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Study Reveals Striking Shifts in Global Manufacturing Costs Over the Past Decade

New BCG Cost-Competitiveness Index Finds Mexico Is Less Expensive Than China, the UK Is the Low-Cost Manufacturer of Western Europe, and Many Emerging Markets Known for Low Costs Are No Longer Cheaper Than the U.S.

CHICAGO, IL -- (Marketwired) -- 04/25/14 -- 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 released today by The 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 U.S. These are among the findings of the new analysis, which is part of BCG's ongoing research into the shifting economics of global manufacturing. Cost competitiveness is becoming increasingly important as organizations around the world rethink their manufacturing networks and as governments recognize the economic importance of a stable manufacturing base.

To shed light on the shifting cost dynamics of global production, the firm has developed 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 percent 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 percent higher than the U.S.

"Many companies are making manufacturing investment decisions on the basis of a decades-old worldview that is sorely out of date," said Harold L. Sirkin, a BCG senior partner and a coauthor of the analysis.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

The authors recommend that companies reassess their global production and sourcing footprints in light of today's cost structures and trends. Manufacturers need to look beyond wages and take into account total costs, including differences in productivity and hidden costs. "When companies build new manufacturing capacity, they are typically placing bets for 25 years or more," said Sirkin, who along with Zinser and Rose is coauthor of The U.S. Manufacturing Renaissance: How Shifting Global Economics Are Creating an American Comeback (Knowledge@Wharton, 2012). "They must carefully consider how relative cost structures have changed -- and how they are likely to evolve in the future."

To request a summary of the research or arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or [email protected].

About The Boston Consulting Group
The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 81 offices in 45 countries. For more information, please visit bcg.com.

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