It’s no secret that location can dramatically impact your production costs and profit margins. Whether you’re running a large technology company with multiple products or a family-owned manufacturer with a single focus, geography plays an important business role.
That leaves leaders for every size of organization facing the same key question: Should you consider reshoring, nearshoring or offshoring your company’s operations? Each option requires a hefty investment and carries long-term consequences. The recent election also adds uncertainty, because the Trump administration has vowed to increase tariffs and may try to eliminate some credits available under the Inflation Reduction Act.
Here's a high-level comparison:
- Offshoring: Producing goods in countries with lower labor, material and regulatory costs than in the U.S. can deliver savings. However, global trade policies and logistical headaches can add risks. China, Vietnam, Indonesia and other Asian countries are popular locations for offshore manufacturing.
- Nearshoring: Moving your operations to Mexico or another nearby location can help minimize complications like time zone differences and costly trans-oceanic shipping. Nearshoring can provide access to skilled workers with lower labor and regulatory costs compared with domestic manufacturing, although it generally offers fewer tax incentives.
- Reshoring: Bringing operations back to the U.S. can provide access to valuable tax credits and incentives. It also supports state and local economies. Reshoring can lower costs and risks associated with tariffs, global logistics and long-distance shipping, but labor and regulatory costs may be higher.
Can Moving Operations Make Your Company More Competitive?
Tax credits and incentives can impact your company’s bottom line. But they’re not the only pieces of the puzzle. The decision to reshore, nearshore or offshore your operations is complex, with numerous financial and nonfinancial variables.
These ten questions can help you think through the issues and gain clarity on whether moving operations could make sense for your business.
1. Are competitors consistently able to undercut your prices due to lower manufacturing costs?
Not being able to sell goods at a competitive price is one of the clearest indicators that your company needs to look for new ways to reduce production costs. Here are some steps to consider:
- Explore nearshoring or offshoring. You may want to look into these options to access labor at a lower cost and gain other potential savings.
- Analyze current costs. Look closely at your current costs for workforce sourcing and training, regulatory compliance, executive travel, freight and shipping, tariffs and taxes, supply chain management, security, real estate and other expenses.
- Evaluate reshoring options. If you’re offshoring now, consider whether reshoring or nearshoring could be a more cost-effective solution. Make sure to include the financial benefit of tax credits and incentives in your calculations.
2. Could changes to tariffs and other trade policies create significant risk for your business?
While shifting economic conditions are a fact of life, changes to tariff and trade policies can abruptly alter your company’s profitability equation.
- Offshoring to China and other popular targets of punitive tariffs carries a risk of politically driven trade policies that can increase your total costs.
- Nearshoring to Mexico offers the advantages of a relatively stable, long-term favored trade relationship, but still brings the risk of changing rules and tax rates.
- Reshoring allows you to stop worrying about dynamic trade policies and the threat of new tariffs while gaining eligibility for potentially lucrative tax credits and incentives for domestic manufacturers.
3. Can you consistently meet skilled labor needs in your current or proposed alternative locations at a reasonable cost?
Choosing the “cheapest” manufacturing site may require additional expenses to find the necessary talent. Here are some considerations:
- Confirm that local educational standards and training practices ensure a steady supply of suitable workers and will help you fill future labor needs.
- Verify that prevailing labor rates in your target location align with the costs for workers with the specific skill sets you need. If they don’t, determine the premium you may have to pay.
- Take into account sustainability issues and ethical labor requirements in any potential location, bearing in mind that these regulations can change quickly.
4. How much risk does international shipping create for your business?
Getting products to consumers is a top priority, and global shipping introduces additional risks to this essential business function:
- When transoceanic shipping prices rise sharply, as they did during the early years of the COVID-19 pandemic, can you afford to absorb additional costs or wait out temporary price spikes and logistical snafus?
- If your primary buying audience is price-sensitive, prioritizing domestic manufacturing or nearshoring may help reduce unexpected shipping cost increases that you would have to pass on to consumers.
- Don’t overlook the impact of potential disruptions in getting your products from manufacture to market. No location is worth regularly losing shipments to piracy, warfare or political chaos affecting ports or freight routes.
5. What other external risks does your current or proposed manufacturing location present?
Many locations have costs that are not related to obvious financial considerations like tax incentives and prevailing wages. For example:
- Political instability near your manufacturing sites can threaten supply chain resilience, transport and the physical safety of your workforce and facilities.
