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For Media Use Only—Do Not Reproduce Slides or Charts Without Permission THIS DOCUMENT CONTAINS PROPRIETARY & CONFIDENTIAL INFORMATION OF THE BOSTON CONSULTING GROUP, INC.
The Shifting Economics of Global Manufacturing An Analysis of the Changing Cost Competitiveness of
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Summary: A significant reordering of national manufacturing
competitiveness has occurred over the past decade
Striking shifts have taken place
in the competitiveness of the
top 25 export economies during
the past ten years
Manufacturing competitiveness
has become truly global
Of the world's top 10 exporters,
China, the U.S., and South
Korea stand apart from the
pack
Dramatic historical volatility
can be seen in the major
drivers of competitiveness
Manufacturers must have a
global perspective to remain
competitive as the economics
continue to shift
• Rapid changes in wages, labor productivity, energy costs, and exchange rates have driven
dramatic changes in relative manufacturing-cost structures
• These changes have led to four emergent categories of relative competitiveness
– Under Pressure. Traditional low-cost countries whose costs are rising quickly
– Losing Ground. Traditional high-cost countries that are falling further behind
– Holding Steady. A mix of low- and high-cost countries that are maintaining their position
– Rising Stars. Mexico and the United States—improved competitiveness versus all others
• Manufacturing competitiveness is no longer concentrated in a single region or country
• East and South Asian countries joined by North American, western European, and eastern
European countries are at the top of the rankings
• The gap between China and the U.S. in overall manufacturing cost—before transportation—is
less than 5 points today
• South Korea, the next-most-competitive major exporter, is ~2 points more costly than the U.S.
• The rest of the top 10 export economies are ~10 to 25 points disadvantaged to the U.S. and
~15 to 30 points disadvantaged to China
• The past ten years have been marked by high volatility
– Several countries have seen more than ten years of 10% to 20% sustained wage growth
– Productivity has doubled in many countries—while declining in others
– Energy costs—relative to the U.S.—have increased in many countries: 50% to 200%
– Currencies have fluctuated greatly, ranging from –20% to +35% versus the dollar
• Future uncertainty in all of these dimensions demands that manufacturers remain flexible to
stay competitive
• Manufacturers need to develop long-term views and build options into their supply chain as
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BCG's Global Manufacturing Cost-Competitiveness Index covers
countries with ~90% of total exports of manufactured goods
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0
15
30
45 Switzerland
Indonesia
The index covers four direct drivers of mfg competitiveness:
wages, productivity growth, energy costs, and exchange rates
0.0
0.4
0.8
1.2 United States
Brazil 0.05
0.10
0.15
0.20
0.25
0.00
Russia
Italy
Productivity index
(scaled to U.S.)
Electricity cost
(cents per kW hour)
0
3
6
9
12
15
18
21
24 Switzerland
Russia
Natural-gas cost
($ per million BTUs)
Dimension
Definition
Range of values
globally in 2014
$35.83
$0.29
1.00
0.15
22.2
5.4
21.1
3.3
Median
Sources: U.S. Economic Census; BLS; BEA; ILO; Euromonitor; EIU; BCG.
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Over the past ten years, there have been dramatic shifts in the
relative cost competitiveness of the top 25 export economies
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Four country categories emerge from these dramatic shifts
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The long-term manufacturing competitiveness of many
traditionally low-cost countries is under pressure
140
90
120
130
100
0
80
110
97 99
96
2014
86
Manufacturing-cost index, 2004 versus 20141 (U.S. = 100)
2004 2004 2004
87
107
97
2014
101
+10
+7
+25
+12 +9
2014 2014 2004
94
2014
123
2004
Natural gas Other Electricity Labor2
China Czech Republic Poland Russia Brazil
Sources: U.S. Economic Census; BLS; BEA; ILO; Euromonitor; EIU; BCG. Note: Index covers four direct costs only. No difference assumed in “other” costs (for example, raw-material inputs, machine and tool depreciation); cost structure calculated as a weighted average across all industries. 1Changes in the index from 2004-2014 are rounded to the nearest percentage point. 2Productivity-adjusted.
