CEOs Should Rethink National Manufacturing-Cost Assumptions

A new study by Boston Consulting Group is ratifying the strategy being pursued by many U.S. CEOs and business owners: to shift output back to the United States and away from countries such as China and Poland. The reason: Manufacturing-cost structures in the U.S. and other places nearby have dramatically improved, while those in once-reliable low-cost-producer nations have risen significantly.

May 5 2014 by Dale Buss

The reason: Manufacturing-cost structures in the United States, Mexico, the United Kingdom and the Netherlands, for instance, have dramatically improved lately, while those in China, Eastern Europe and other once-reliable low-cost-producer nations have risen significantly.

China’s manufacturing-cost advantage over the United States has shrunk to less than 5 percent, and costs in Eastern European nations are at parity or above those in the U.S., BCG concluded.

The implications for business-location decision-makers are clear. “These changes should drive companies to rethink their sourcing strategies, as well as where to build future capacity,” said Michael Zinser, a BCG partner who is co-leader of the firm’s manufacturing practice. “Many will opt to manufacture in competitive countries closer to where goods are consumed.”

In rethinking such decisions, CEOs should check out of a “decades-old worldview that is sorely out of date,” said Harold L. Sirkin, BCG senior partner and co-author of the study. “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 transformation of the United States into a cost-competitive manufacturing power has been the most profound. The overall manufacturing-cost structures of the U.S. and Mexico have significantly improved relative to nearly all other leading exporters across the globe, BCG said. The key reasons noted were stable wage growth, sustained productivity gains, steady exchange rates and a big energy-cost advantage that is driven largely by the 50-percent fall in natural-gas prices since large-scale production of U.S. shale gas began in 2005.

The research identified four distinct patterns of change in manufacturing-cost competitiveness over the past decade that involved most of the 25 economies studied:

  • Under Pressure: Traditional low-cost countries whose costs are rising quickly, including China, Brazil, Czech Republic, Poland and Russia. This is due to sharp wage increases, lagging productivity growth, unfavorable currency swings and a dramatic rise in energy costs.
  • Losing Ground: Countries falling further behind were Belgium, Sweden, France, Switzerland and Italy.
  • Holding Steady: Includes the UK, Netherlands, India and Indonesia, which have kept pace relative to the U.S. thanks to steady productivity growth.
  • Rising Stars: were the United States and Mexico.

Read the full report here: The Shifting Economics of Global Manufacturing