- Climate change increasingly poses risks because of drought, severe storms, rising ocean levels and higher temperatures in many locations.
- Consumer preference for domestically produced goods can be strong. Consumer sentiment can also affect purchasing behavior for products manufactured in countries perceived as adversaries, such as China.
6. How could federal and state tax credits offset higher labor costs and other expenses associated with domestic manufacturing?
While employers typically pay higher wages for U.S. workers compared to those in other countries, there are several
underutilized tax credits that can significantly offset greater labor costs.
- The Inflation Reduction Act includes Advanced Manufacturing Production Credits for products related to solar and wind energy, inverters, electric vehicles, batteries and many specific minerals.
- The CHIPS and Science Act boosted subsidies for domestic semiconductor chip manufacturing as well as related research and workforce training.
- Also explore federal research and development (R&D) tax credits and tax credits for employers — valuable incentives for almost all domestic manufacturers — along with a wide variety of state tax credits that are available.
7. What tax incentives or concessions could incentivize your domestic operations in a particular location?
Local and state governments actively court business investments that can provide new jobs and generate economic activity in the area. They often provide generous incentives, such as:
- Low-interest financing and even cash grants may be available to companies that establish operations in certain cities, counties and states.
- State and local governments commonly offer temporary or permanent sales tax exemptions, property tax abatements, infrastructure offsets and other financial breaks.
- Combining state and local financial incentives with federal tax credits can dramatically improve the math of manufacturing in the U.S. compared to abroad.
8. Do you have internal resources who can provide long-term guidance and management of international operations?
Your outsourcing plan may look viable on paper. But if your team doesn’t know an area intimately, you may be unaware of issues that could eat up any cost savings.
- How does the permitting process work in practice? Is bribery a common aspect of doing business? Issues like these could delay progress and increase expenses.
- Without fluency in the local language, hiring and managing local employees may prove more challenging than you anticipate.
- Beyond any language barrier, a lack of cultural understanding can hinder your ability to gain trust and meet the expectations of local employees and the community.
9. How quickly would potential savings exceed the cost of moving operations?
Even if you can operate elsewhere with less expense, you’ll need to determine whether future savings will create a net gain within a reasonable time.
- Starting operations in a new location demands a substantial investment of time and money — resources that may be better directed to creating efficiency gains at your current site.
- How often are you willing to relocate? No matter where you go, another location will eventually present a more attractive proposition as economic conditions, regulatory paradigms and labor dynamics continue to evolve.
- Shifting your operational center creates major disruption for your company and the people who make it successful. Loss of time, productivity and personnel can represent meaningful costs that offset potential savings.
10. Does a different location make sense from a broader operational perspective?
It’s easy for leaders to see the potential cost savings — including tax credits, local incentives and other financial considerations — but miss the broader implications.
- Operational needs must always take priority. An optimal location offers access to skilled labor, supply chain stability, appropriate real estate, physical safety and all other business necessities.
- Think carefully about how much risk you’re willing to accept in exchange for lower costs to meet these non-negotiable business needs. Factor in political, regulatory, environmental, transportation and other risk categories in your assessment.
- Relocation isn’t a black-and-white decision. It requires a thoughtful analysis that weighs the costs and risks of moving operations against the potential benefits your company could achieve through reshoring, nearshoring or offshoring.
Find Clarity Through a Tax-Aware Lens
These questions may lead to clear answers that inspire you to consider a relocation or encourage you to focus on maximizing efficiency where you are today. But often the answers are less straightforward, and your responses may raise more questions.
You’ll want to keep tax considerations top of mind as you weigh your options. Although it’s one of many factors, tax strategy is an important part of your decision because tax incentives (or the lack of them) can substantially alter your profitability potential and risk profile in any location.
Assessing strategies to lower production costs should always be a consultative process with a trusted tax advisor — especially for complex issues with significant tax implications, such as a potential change in manufacturing location.
Determining whether and where to move your operations can be challenging. But the potential for increased profitability and peace of mind makes the effort a wise investment that can provide long-term benefits for your business.
Know the Tax Impact of Moving Your Operations
Could your business achieve more by reshoring, nearshoring or offshoring? Or are you better off staying put? We can help you analyze the tax impact of your options and find data-driven answers. Find out how our experienced tax credit specialists can guide you through complex regulations to maximize the value of your tax incentives wherever you are.
