for parts and materials from local suppliers, reduced logistical complexities, and enhanced supply chain resilience. The proximity of onshored manufacturing facilities simplifies production scheduling and minimizes delays associated with long-distance coordination. Additionally, onshoring aligns with national economic and strategic interests, as it can stimulate domestic economies, create jobs, and enhance national security by reducing reliance on international supply chains. These combined factors make onshoring an appealing strategy for improving production responsiveness in the automotive industry. 

How Does Onshoring Optimize Manufacturing Processes?

Onshoring optimizes manufacturing processes by locating production facilities or activities within the same country where a company's target market or customers are located. This approach offers several advantages that enhance manufacturing efficiency. Onshoring reduces shipping times and costs, as products do not need to traverse long distances. This proximity enables manufacturers to respond quickly to changes in customer demands.

A simplified and localized supply chain, characterized by shorter distances between suppliers and manufacturers, contributes to streamlined logistics, reduced complexity, and enhanced supply chain resilience. Moreover, onshoring promotes better quality control through close oversight of the production process, resulting in fewer defects and higher overall product quality. 

What Are the Benefits of Onshoring?

Here are the key benefits of onshoring:

1. Reduces transportation costs, minimizes customs charges, and avoids expensive airfreight. Some countries offer financial incentives for onshore operations.
2. Simplifies compliance with domestic regulations, ensuring easier adherence to quality standards and intellectual property protection.
3. Onshore service providers understand local markets and can tailor services to meet evolving demands.
4. Shared cultural context with onshore providers enhances effective communication and client interactions.
5. Enables easier oversight, shorter turnaround times, and efficient issue resolution.
6. Keeping all aspects of production within the same country simplifies supply chains, reduces complexity, and minimizes international risks.
7. Creates jobs, stimulates local economies, increases consumer spending, and contributes to economic growth.

What Are the Key Cost Savings for Companies Due to Onshoring?

Onshoring reduces shipping costs by locating production facilities closer to the target market and minimizes inventory holding costs. Lower transportation expenses and customs duty savings result from shorter supply chains, while simplified compliance with import/export regulations further contributes to cost savings. Proximity to production facilities reduces the need for extensive buffer stocks and costly emergency orders. 

How Does Onshoring Help Businesses Maintain Better Quality Control Over Their Products or Services?

Onshoring plays a huge role in helping businesses maintain better quality control over their products or services. Companies gain direct oversight and proximity to their production processes. This proximity allows for frequent and real-time monitoring, fostering tighter quality control. Companies can readily identify and address issues, resulting in fewer defects and higher overall product or service quality. Furthermore, the shared regulatory and compliance framework in the home country simplifies adherence to industry standards, safety regulations, and quality control measures.

What Regulatory and Legal Benefits Does Onshoring Offer?

Onshoring provides businesses with several regulatory and legal benefits that stem from operating within the same country where they are headquartered. Companies can more effectively protect their intellectual property, relying on familiar legal mechanisms for safeguarding patent, trademark, and proprietary information. Contract enforcement becomes more straightforward, as agreements made within the home country are easier to uphold through local legal systems. Onshoring also enables adherence to local data security and privacy laws, enhancing protection for sensitive customer data.

What Are the Disadvantages of Onshoring?

Onshoring, while offering several benefits, also comes with its share of disadvantages that companies must carefully consider:

1. Competitive Disadvantages

Onshoring can lead to higher production costs compared to offshore alternatives. This can potentially impact a company's competitiveness in the global market where lower-cost options exist. This will be location-specific and will vary from country to country. However, companies often employ strategies such as increased automation to mitigate these higher costs. The ability to remain competitive in the global market is influenced by a combination of factors, including labor costs, automation, efficiency gains, and the unique competitive landscape of each industry.

2. Supply Chain Disruption

Onshoring, especially within the same country, can expose businesses to supply chain disruptions that are specific to domestic or regional factors. While natural disasters, labor strikes, and economic fluctuations can potentially impact any location, certain disruptions may be more pronounced in areas with specific economic conditions or regulatory environments. For example, onshoring from industrialized, unionized regions to areas with "right to work" laws may reduce the risk of labor strikes but introduce other complexities related to labor dynamics.

3. Relocation Costs and Risks

When a company considers establishing or relocating operations domestically through onshoring, it can encounter certain risks associated with the transition to new locations. These risks encompass several aspects of the relocation process. Firstly, there may be temporary operational disruptions as equipment and infrastructure are moved, set up, and tested in the new location. Secondly, workforce challenges may arise, including the recruitment and training of new employees or the relocation of existing staff. This can involve logistical and human resource complexities and concerns about retaining skilled workers. Additionally, different regions or states within the country may have varying regulations and compliance requirements, necessitating careful management to ensure adherence. Lastly, the transition may require adjustments to marketing strategies, distribution networks, and customer relationships, potentially impacting market share and sales during this period. 

