How Nearshoring Can Boost Private Equity Profits
Global political tensions and supply chain vulnerabilities have constituted a one-two punch for private equity firms with manufacturing companies in their portfolios. This has many private equity firms on the lookout for calmer shores.
Nearshoring—relocating business operations closer to home—has emerged as a compelling option. The Nearshore Company offers unique advantages for private equity firms looking to enhance profitability and operational efficiency for their portfolio companies through nearshoring in Mexico.
The Strategic Shift to Nearshoring
Even before the pandemic, businesses with significant manufacturing exposure contemplated the benefits of moving production closer to their primary markets. Factors such as protectionist policies, inadequate intellectual property protection, and rising labor costs in traditional manufacturing hubs like China have driven this trend. According to Middle Market Growth, over the past two decades, hourly manufacturing labor costs in China have surged by over 500 percent, making it less competitive.
The COVID-19 pandemic further highlighted how fragile global supply chains can be. This has accelerated the move toward reshoring and nearshoring. A report by Xometry indicates that 55 percent of U.S. CEOs in manufacturing plan to reshore operations, with many aiming to do so within the year. For private equity firms, this presents a significant opportunity to reassess and optimize their manufacturing strategies during their investments’ due diligence and ownership phases.
The Nearshore Advantage
Nearshoring offers multiple benefits that can significantly boost the profitability of portfolio companies:
1. Cost Efficiency: Nearshoring to Mexico can dramatically reduce total landed costs, which include tariffs, shipping, warehousing, and losses due to shrinkage. These savings can improve the overall cost structure and profitability of portfolio companies.
2. Enhanced Supply Chain Resilience: By bringing manufacturing closer to the U.S., companies can reduce lead times and improve their ability to respond to market changes. This agility is crucial in maintaining competitive advantage and meeting customer demand effectively.
3. Government Incentives: Mexico offers various incentives for local manufacturing. Additionally, U.S. policies like the Inflation Reduction Act and the CHIPS and Science Act provide tax credits and grants for specific industries, further enhancing the financial appeal of nearshoring.
Practical Considerations for Nearshoring
Implementing a successful nearshoring strategy requires meticulous planning and execution. Here are key steps to consider:
1. Thorough Evaluation: Conduct a detailed analysis of the business and financial case for nearshoring. This includes assessing current and future tariff impacts, lead times, and the criticality of components to the end product.
2. Project Planning: Develop a comprehensive plan that outlines the transition process, including building sufficient inventory to meet customer demand during the transition and recreating necessary tooling and manufacturing processes.
3. Risk Management: Identify potential risks and develop contingency plans to address them. This involves validating manufacturing processes and ensuring the capacity to meet demand once local production ramps up.
The Nearshore Company’s Commitment
At The Nearshore Company, we are dedicated to helping private equity firms maximize the potential of their portfolio companies through nearshoring. With more than 30 years of experience, we provide deep industry insights and tailored strategies to optimize manufacturing operations. Plus, our cost models are designed to enhance operational capacity while maintaining cost efficiency, helping you achieve your financial goals. Our goal is to be your trusted ally, committed to your success, and focused on building long-term, mutually beneficial relationships.
Nearshoring presents a strategic opportunity for private equity firms to boost the profitability and resilience of their portfolio companies. By partnering with The Nearshore Company, firms can leverage Mexico’s manufacturing advantages and secure a competitive edge in the market. As the global manufacturing landscape evolves, nearshoring is a practical and profitable solution.
If you’re ready to explore how nearshoring can transform your portfolio companies, contact The Nearshore Company today. Together, we can navigate the complexities of modern manufacturing and drive sustainable growth.
