Continuing their study on the state of manufacturing in the US, as well as from a global perspective. The Boston Consulting Group has put together a great presentation to explain now that manufacturing competitiveness is no longer concentrated in a single region or country.
The research identified four distinct patterns of change in manufacturing competitiveness by cost over the past decade that involve most of the 25 economies studied.
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 percent. Costs in eastern European nations are at parity or above costs in the U.S.
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 percent; in Sweden, 7 percent; in France, 9 percent; and in Switzerland and Italy, 10 percent. Higher energy costs and low productivity growth — or even productivity declines — are the chief reasons.
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.
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 percent 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 percent lower than those of the world’s ten leading goods-exporting nations other 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 who is coleader of the firm’s 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.”
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 manufacturing competitiveness could be undermined by other factors, such as a difficult business environment or poor logistical infrastructure.