CSCMP's Supply Chain Quarterly
October 16, 2018
Forward Thinking

Perceptions of countries' cost competitiveness are outdated, report says

Changing labor and production costs are leading companies to rethink their global production strategies, according to the Boston Consulting Group.

New research from the Boston Consulting Group (BCG) indicates that countries that are perceived as low-cost manufacturing locations, such as Brazil and Russia, are no longer much cheaper than the United States, and countries once thought of as high-cost, such as the United Kingdom, have become much more competitive in recent years. This development is already spurring a number of companies to change their global sourcing and manufacturing investment strategies.

"Many companies are beginning to see the world in a new light," said Harold L. Sirkin, a senior partner at the Boston Consulting Group who co-authored the report, titled The Shifting Economics of Global Manufacturing: How Cost Competitiveness is Changing Worldwide. "They are finding that many old perceptions of low-cost and high-cost countries are out of date, and they are starting to realign their global sourcing and production networks accordingly."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 noted that traditionally low-cost countries, such as Brazil, China, Czech Republic, Poland, and Russia, are under pressure to maintain that advantage. At the same time, the competitiveness of traditionally high-cost countries, such as France, Italy, and Sweden, continues to deteriorate due to weak productivity gains and higher energy costs. Some countries that were long considered to be high-cost, such as the U.K., have become much more competitive and are attracting manufacturers in the automotive and other industries.

BCG singled out Mexico and the United States as "rising stars" because of their moderate wage growth, sustained productivity, and energy cost advantages. The report points out that Mexico has surpassed China in terms of cost competiveness. In 2004, China's average manufacturing costs were estimated to be 6 percent higher than Mexico's, according to BCG. But currently Mexico is around 4 percent cheaper than China. That's partly because China's manufacturing wages have nearly quintupled since 2004, while Mexican wages have risen by less than 50 percent in U.S. dollar terms.

Companies should expect relative cost competitiveness around the world to remain dynamic, according to the report, which also includes recommendations for dealing with such volatility. For details, click here.

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