Study reveals striking shifts in global manufacturing costs over the past decade

May 20, 2014

Manufacturing cost competitiveness around the world has changed dramatically over the past decade — so much so that many old perceptions of low-cost and high-cost nations no longer hold, according to new research released by The Boston Consulting Group (BCG), Chicago.

In manufacturing, Brazil is now one of the highest-cost countries, for example, and the U.K. is the cheapest location in western Europe. Mexico now has lower manufacturing costs than China, while costs in much of eastern Europe basically are on par with the U.S.

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-competitiveness: Australia has the highest manufacturing-cost structure of the 25 ‐ about 30 percent higher than the U.S.

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

  • •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 the same or more than costs in the U.S.
  • •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.
  • 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 U.K. and 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 U.K. and Netherlands have boosted their cost competitiveness relative to other exporters in western and eastern Europe.
  • 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 10 leading goods-exporting nations other than China.