4. Trade Barriers and Tariffs

Onshoring may not necessarily shield a company from trade barriers and tariffs, particularly when the onshored plant produces components or parts that were previously sourced internationally. In such cases, domestically produced components may now be subject to tariffs when shipped to foreign markets, potentially impacting production costs and market access. The specific impact will depend on the products, materials, and international trade agreements in place.

5. Higher Labor Costs

One of the primary disadvantages of onshoring is the potential for higher labor costs compared to offshore locations with lower wage rates, which can impact overall profitability.

6. Limited Access to Specialized Skills

Some specialized skills or expertise may be more readily available in other countries. Onshoring may limit access to these specialized resources. An example here would be a technology company in the United States outsourcing software development to India, a country known for its strong IT and software engineering talent pool. India’s labor costs are also a lot lower versus if the company decides to onshore its software development operations to the United States.

7. Loss of Global Market Presence

Focusing on domestic or regional markets through onshoring can have both advantages and disadvantages. On one hand, localizing production in specific countries can enhance cultural alignment and market fit, serving the needs of those markets more effectively. However, this localized approach may potentially limit a company's global market presence, making it miss out on international growth opportunities. It's important to strike a balance between local and global strategies, as onshoring doesn't necessarily mean a complete withdrawal from international markets. Companies can still export domestically produced goods but should carefully consider factors like tariffs and their overall global market strategy.

8. Impact on Workforce

Domestic-to-domestic onshoring can have implications for the workforce in the region where operations are downsized or relocated. While onshoring often brings benefits such as job creation and economic opportunities to the destination region, it can leave behind a workforce in the source region that may face job displacement or changes in employment dynamics. The impact on local workers can vary depending on the skills required for the new operations in the destination region. If the new onshored activities are highly automated, there may be fewer low-skill job opportunities, potentially affecting workers who may need alternative employment options or retraining. Balancing the benefits and challenges for both source and destination regions is a critical consideration in domestic-to-domestic onshoring decisions.

Does Onshoring Affect a Company's Global Competitiveness, Especially Against Offshore Competitors?

Yes. Onshoring can indeed impact a company's global competitiveness, particularly when compared to offshore competitors. The effect depends on various factors, including: cost competitiveness, quality control, proximity to the market, and supply chain resilience. Onshoring typically involves higher labor and operational costs, potentially affecting cost competitiveness against offshore competitors with lower wages. However, it can offer advantages in terms of quality control, quicker responses to local market demands due to proximity, and enhanced supply chain resilience, reducing exposure to international risks. Additionally, some consumers prefer locally produced goods and services, potentially giving onshore companies a competitive edge. Ultimately, the impact on competitiveness varies depending on a company's specific circumstances.

Does Onshoring Affect Companies' Market Presence and International Access?

Yes, onshoring might have an impact on a company's market presence and international access. When a company chooses to onshore, it often means prioritizing local or regional markets. This focus can lead to a stronger market presence within the home country or region, allowing for deeper market penetration and customer engagement. However, this emphasis on onshore markets may come at the cost of reduced global reach. Companies may allocate fewer resources to international expansion and marketing efforts, potentially resulting in a loss of global market share. Onshoring can also lead to market segmentation, where products or services are tailored to local market preferences, potentially limiting their appeal in international markets. Trade barriers, such as tariffs and import restrictions, may apply, impacting international access. The bottom line is that onshoring might require companies to make strategic trade-offs between local and international markets. They can do this by considering their specific goals and priorities.

Does Onshoring Affect Offshore Workers and Job Displacement?

Yes, it can, but reshoring has a bigger part to play here since this outcome often arises when companies decide to relocate certain business functions or manufacturing processes from offshore locations back to their home country. Consequently, jobs that were previously outsourced to offshore workers may be displaced. 

The extent of job displacement can vary depending on the industry, with some sectors being more vulnerable to job losses due to reshoring than others. Factors such as: rising labor costs in offshore locations, government policies, and economic considerations can influence the decision to reshore. To address potential job displacement, some companies or governments may invest in workforce development and retraining programs to equip affected offshore workers with skills that are in demand in emerging industries or sectors.

Is Onshoring the Same as Outsourcing?

