Global automakers are expanding production in the UK, for example, which has emerged as one of Western Europe's lowest-cost manufacturing locations, while at the same time they are slashing capacity in Australia, now one of the most expensive. In Mexico, where manufacturing costs are now estimated to be cheaper than those of China, Asian electronics manufacturers such as Foxconn and Sharp are expanding production.
"Many companies are beginning to see the world in a new light," said Harold L. Sirkin, a BCG senior partner and coauthor of the report. "They are finding that many old perceptions of low-cost and high-cost countries are out of date, and they are starting to realign their global sourcing and production networks accordingly."
The report expands on earlier BCG research into changes in direct manufacturing costs among the world's 25 largest goods-exporting nations since 2004. That research, released in April, found that several economies still often perceived as low-cost manufacturing nations – such as China, Brazil, Russia, and the Czech Republic – are no longer much cheaper than the U.S. In some cases, they are estimated to be even more expensive, according to the new BCG Global Manufacturing Cost-Competitiveness Index. The index also found that the competitiveness of historically high-cost nations, such as the U.S. and the UK, has significantly improved.
The BCG Global Manufacturing Cost-Competitiveness Index is a new tool that sheds light on the shifting cost dynamics of global production. The index compares changes in direct costs between 2004 and 2014 in the world's 25 leading export economies along four dimensions: manufacturing wages, productivity, energy costs, and currency exchange rates.
The new report analyzes the factors driving the cost shifts in greater detail in several economies, such as Australia, India, Mexico, and the UK, and the impact of changing costs on those nations' manufacturing competitiveness. The report also offers recommendations on how companies and governments can respond.
Several countries that have most improved their competitiveness over the past decade are already attracting new manufacturing investment and jobs, while investment is declining in some of those that have lost ground in the BCG index. In the UK – where the direct-manufacturing cost structure has improved by up to an estimated 10 percentage points in the index over other leading Western European exporters since 2004 – automobile output has increased by around 50 percent since 2009. According to the Financial Times, auto production is projected to grow by another one-third by 2017 to 2 million units annually, thanks to around $17bn in new investment by automakers such as Jaguar Land Rover, Nissan, Honda, and the BMW Group's MINI.
Contrast the UK's performance with that of Australia, the country whose global cost competitiveness deteriorated the most from 2004 to 2014, according to the BCG index. Australian auto production has contracted by half since 2004, and Ford Australia, Toyota, and General Motors' Holden subsidiary plan to shut their factories by 2017. Overall investment in Australian manufacturing fell by 6 percent between 2004 and 2012. A major reason is that Australia's booming natural resources sector helped push manufacturing wages up by about 48 percent over the past decade and Australia's currency up by 21 percent against the U.S. dollar. Overall manufacturing labor productivity, however, fell by 1 percent over the same ten-year period.
"Improving the productivity of each worker is becoming an increasingly important factor in manufacturing competitiveness across the globe," said Michael Zinser, a BCG partner who is co-leader of the firm's manufacturing practice. "This is especially true as the once-considerable wage gaps between developed and developing economies continue to shrink."
The shifting cost positions of Mexico and China have also influenced investment. In 2004, China's average manufacturing costs were estimated to be 6 percent higher than Mexico's, according to the BCG index. Mexico is currently around 4 percent cheaper on average.
Chinese manufacturing wages have nearly quintupled since 2004, while Mexican wages have risen by less than 50 percent in U.S. dollar terms. Adjusted for productivity, Mexican labor costs are now estimated to be 13 percent lower than those of China. Partly as a result, Mexican exports of electronics – an industry dominated by China for more than a decade – have more than tripled, to $78bn, from 2006 to 2013. Asian companies account for one-third of investment in Mexican manufacturing. Taiwanese electronics manufacturing giant Foxconn, China's largest single investor, says it now exports 8 million PCs a year from its 5,500-worker facility in Chihuahua state, and a major expansion is in the works.
Not all countries are taking full advantage of their low-cost advantages, however. The report found that global competitiveness in manufacturing is undermined in nations such as India and Indonesia by several factors, including logistics, the overall ease of doing business, and inflexible labor markets. "A lot of factors other than wages and exchange rates weigh heavily on corporate decisions about where to locate production," said Justin Rose, a BCG partner and coauthor. "These challenges must be overcome before they can translate low costs into a surge of investment and exports across a broad range of industries."
Rather than seeing the globe in terms of low cost versus high cost, the report recommends that companies base manufacturing decisions on "a more current and sophisticated understanding of competitiveness" within regions. Companies should reassess their manufacturing footprints and explore investments that can improve productivity.
They should fully account for logistics and obstacles to efficiently conducting business that can add hidden costs and risk. Companies should also understand the implications of changing manufacturing locations on their entire supply chains to avoid surprises, such as unforeseen shipping and import duty costs.
Companies should also expect that volatility will continue and that relative cost competitiveness around the world will remain dynamic.
"The winners are likely to be companies that align their operations with the shifting economics of global manufacturing – and build in the flexibility to shift gears as those economies continue to evolve," said Sirkin.