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China and Russia have seen rising wages and energy costs
weakening their competitiveness in the past ten years
21.90
6.76
12.47
4.35
0
10
20
30
Productivity-adjusted
manufacturing wages ($)
+224%
+187%
2014 2004 2014 2004
~200% increases in
productivity-adjusted
labor costs
~70% increases in electricity
costs
China Russia China Russia China Russia
Natural-gas costs
have more than doubled
5
3
11
7
0
10
20
Industrial electricity
cost (cents per kilowatt hour)
+78%
+66%
2014 2004 2014 2004
3.3
1.1
13.7
5.8
0
10
20
Industrial natural-gas cost
($ per million BTUs)
+202%
+138%
2014 2004 2014 2004
Sources: U.S. Economic Census; BLS; BEA; ILO; Euromonitor; EIU; BCG. Note: Index covers four direct costs only. No difference assumed in “other” costs (for example, raw-material inputs, machine and tool depreciation); cost structure calculated as a weighted average across all industries.
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Brazil has lost ground in all dimensions
"Under Pressure"
All drivers worsened for Brazil
Brazil has seen a dramatic decrease in
global manufacturing competitiveness
A decade of decline in all dimensions has led to a
substantial loss of competitiveness
... driven by substantial cost pressures and
currency appreciation not followed by
productivity increase
• Wages more than doubled over the period
• 20% appreciation of the Brazilian real versus the
U.S. dollar
• Industrial electricity costs rose by 90%
• Natural gas costs rose by nearly 60%
• Meanwhile, labor productivity grew only 3% over
the ten-year period
As a result, Brazil’s cost position today is in the
bottom quintile of the top 25 exporters
3
1
43
15
0
5
10
15
20
Currency
Impact on manufacturing-cost index, 2004-2014 (ppts)
Wages Productivity Electricity Natural gas
Total labor impact is a combined
22-point decrease in
competitiveness
Better Worse
Sources: U.S. Economic Census; BLS; BEA; ILO; Euromonitor; EIU; BCG. Note: Exchange rate impacts have been removed from wages but are included in electricity and natural-gas impacts.
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Poland remains competitive versus European peers, but it
has “tipped” versus other global exporters
Net competitiveness worsened Energy cost growth was the primary driver
Ten years ago, Poland was the most cost-
competitive country in Europe
• Poland had an 8-point advantage over the next-
closest European exporter
• It had a 23-point advantage over Germany
The combination of productivity-adjusted wage
growth just above median rate of top 25
exporters...
...and dramatic increases in energy costs has
driven overall competitiveness lower
• Electricity costs up more than 90%
• Industrial natural-gas costs up more than 175%
Poland remains highly competitive versus
European peers, but it is losing ground against
the strongest global competitors
Sources: U.S. Economic Census; BLS; BEA; ILO; Euromonitor; EIU; BCG. 1Changes in the index from 2004-2014 are rounded to the nearest percentage point. 2Productivity-adjusted.
"Under Pressure"
120
130
0
80
90
100
110
Manufacturing-cost index, 2004 versus 20141 (U.S. = 100)
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Many traditionally high-cost countries in western Europe
continue to lose ground globally
90
80
0
150
140
130
110
120
100
123
2004
+7
+7
2004
+10
2004 2004 2014 2014
125
2004 2014
116
109
+10
124
Manufacturing-cost index, 2004 versus 20141 (U.S. = 100)
115
2014
117
123
112 115
2014
Other Electricity Natural gas Labor2
Belgium France Italy Sweden Switzerland
Sources: U.S. Economic Census; BLS; BEA; ILO; Euromonitor; EIU; BCG. Note: Index covers four direct costs only. No difference assumed in “other” costs (for example, raw-material inputs, machine and tool depreciation); cost structure calculated as a weighted average across all industries. 1Changes in the index from 2004-2014 are rounded to the nearest percentage point. 2Productivity-adjusted.