Yes and no. Onshoring can be a form of domestic outsourcing. In this scenario, onshoring is the activity of outsourcing business functions or processes to a third-party service provider located within the same country or national borders as the hiring company. In onshoring, both the company and the service provider operate within the same domestic market. 

Outsourcing is a broader concept that encompasses the delegation of tasks or processes to external parties, which can be located either abroad or domestically. In outsourcing, the location of the service provider can be within the same country (onshoring) or in another country (offshore outsourcing or offshoring).

What Are the Best Onshoring Companies?

Determining the "best" onshoring companies can vary depending on your specific needs, industry, and location. It will depend on factors like the nature of your business, the services or products you require, your location, and your budget. Here are a few examples of well-known onshoring companies in different industries:

1. Information Technology (IT) Services: For onshoring IT services, providers like Cognizant, Capgemini, and DXC Technology have a presence in various countries.
2. Customer Support and Call Centers: Onshoring customer support functions can be done through companies like Alorica, Convergys (now part of Concentrix), or Sitel.
3. Data Security and Privacy: Security and data privacy services can be onshored with firms such as IBM Security, Symantec (now part of Norton LifeLock), or McAfee.
4. Apparel and Fashion: Brands like Levi Strauss, New Balance, or L.L.Bean often emphasize onshoring for certain product lines.
5. Automotive Industry: Automakers like General Motors, Ford, and Toyota have a significant onshore manufacturing presence in the United States, where their headquarters are based. 
6. Consumer Electronics: Brands like Apple and Dell have invested in onshoring some of their manufacturing and assembly operations in the United States.

What Is the Difference Between Onshoring and Reshoring?

Onshoring is a business strategy in which a company outsources specific business functions or manufacturing processes to third-party service providers or manufacturers that operate within the same country as the hiring company. It can also involve relocating a domestic organization to another location within  the same country, or establishing business operations within the country of origin. Unlike offshoring, which involves outsourcing to foreign countries, onshoring keeps operations within the national borders of the company’s home base.

Reshoring, on the other hand, is the opposite of offshoring, where a company moves its manufacturing or production to another country. Reshoring means bringing operations that had at one time been in the home base country, but which had been offshored, back to the home base country.  This is often done by companies to reduce their dependence on foreign suppliers or to address various economic, logistical, or strategic considerations. Reasons for reshoring could be to decrease lead times, to address rising overseas costs, and to support the local economy, among others. 

What Is the Difference Between Onshoring and Nearshoring?

Onshoring and nearshoring are both strategies that involve locating business operations or processes closer to the company's home market. Onshoring can have more than one scenario, one of them being to relocate a local company within national borders, while nearshoring transfers an operation to a country near the home country, usually one with lower labor costs. Other scenarios for reshoring could be outsourcing to a domestic third-party, or to establish a business within the national borders. Onshoring is often chosen for reasons such as better quality control, shorter supply chains, compliance with local regulations, and supporting the local economy. 

Nearshoring, on the other hand, may involve outsourcing to a neighboring country or a country within close geographic proximity to the company's home country, but it does not necessarily have to be outsourced to be considered nearshoring. For example, nearshoring from the US to Mexico. This is also considered nearshoring because the company is moving its operations closer to its home country (the United States). However, it can also be considered outsourcing because the work was originally in the United States, and it is being outsourced to Mexico.

While nearshoring may still involve outsourcing to an external service provider, it provides advantages such as reduced time zone differences, improved communication compared to offshoring, and potentially lower labor costs compared to onshoring. Nearshoring is commonly chosen when companies want to balance cost savings with the benefits of proximity and, in some cases, cultural alignment.

What Is the Difference Between Onshoring and Offshoring?

Onshoring and offshoring refer to different business strategies in terms of their location based on the home country where the original company is situated. It involves either establishing business operations within the company's home country, relocating local business operations within national borders, or outsourcing them to entities located there, ensuring that the outsourcing partner is within the national borders of the hiring company. In contrast, offshoring mainly involves the outsourcing of business functions or manufacturing processes to third-party service providers or manufacturers located in foreign countries. It is also likely that the foreign operation is owned and managed by the original company. 

Offshoring takes place across international borders and is often driven by factors such as cost savings due to lower labor or production costs, access to specialized skills, or global market expansion. Companies engage in offshoring to leverage the advantages offered by lower costs in foreign labor markets, even if it entails longer supply chains and potential challenges related to distance, time zones, and cultural differences.

Summary

This article presented onshoring, explained it, and discussed the concept and which industries benefit. To learn more about onshoring, contact a Xometry representative.

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