Supply Chain News: A Lot has Changed in a Decade Relative to Global Manufacturing Cost Competitiveness, New BCG Study Finds
US a Rising Star that Should Gain Share, While China, Brazil Headed in Wrong Direction
SCDigest Editorial Staff
In something of an extension to research it released earlier this year, Boston Consulting Group is out with a new report that says that manufacturing competiveness is changing rapidly across the globe - often in surprising ways.
As a result, there has been a major shift in which countries are the most cost competitive in manufacturing from 2004 to here in 2014, BCG research finds, with the US now categorized as a "rising star."
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"Years of change in wages, productivity, energy costs, currency values and other factors are quietly but dramatically redrawing the map of global manufacturing cost competitiveness," the BCG report says. "The new map increasingly resembles a quilt-work pattern of low cost economies, high cost economies, and many that fall in-between, spanning all regions."
Those four factors cited above are what BCG used to compare manufacturing competitiveness across the 25 largest export countries around the globe.
While a variety of other factors also help determine true competitiveness, such as logistics costs, level of corruption, overall ease of doing business, etc., BCG did not include those factors in its scoring because they are often local in nature, and very different from area to area even within a single country. But, it notes, manufacturers must of course also vet those other factors before deciding where to locate factories.
On the four categories used for the analysis, there have been a lot of dynamics over the past 10 years. For example, although manufacturing wages rose in the period in all 25 countries studied , they increased by something like 10-20% annually in countries such as China and Russia, while rising only 2-3% per year in other areas. Over 10 years, that difference will have a dramatic impact on competitiveness.
There are also similar dynamics in terms of energy costs, where for example, natural as prices - a key input for many manufacturing sectors - have fallen 25-35% in the US due to the fracking revolution, whereas nat gas prices has risen 100-200% in many countries over the same period.
Ditto for exchange rates, where a weakening currency makes a given country's exports more price competitive, with the opposite effect for a rising currency. Over the past decade, for example, the value of India's rupee has fallen some 26% versus the US dollar, while China's Yuan currency has risen about 35% in value.
With all that as a backdrop, below is a graphic showing the manufacturing cost index of these 25 countries, relative to US costs in 2014, with the US at a baseline value of 100. So, for example, manufacturing costs in South Korea are about 2% higher than in the US in 2014, while costs in India are 13% lower (without considering some of the other factors mentioned above).
Source: BCG
As can be seen, the US has lower costs than all but seven other countries, and some of those, such as China, are heading rapidly in the wrong (higher cost) direction.
In fact, BCG places the US and Mexico as its two "rising stars" for manufacturing competitiveness, while it lists China, Brazil and Poland among the countries "under pressure" - seeing their once substantial cost advantages ebbing away for a variety of reasons
For some of the countries with lower manufacturing costs today than those in the US, BCG also did an analysis of some of the other factors that would also be considered in a sourcing decision. Note the scores on these other factors is a rank relative to some 160 other countries worldwide.
Source:BCG
The bottom line: a lot has changed in a decade, so it may be time to revisit some assumptions about relative costs across the globe. But BCG believes the US is very well positioned to gain share of the global manufacturing market.
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