China Loses Low-Cost Manufacturing Crown to India, Mexico

China's total manufacturing costs are now only 6% below those of American factories.

According to a new study by AlixPartners, China has lost its position as the world's lowest-cost components manufacturer to India and Mexico.

The U.S. has also significantly closed the gap to the degree that China's total manufacturing costs are now only 6% below those of American factories, the study reports on May 20.

"Gone are the days when companies could see cost savings of 30% or more by making 'no-brainer' manufacturing-footprint and outsourcing decisions, to China in particular," said Stephen Maurer, a managing director at the firm.

The company, which specializes in helping distressed businesses, compiled its Manufacturing-Outsourcing Cost Index by analysing a basket of manufactured components and assembled parts, ranging from small motors to die castings. It compared the cost of making the items in China, India, Brazil and Mexico versus the U.S., tracking changes over three years in factors such as labor, overheads, exchange rates, transportation and raw material costs.

The index showed major shifts in costs over the past six months that pushed China down the rankings and Mexico now on top, the firm said in a statement.

It predicted China's costs would improve in the second half of 2009, as more moderate oil prices and the economic slowdown reduced sea shipping costs, but added the country was unlikely to catch up with India and Mexico this year.

Meanwhile, U.S. plants have become much more competitive, but their costs are still much higher than most of the countries studied, the firm said.

Manufacturing accounts for more than 40% of the economy in China, which has been hit hard by evaporating demand for its products in key export markets such as the U.S.and Europe.

But Chinese manufacturer activity has shown signs of expanding over the past two months after nine months of contraction.

Copyright Agence France-Presse, 2009

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