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Lack of productivity gains and rising energy costs are the
biggest reasons for slipping competitiveness
3.0
5.5
0.3
0
2
4
6
Impact on manufacturing-cost index, 2004-2014 (percentage points)
Natural gas Electricity Productivity-adjusted wages
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Diverse countries have been holding steady in
competitiveness
120
110
90
0
100
80
Manufacturing-cost index, 2004 versus 20141 (U.S. = 100)
+1
+1
-1
2004 2014
83 82
2014
+1
2004
87
2014
109
2004
107
2014
111
2004
113
87
Other Natural gas Electricity Labor2
"Holding Steady"
India Indonesia Netherlands
Sources: U.S. Economic Census; BLS; BEA; ILO; Euromonitor; EIU; BCG. Note: Index covers four direct costs only. No difference assumed in “other” costs (for example, raw-material inputs, machine and tool depreciation); cost structure calculated as a weighted average across all industries. 1Changes in the index from 2004-2014 are rounded to the nearest percentage point. 2Productivity-adjusted.
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0 100 200 300 400
-50 0 50 100 150
-50 0 50 100
-50 0 50 100 150 200 250
United Kingdom Netherlands Other top 25
Different underlying dynamics can be seen in the key drivers
for holding-steady countries (I/II)
Relative stability in underlying competitiveness drivers for the Netherlands and the United Kingdom relative
to others
Productivity Productivity growth,
2004–2014 (%)
Exchange rate Change in exchange
rate versus US$,
2004–2014 (%)
Energy costs
Change in
natural-gas cost,
2004–2014 (%)
Wage rate Raw-wage growth,
2004–2014 (%)
Sources: U.S. Economic Census; BLS; BEA; ILO; Euromonitor; EIU; BCG.
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0 100 200 300 400
-50 0 50 100 150
-50 0 50
-100 -50 0 50 100 150 200 250
Different underlying dynamics can be seen in the key drivers
for holding-steady countries (II/II)
Productivity Productivity growth,
2004–2014 (%)
Exchange rate Change in exchange
rate versus US$,
2004–2014 (%)
Energy costs
Change in
natural-gas cost,
2004–2014 (%)
Wage rate Raw-wage growth,
2004–2014 (%)
Sources: U.S. Economic Census; BLS; BEA; ILO; Euromonitor; EIU; BCG.
"Holding Steady"
Other Indonesia India
Dynamic, counterbalancing swings in underlying competitiveness drivers for India and Indonesia
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Compared with all others, Mexico and the United States are
rising stars
"Rising Stars"
Sources: U.S. Economic Census; BLS; BEA; ILO; Euromonitor; EIU; BCG. Note: Index covers four direct costs only. No difference assumed in “other” costs (for example, raw-material inputs, machine and tool depreciation); cost structure calculated as a weighted average across all industries.
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Size of exports (highest to lowest)
Dramatic shifts have led to a wide spread in cost
competitiveness across the top 25 export economies
90
140
120
110
100
130
0
80
India
87
Taiw
an
97
Manufacturing-cost index, 2014 (U.S. = 100)
Mexic
o
91
Russia
99
Canada
115
United K
ingdom
109
Belg
ium
123
Neth
erlands
111 Italy
91
Bra
zil
123
Spain
109
Austr
alia
130
Sw
itzerland
125
Czech R
epublic
107
Austr
ia
111
Sw
eden
116
Pola
nd
101
Indonesia
83
Thaila
nd
123
Fra
nce
124 S
outh
Kore
a
102
Japan
111
United S
tate
s
100
Germ
any
121
Chin
a
96
Other Electricity Natural gas Labor1
Sources: U.S. Economic Census; BLS; BEA; ILO; Euromonitor; EIU; BCG. Note: Index covers four direct costs only. No difference assumed in “other” costs (for example, raw-material inputs, machine and tool depreciation); cost structure calculated as a weighted average across all industries 1Productivity-adjusted.
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Summary of competitiveness index rankings for the top 10
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Several of the remaining top 25 exporters have very attractive
direct-cost profiles but are challenged by secondary factors
Mfg cost
relative to
the U.S.
