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Canada's nearshoring opportunity: The benefits of bringing assembly back to North America

There is an employee in a factory working to cut a large piece of steel.
03 Dec 2013

According to the 20th Annual Survey of Third-Party Logistics Provider CEOs by Penske Logistics, North American companies are moving out of Asia and bringing their manufacturing operations back to the U.S. and Canada or nearshoring to Mexico. North American manufacturing continues to embrace reshoring and nearshoring, especially as more companies begin to move toward using high-skilled labor rather than low-skill assembly, which dominates Asian manufacturing. The Financial Post reported the reshoring and nearshoring movements are more dominant with American manufacturers than Canadian companies, which seem to be lagging behind. In an interview with HSBC Global Connections, Harry Moser, founder of the U.S. Reshoring Initiative, suggested Canada may not be able the best place to reshore for many companies, making offshore manufacturing to Mexico much more beneficial.

Canada's unique challenge
Compared to the U.S., Canada's reshoring efforts aren't as strong. According to The Globe and Mail, Canadian unit labor costs (ULC), or the average cost of labor per unit of output, rose 75 percent between 2000 and 2012 compared to the U.S., a factor which may be hindering Canadian companies from reshoring to the country. With wages rising in China, U.S. companies are choosing to reshore back to the U.S. or offshore south to Mexico. The Globe and Mail reported Canada's manufacturing base might begin to decline. In fact, the country's number of manufacturing jobs is dropping. According to the newspaper, there were 53,400 fewer positions in Canada's manufacturing sector in August 2013 compared to August 2012. 

"We're seeing traditional manufacturing line jobs going steadily down in the automotive sector," Michael Bloom, vice president of organizational effectiveness and learning at the Conference Board of Canada, told the Financial Post. "On the other hand, if you look at high-value-add areas of the technology sector, you can see other jobs being created that are manufacturing but not high volume."

Additionally, when American companies move production back to the U.S. they invest in higher quality positions and advanced technology, increasing their competitiveness. According to the Financial Post, Canadian manufacturers could lose out on this drive in innovation within North American manufacturing if they don't migrate back to North America from Asia. Yet reshoring might not be a viable option for many Canadian manufacturers. In order to be innovative and still maintain costs and productivity, Canadian companies will have to nearshore to Mexico.

Nearshoring's benefits
According to Moser, a major trend in North American manufacturing is expanding to Mexico. The Penske Logistics survey found nearshoring is biggest among companies in automotive and technology, which are industries that often require experienced labor to stay innovative and competitive. According to the survey, this movement can best be seen through the number of third-party logistics services that are employed in Mexico. Of the respondents, 87 percent said they are providing services to manufacturers in Mexico. For Canadian companies, Mexico is much closer to end markets than other offshoring destinations, has an adaptable supply chain and has the high-skilled labor needed to stay competitive with U.S. businesses. Some American companies choose to nearshore rather than reshore for these benefits, and Canadian businesses may want to follow suit.

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