Most working-age Americans have only heard about the days when America’s factories supplied goods to virtually the entire world.
Now China, India and other low-cost countries supply these goods. And before China, in the 1970s and ’80s, it was Japan.
Indeed, two generations of Americans have now come of age laboring under the assumption that the United States can’t compete with China and other low-cost manufacturers. While that may have been true a decade ago, it’s no longer true today.
We recently completed an extensive review of manufacturing costs in 25 top exporting countries, which together account for 90 percent of global manufacturing exports. We then ranked them, creating what we call the BCG Global Manufacturing Cost-Competitiveness Index.
What we found was that when the most-important cost factors are considered — such as total labor costs, energy, productivity growth and currency exchange rates — “low-cost” Brazil is now one of the highest-cost manufacturing nations in the world, Mexico is cheaper than China, China is close to the United States (as are most of the traditionally “low-cost” countries of Eastern Europe), and the low-cost leader in Western Europe is none other than the country that launched the Industrial Revolution 250 years ago: the United Kingdom.
The country with the lowest manufacturing costs, we found, was not China.
It was Indonesia. Indonesia was followed by India, then Mexico and Thailand. China came next, at No. 5, followed closely by Taiwan and then the United States.
Significantly, we found that the convergence in manufacturing costs between China and the United States was due primarily to the combination of rising labor costs in China and higher productivity levels and lower energy costs in the United States. When transportation and other factors — such as product quality, intellectual property rights and long-distance supply chain issues — also are considered, for many companies and product lines the alleged savings achieved by manufacturing in China hardly seem worth it anymore.
For the record, the countries with the highest manufacturing costs of the 25 we studied were Australia, Switzerland, Brazil, France, Italy and Belgium, all
of which have costs that are 20 percent to 30 percent higher than U.S. costs.
The precise cost figures that we calculated provide just a current snapshot. More important is the trend line.
Brazil, China, the Czech Republic, Poland and Russia all experienced significant increases in relative manufacturing costs since 2004. It was due to some combination of sharp wage increases, lagging productivity growth, unfavorable currency swings and dramatic energy cost increases.
Several countries that were relatively expensive a decade ago, mostly in Western Europe, fell even further behind. Relative to U.S. costs, average manufacturing costs in Belgium rose 6 percent from 2004 to 2013; in Sweden, 7 percent; in France, 9 percent; in Italy, 10 percent. Due largely to productivity gains, the U.K. held its own.
And the two countries making the greatest gains in manufacturing competitiveness were the U.S. and Mexico. The key reasons were stable wage growth, sustained productivity gains, steady exchange rates and the big energy cost advantage the United States now enjoys, due to the shale-gas boom.
Our findings have important implications for both companies and governments. Many companies continue to see the United States as a high-cost manufacturer and Latin America, Eastern Europe and Asia, especially China, as low-cost. In fact, the new data show that what exists today is a real competitive marketplace of manufacturing opportunities, with high-cost and low-cost countries virtually everywhere. This changes the decision-making process.
It also impacts policymaking.
National leaders need to understand that many factors affect manufacturing competitiveness, including worker productivity, natural gas and electricity prices, exchange rates and infrastructure. It’s not just labor costs. Only when they understand this can they formulate effective policies.
Harold L.Sirkin is a senior partner of The Boston Consulting Group, where Justin Rose and Michael Zinser are partners. They are the co-authors of “The U.S. Manufacturing Renaissance: How Shifting Global Economics Are Creating an American Comeback.” Send comments to email@example.com.