A study by the Boston Consulting Group shows that traditional views on low-cost manufacturing are not true anymore. The last 10 years has seen a shift in the lost-cost advantage away from China. China is still ranked the lowest cost by some measures, but the all-in cost, including quality, has resulted in a new look at other manufacturing centers, including the US. China’s cost advantage in manufacturing is now less than five percent. Mexico is now lower-cost than China, and the US is on par with Eastern European costs.
Britain is the low-cost manufacturer in Western Europe. That will certainly come as a surprise to many, but it does explain why Industrial Production in the UK is up 0.7% year-over-year (annual basis), on par with powerhouse Germany (at 0.9%). The low-cost provider recognition will help Britain’s workforce, and then consumer spending, in the years to come. Do not look for a China-like boom, but expect a sustainable recovery in the manufacturing sector through at least the next few years.
The shift has occurred because of wage increases, productivity gains in the US, Mexico, and Britain, stable exchange rates, and energy costs. Labor costs are likely to go up in the US and Mexico as demand puts pressure on supply in both countries. Wage increases are also likely in Mexico as the standard of living improves. Efficiency gains through automation, process improvement, and skill enhancement should keep both countries in the enviable position of being good places to manufacturer in the years to come.