Old perceptions of low-cost and high-cost nations are no longer valid because manufacturing cost competitiveness around the world has changed significantly over the past decade, according to new research from The Boston Consulting Group (BCG). For example, for manufacturing, Brazil is now one of the highest-cost countries, the UK is the cheapest location in western Europe, Mexico now has lower manufacturing costs than China, and costs in much of eastern Europe are basically at parity with the U.S., the firm found.
The firm has developed a tool—it calls the BCG Global Manufacturing Cost-Competitiveness Index—to track changes in production costs over the past decade in the world’s 25 largest goods-exporting nations. These 25 countries account for nearly 90 percent of global exports of manufactured goods, BCG notes. The index covers four direct economic drivers of manufacturing competitiveness: wages, productivity growth, energy costs and currency exchange rates.
“Many companies make manufacturing investment decisions on the basis of a decades-old worldview that is sorely out of date,” says Harold L. Sirkin, a BCG senior partner and a coauthor of the analysis.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 several distinct patterns of change in manufacturing cost competitiveness over the past decade, but two shifts particularly caught my eye. First, there are the countries BCG labels “Under Pressure.” These five economies have historically been considered low-cost manufacturing bases—China, Brazil, the Czech Republic, Poland and Russia. And yet, all have seen their cost advantages erode significantly since 2004. That erosion has been driven by a confluence of sharp wage increases, lagging productivity growth, unfavorable currency swings and a dramatic rise in energy costs, BCG explains.
The second group is countries BCG calls “Rising Stars.” Most notably, the overall manufacturing-cost structures of Mexico and the U.S. have significantly improved relative to nearly all other leading exporters around the world. The key reasons were stable wage growth, sustained productivity gains, steady exchange rates and a big energy-cost advantage largely driven by the 50 percent fall in natural-gas prices since large-scale production of U.S. shale gas began in 2005. Interestingly, Mexico now has lower average manufacturing costs than China, according to BCG’s research.
By the way, this finding reminds me of a previous BCG report on Mexico. Last summer, the group explained the key drivers of Mexico’s improving competitive edge are relatively low labor costs and shorter supply chains due to the country’s proximity to markets in the U.S. The industries expected to see the biggest production gains from manufacturing in Mexico are transportation goods, computers and electronics, appliances, and machinery. These industries have relatively high labor content, stringent logistical requirements, and strong existing manufacturing clusters in Mexico, Eduardo León, a BCG senior partner based in Monterrey, said at the time.
“While labor and energy costs aren't the only factors that influence corporate decisions about where to locate manufacturing, these striking changes represent a significant shift in the economics of global manufacturing,” says 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.”
Have you or executives at your company recently evaluated the cost of manufacturing in various countries or regions? Furthermore, do you think that China is losing its edge and that Mexico is a “rising star?”