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Fair-weather friend shoring?

How geopolitical tensions are affecting friend shoring, nearshoring and reshoring

Geopolitical tensions have given rise to a new trend in global trade in the form of friend shoring, nearshoring and reshoring. Organisations are relocating operations to be closer to home and key markets or to more politically friendly jurisdictions. What is the impact this will have on M&A activity in the year ahead?

All ashore

Friend shoring is the practice of outsourcing or offshoring business processes to countries with which a company has strong economic, political or cultural ties, explains Ronan Murray, corporate finance partner, EY. “It could also be understood as adapting existing offshored activities to a more friendly regime.

“Nearshoring involves relocating business processes to a nearby country or region, often one that shares geographical proximity, cultural similarities, or a time zone with the home country. The goal is to maintain advantages like cost savings while reducing logistical challenges.”

Reshoring is the process of bringing back business operations or manufacturing to the home country from a foreign location, says Murray. “This is often driven by a desire to reduce dependency on overseas suppliers, enhance quality control and address geopolitical or economic risks.”


Increased focus

There has been an increased focus on friend shoring and nearshoring, says Eoin Plant-O’Toole, associate professor in logistics and supply chain management at Edinburgh Napier University and chair, CILT Ireland Policy Committee. “Many multinationals are assessing the increased global geopolitical tensions and are thinking about how this may risk disrupting their supply chains and impact their continuity of supply. This can cause a rethink in their supply chain design and partner location decisions. Supply chains may then shift away from potential geopolitical rivals, as they fear if tensions mount, there could be trade restrictions imposed and the potential weaponisation of trade.

“We have already seen elements of this in US technology companies where trade restrictions have been placed on exports of certain chips to China. China has also banned some chips from the US, with some branding it as a US-China chip war. As China is a key world manufacturing centre focusing predominantly on assembly, this has implications for technology companies with manufacturing partners operating in China,” Plant O’Toole explains.

Impact on M&A

The shift towards friend shoring, nearshoring or reshoring may lead to divestments in locations that are no longer aligned with the company’s strategic goals or are impacted by changing economic conditions and geopolitical uncertainty, says Fergal McAleavey, corporate finance partner, EY. “This will continue to influence company’s decisions regarding their global footprint. Environmental sustainability concerns may also impact decisions, with companies evaluating the carbon footprint associated with different locations.”

Companies may diversify suppliers and manufacturing locations to mitigate risks associated with over-dependence on a particular region, says Murray. “Investing in advanced technologies, like automation and robotics, can also enhance efficiency, making reshoring or nearshoring more viable.”

Future impact

In the year ahead, increased emphasis on friend shoring and nearshoring may lead to more regional M&A activity as companies seek to consolidate operations in nearby or strategically important locations, says McAleavey. “Further into the future, reshoring, driven by concerns such as supply chain resilience and geopolitical stability, could influence M&A decisions over the long term. Companies may consider acquiring domestic assets to enhance control over critical aspects of their supply chains.”

Going green(field)

Companies might explore acquisitions in new locations rather than build and establish new facilities, especially if M&A provides a quicker entry into markets with established infrastructure and talent pools, says Murray.

“The emphasis on reshoring is often linked to the desire for greater supply chain resilience to reduce vulnerability to global disruptions,” says McAleavey. “Cost efficiency and competitiveness are critical for all companies, and events such as the recent backups in the Panama Canal and Suez Chanel, which threaten the global logistics chain, or the fact that hourly wages in China have increased significantly, reducing the attractiveness of manufacturing in Asia, could lead to a major change in the current geoeconomic situation where Ireland could have a great opportunity to add value through innovation and improve the value chain for European companies.”

Friend shoring, nearshoring and reshoring represent strategic responses to evolving global dynamics, McAleavey says. “Their impact on M&A activity will depend on a variety of factors, including geopolitical stability, economic conditions, and the adaptability of businesses to changing circumstances.”