Global Economy
Global Manufacturing: UK lowest cost location in western Europe; Brazil one of highest-cost countries
By Michael Hennigan, Finfacts founder and editor
Jun 24, 2014 - 1:25 AM

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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 Boston Consulting Group (BCG). In manufacturing, Brazil is now one of the highest-cost countries, for example, and the UK is the cheapest location in western Europe. Mexico now has lower manufacturing costs than China, while costs in much of eastern Europe are basically at parity with the US.

A new tool - - BCG’s Global Manufacturing Cost-Competitiveness Index - - that 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, include 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-competiveness: Australia has the highest manufacturing-cost structure of the 25—around 30% higher than the US.

“Many companies are making manufacturing investment decisions on the basis of a decades-old worldview that is sorely out of date,” said Harold L. Sirkin, a BCG senior partner and a co-author of the analysis.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.”

The research identified four distinct patterns of change in manufacturing cost competitiveness 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, unfavourable currency swings, and a dramatic rise in energy costs. China’s manufacturing-cost advantage over the US has shrunk to less than 5%. Costs in eastern European nations are at parity or above costs in the US.
  • 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 even productivity declines—are the chief reasons.
  • Holding Steady. A handful of countries held their manufacturing costs constant relative to the US 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 US 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 US meanwhile, are 10 to 25% lower than those of the world’s ten leading goods-exporting nations other than China.

“While labour 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 co-leader 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.”

BCG says 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.

“With a better understanding of where rising costs and other factors are putting their manufacturers at a disadvantage, countries can take more effective action to shore up competitiveness,” said Justin Rose, a BCG partner and a co-author.


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