Study Reveals Striking Shifts in Global Manufacturing Costs in Past Decade

07.01.2014
Economy

Many low-cost emerging markets are no longer cheaper than the U.S.

Manufacturing cost competitiveness around the world has changed dramatically over the past decade: so dramatically that many old perceptions of low-cost and high-cost nations no longer hold, according to new research by The Boston Consulting Group (BCG).

To shed light on the shifting cost dynamics of global production, BCG has developed the Global Manufacturing Cost-Competitiveness Index, which tracks changes in production costs over the past decade in the world’s 25 largest goods-exporting nations. The index covers four direct economic drivers of manufacturing competitiveness: wages, productivity growth, energy costs, and currency exchange rates. The 25 countries account for nearly 90% of global exports of manufactured goods.

The 10 countries with the lowest manufacturing costs, according to the index, are a mix of nations from around the world. Six of the 10 are in Asia, while several others are in North America and eastern Europe. A number of other countries have experienced extreme drops in cost-competitiveness: Australia has the highest manufacturing-cost structure of the 25: around 30% higher than the U.S.

“Many companies are making manufacturing investment decisions on the basis of a decades-old worldview that is sorely out of date,” says Harold L. Sirkin, a BCG senior partner and a coauthor of the analysis. “They still see North America and western Europe as high cost and Latin America, eastern Europe, and most of Asia: especially China: as low cost. In reality, there are now high- and low-cost countries in nearly every region of the world.”

Four Patterns of Change

The research identified four distinct patterns of change in manufacturing cost competitiveness over the past decade that involve most of the 25 economies studied.

1. Under pressure. Five economies traditionally regarded as low-cost manufacturing bases: China, Brazil, the Czech Republic, Poland, and Russia: have seen their cost advantages erode significantly since 2004. The erosion has been driven by a confluence of sharp wage increases, lagging productivity growth, unfavorable currency swings, and a dramatic rise in energy costs. China’s manufacturing-cost advantage over the U.S. has shrunk to less than 5%. Costs in eastern European nations are at parity or above costs in the U.S.

2. Losing ground. Several countries that were already relatively expensive a decade ago, primarily in western Europe, have fallen even further behind. Relative to the costs in the U.S., average manufacturing costs in Belgium rose by 6%; in Sweden, 7%; in France, 9%; and in Switzerland and Italy, 10%. Higher energy costs and low productivity growth: or productivity declines: are the chief reasons.

3. Holding steady. A handful of countries held their manufacturing costs constant relative to the U.S. from 2004 to 2014 and have significantly improved their competitiveness within their regions. Declining currencies, along with productivity growth that largely offset wage hikes, helped keep overall costs in check in Indonesia and India. The UK and the Netherlands, on the other hand, have kept pace thanks to steady productivity growth. As a result, the cost structures of Indonesia and India have improved relative to Asia’s other major exporters, while the UK and the Netherlands have boosted their cost competitiveness relative to other exporters in western and eastern Europe.

4. Rising stars. The overall manufacturing-cost structures of Mexico and the U.S. have significantly improved relative to nearly all other leading exporters across the globe. The key reasons were stable wage growth, sustained productivity gains, steady exchange rates, and a big energy-cost advantage that is largely driven by the 50% fall in natural-gas prices since large-scale production of U.S. shale gas began in 2005. Mexico now has lower average manufacturing costs than China. Overall costs in the U.S., meanwhile, are 10% to 25% lower than those of the world’s ten leading goods-exporting nations other than China.

Implications for Manufacturers

The findings have implications for both companies and governments as they consider their manufacturing options. Several countries that have lost ground since 2004 risk becoming even less cost competitive if current wage and productivity trends continue. In some nations with low direct-manufacturing costs, BCG found that competitiveness could be undermined by other factors, such as a difficult business environment or poor logistical infrastructure.

The study’s authors recommend that companies reassess their global production and sourcing footprints in light of today’s cost structures and trends. Manufacturers need to look beyond wages and take into account total costs, including differences in productivity and hidden costs.

To request a summary of the research, contact Eric Gregoire at 617.850.3783 or gregoire.eric@bcg.com.

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