When it comes to where to site a factory for manufacturing competitiveness, be prepared to throw the old stereotypes out the window.
Over the past decade, the U.S. and Mexico have become “rising stars” among the top 25 export economies while China and Brazil are among the countries that have seen their cost advantages erode significantly, new analysis by the Boston Consulting Group shows. Overall costs in the U.S. are 10% to 25% lower than those of the world’s 10 leading goods-exporting nations with the exception of China.
According to BCG, the top 10 most competitive export economies are: China, United States, South Korea, United Kingdom, Japan, Netherlands, Germany, Italy, Belgium and France.
To help track the changes in global production costs over the last 10 years, BCG has developed a Global Manufacturing Cost-Competitiveness Index that covers four economic drivers: wages, productivity growth, energy costs and currency rates. The 25 countries included in the index represent nearly 90% of the global exports of manufactured goods.
“Many companies are making manufacturing investment decisions on the basis of a decades-old worldview that is sorely out of date,” said Harold L. Sirkin, a BCG senior partner and a co-author of the analysis.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.”
BCG found four patterns of change among these manufacturing export nations:
- Under Pressure: China, Brazil, the Czech Republic, Poland and Russia have been viewed as low-cost manufacturing sites, BCG stated, but their cost advantages have deteriorated since 2004. Sharp wage increases, lagging productivity growth, unfavorable currency swings and a dramatic rise in energy costs have impacted these nations. Brazil is now one of the highest-cost countries for manufacturing. China’s manufacturing-cost advantage over the U.S. has shrunk to less than 5%, BCG found, while costs in eastern European nations are at parity or above costs in the U.S.
- Losing Ground. Several countries in the Eurozone that were expensive 10 years ago have seen their competitive stance only worsen. “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%,” BCG found. “Higher energy costs and low productivity growth—or even productivity declines—are the chief reasons.”
- Holding Steady. Compared to the U.S., a few countries have kept their manufacturing costs fairly constant and improved their competitiveness within their regions. In Indonesia and India, declining currencies, along with productivity growth that largely offset wage hikes, helped keep overall costs in check. The United Kingdom and the Netherlands 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,” BCG explained.
- Rising Stars. The manufacturing cost structures of Mexico and the U.S. have shown marked improvement over the past decade, fueled by stable wage growth, sustained productivity gains, steady exchange rates, and a major energy-cost advantage that is largely driven by the 50% fall in natural gas prices in the U.S. since large-scale shale gas production began in 2005. Mexico now has lower average manufacturing costs than China.
“While labor and energy costs aren’t the only factors that influence corporate decisions on where to locate manufacturing, these striking changes represent a significant shift in the economics of global manufacturing,” said Michael Zinser, a BCG partner and co-leader of its Manufacturing practice. “These changes should drive companies to rethink their sourcing strategies, as well as where to build future capacity. Many will opt to manufacture in competitive countries closer to where goods are consumed.”
Manufacturers need to look beyond wages and take into account total costs, including differences in productivity and hidden costs, BCG said. “When companies build new manufacturing capacity, they are typically placing bets for 25 years or more,” said Sirkin, co-author with Zinser and Justin Rose of The U.S. Manufacturing Renaissance: How Shifting Global Economics Are Creating an American Comeback. “They must carefully consider how relative cost structures have changed—and how they are likely to evolve in the future.”