Nearshoring, or the movement of production closer to end-consumers, is not new, but it is on the rise. More companies mentioned nearshoring in 2023 earnings calls than any previous year since 2010, when data collection began, according to HSBC analyst Mark McDonald.

Greenfield foreign direct investment (FDI) into factories in nearshoring locations close to western Europe has also been on an upward trajectory since the Covid-19 pandemic. More than $82bn was pledged to manufacturing projects by foreign companies in 15 nearshoring destinations in central and eastern Europe (CEE) and north Africa between 2022 and 2023, according to fDi Markets. This was the highest two-year figure ever and marks a 62% increase compared to the pre-pandemic years of 2018–2019. 

To be classified as a nearshoring destination in the study, these 15 countries needed to have at least 25% of their greenfield FDI in manufacturing since 2010 and have attracted at least five FDI manufacturing projects in 2023. 

Nearshoring has a multitude of aims. The Covid-19 pandemic laid bare the risks of overstretched global value chains overly dependent on China. Nearshoring and shorter supply chains are a way for companies to build more resilience. Besides, companies nearshore production to bypass the kind of tariffs that the likes of the EU and the US have increasingly leveraged over the past few years as they pass protectionist industrial policies, particularly targeted at strategic sectors like electric vehicles (EVs), batteries and semiconductors. It differs from reshoring as firms still refrain from a full retreat into their domestic markets if they can find cheaper manufacturing hubs in their neighbourhood. 

“A lot of companies are looking into where they should produce, how to de-risk from China and make sure that supply chains deliver in the way they should,” says René Buck, the CEO of consultancy BCI Global. Businesses rarely make explicit mentions of nearshoring in their investment announcements, but there is plenty of anecdotal evidence that this is the reasoning. 

French carmaker Renault is investing €400m with local partners to expand its factory in Bursa, Turkey, to turn it into an international export hub after it closed its Russian operations in the wake of the invasion of Ukraine. In 2022, most of the cars produced at its Bursa factory were exported to Europe. 

Chinese EV and battery maker BYD is developing its first European EV factory in Szeged, Hungary. This came a few months after the EU initiated an investigation into China’s subsidies for its EV industry. And Ionway, a joint venture between Germany’s Volkswagen and Belgium’s Umicore, is building its first production facility for cathode active material used in EV batteries in Nysa, Poland. Ionway says this will help Europe develop its regional battery supply chain.

A flurry of large nearshoring investments in strategic sectors is pushing up the capital intensity of projects. The mean average announced capital expenditure (capex) for each manufacturing FDI project in the 15 countries increased from $44.5m in 2019 to $130.8m in 2023. There are also signs of increased automation and robotisation — the average capex pledged to FDI projects in the industrial equipment sector reached an all time high of $36.6m between 2022 and 2023. 

Major economies in CEE have been the main beneficiaries from the move to build out strategic supply chains in Europe. Hungary attracted $18.8bn worth of FDI into manufacturing in the last two years, up by 141% from 2018–2019. More than half of this came from mega projects in batteries and the metals that are put in them, including by China’s CATL and South Korea’s SK Innovation. 

Poland has had manufacturing FDI jump by 45% in the last two years, compared to before the pandemic, largely due to US chipmaker Intel’s plans to build a new fab. Due to rising labour costs in ‘traditional’ CEE markets such as Poland and Hungary, companies are increasingly looking at alternative locations to set up new plants, says Guy Douetil, the managing director for the EMEA region at advisory firm Hickey & Associates. 

“Companies need to build in some more resilience, but it doesn’t mean they will exit locations where they have established plants,” he adds. Manufacturing FDI into Romania, Slovakia and North Macedonia all more than doubled in the latest two-year period, compared to 2018/19. Other countries, such as Serbia, the Czech Republic and Bulgaria, attracted more than $1.5bn of foreign manufacturing investment. 

Cheap and available labour have drawn companies towards northern African markets like Morocco and Egypt. “There’s a decent population of talent that [companies] can tap into. It’s a balance between stability and the size of the market,” explains Mr Douetil.

While shifting production to markets close to western Europe aims to boost resilience to multinational supply chains, this is not without its pitfalls. “The risk landscape is now significantly worse than it was four years ago,” says Jimena Blanco, chief analyst at consultancy Verisk Maplecroft, which found that more than three-quarters of 40 nearshoring hubs globally have witnessed a rise in the risk of civil unrest.