Reuters Events | Supply Chain & Logistics Business Intelligence

Investment is pouring into nearshoring, with stable, low-cost destinations near major markets the most attractive, but Europe-China trade continued to deepen from 2018 to 2023 says research

European destinations dominate the 2024 version of Savill’s Nearshoring Index, with European destinations making up six of the top 10 countries, led by Portugal at the top, followed by the Czech Republic and Poland.

The Index, which scores a country’s resilience, economic cost, business environment and Environmental, Sustainability and Governance (ESG) to produce a composite score, also featured Sweden, Spain and the UK in their top 10.

For businesses targeting European consumers, locations such as Poland, Portugal and the Czech Republic often provide a rare ‘Goldilocks’ solution

These countries have benefitted from a wider trend in what is known as nearshoring or reshoring, which is where businesses reconfigure their supplier networks to be closer to their end markets or in the same country as the final destination for the goods.

In a blog post on the research, analyst Charlotte Rushton wrote that: “For businesses targeting European consumers, locations such as Poland, Portugal and the Czech Republic often provide a rare ‘Goldilocks’ solution – they are low cost, but are part of the European single market, which offers open borders, free movement of capital and stability.”

This was also the finding from Reuters Events, Supply Chain research on the phenomenon, which concluded in a 2022 white paper that among European business leaders Poland was perceived as the top economy to resituate sourcing and manufacturing to, with the Czech Republic also coming inside the top 10.

Both pieces also highlighted the growing importance of other low-cost destinations, such as Vietnam and Mexico. Savills noted that these two countries have improved their scores between 2022 and 2024 as their cost differential improved relative to other markets, making them even more competitive on this basis.

However, more expensive locations have also become more attractive due to their stability, with the UK in the top 10 in both studies. Savills found that the manufacturing sector usage of warehouse space in the country rose 32% from 2021 to 2023 to 58.5 million square feet.

Europe struggles to quit China

While the driver for the restructuring of global manufacturing and logistics is a growing realisation of the risks of concentrations in international supply chains, shifting networks is highly challenging. Even with increased investment into a more diverse set of manufacturing locations, recent research from the Peterson Institute for International Economics (PIIE) showed that the EU and China have actually deepened their trade relationship in the period 2018 to 2023. Conversely, businesses in the US have dramatically diversified their sourcing strategies over the period and are now far less reliant on China.

The findings utilised a metric known as the Herfindahl-Hirschman index (HHI), which measures concentration in a given market, with a higher score indicating a higher concentration. In this case, the HHI numbers indicate how concentrated imports are from a partner.

For the US, the HHI score for China fell by 267 points between 2018 and 2023, which essentially halves the concentration of imports from the country, while the EU saw the comparable figure for imports from China rise by 101 points.

In China’s place, the US has increased imports from all of its other major trade partners, with the EU, Canada and Mexico all increasing trade with the US and so seeing rising HHI scores.

It is worth noting, however, that the EU is more diversified overall and less reliant on its largest trade partners than the US. The findings show that only the US and China account for 10% or more of the European Union’s 2023 imports.

The research also uncovered that the bilateral trade relationship between China and the EU grew even more concentrated for manufactured goods than total imports.

The HHI score for China’s imports of manufactured goods from the EU rose 62 points and in the other direction the EU number from Chinese imports rose 204 points.

These pieces of research indicate that there is growing recognition of the need to have diversified supply chains that are more focused on stable countries and trading relationships, but a widening gap in approach and implementation between the US as Europe.

The overall trend though is for investment into cost competitive locations, well situated within or close to major markets. Savills calls this change less a shock “more of a subtle change” where companies continue to prioritise “reducing costs and increasing economic efficiency” within the framework of nearshoring and reshoring.