Overall
business
environment2
Ease of
doing
business3
Logistics
performance4
Corruption
perception5
Rank
47
35
31
29
47
Country1
Indonesia
India
Thailand
Mexico
Russia
Rank
120
134
18
53
92
Rank
59
46
38
47
95
Rank
114
94
102
106
127
Sources: U.S. Economic Census; BLS; BEA; ILO; Euromonitor; EIU; BCG. 1Includes a selection of economies ranked from 11 to 25 on total export size. 2EIU ranking based on ten separate criteria or categories covering the political environment, the macroeconomic environment, market opportunities, policy toward free enterprise and competition, policy toward foreign investment, foreign trade and exchange controls, taxes, financing, the labor market, and infrastructure. 3World Bank Ease of Doing Business Index. 4World Bank Logistics Performance Index. 5Transparency International 2013 Corruption Perception Index.
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The BCG analysis considered two future scenarios: analyst
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Key takeaways for manufacturers (I/II)
Manufacturing is now more competitive on a global scale than ever before
• Manufacturers need to be focused on building and optimizing truly global network footprints
Manufacturers in all countries should...
• Map current and future demand to regions and intelligently optimize their manufacturing network
• Build a true total-cost view, incorporating additional factors such as hidden costs
• Take a long-term view when making investment decisions, building optionality into the network
• Support the reduction of barriers to increased competitiveness in all countries
– Especially reforms focused on corruption, general ease of doing business, and
development of infrastructure
Manufacturers with facilities in rising-star countries should...
• Continue to advance productivity, taking advantage of new digital tools and advanced robotics
where appropriate
• Collaborate with local and national stakeholders to build and retain a skilled workforce
– Especially as demographics become less favorable toward the end of the current decade
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Key takeaways for manufacturers (II/II)
Manufacturers with facilities in under-pressure countries should...
• Drive productivity improvement programs—including automation and lean—to offset rapid
wage growth
• Drive energy efficiency measures designed to lessen the impact of rising energy costs
Manufacturers with facilities in losing-ground countries should...
• Increase productivity in facilities through training and capital investment—where cost effective
• Look for opportunities to increase labor flexibility
• Explore options to shift production to more favorable locations
Manufacturers with facilities in holding-steady countries should...
• Develop action plans with both improving and declining future scenarios
• Frequently assess the competitiveness of their facilities relative to the rest of the network
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This research is part of BCG’s series on the shifting dynamics
of global manufacturing
Authors of This Analysis
Harold L. Sirkin
Senior partner and coauthor of The U.S. Manufacturing
Renaissance: How Shifting Global Economics Are
Creating an American Comeback
(Knowledge@Wharton, November 2012)
BCG Chicago
Michael Zinser
Partner, coleader of the Manufacturing practice, and
coauthor of The U.S. Manufacturing Renaissance: How
Shifting Global Economics Are Creating an American
Comeback
BCG Chicago
Justin Rose
Partner, leader of green energy in the Americas, and
coauthor of The U.S. Manufacturing Renaissance: How
Shifting Global Economics Are Creating an American
Comeback
BCG Chicago
Selected Publications and
Research in the Series
How Cheap Natural Gas Benefits the Budgets of U.S.
Households
An article by The Boston Consulting Group
December 2013
Majority of Large Manufacturers Are Now Planning or
Considering “Reshoring” from China to the U.S. (press release)
Survey findings by The Boston Consulting Group
September 2013
The U.S. Skills Gap: Could It Threaten a Manufacturing
Renaissance?
A report by The Boston Consulting Group
August 2013
Behind the American Export Surge: The U.S. as One of the
Developed World's Lowest-Cost Manufacturers
A report by The Boston Consulting Group
August 2013
U.S. Manufacturing Nears the Tipping Point: Which Industries,
Why, and How Much?
A report by The Boston Consulting Group
March 2012
Made in America, Again: Why Manufacturing Will Return to the
U.S.
A report by The Boston Consulting Group
August 2011
Note: Publications are available on BCG's thought leadership portal, www.bcgperspectives.com, or at www.bcg.com.
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Glossary
BEA = Bureau of Economic Analysis (United States)
BLS = Bureau of Labor Statistics (United States)
EIU = Economist Intelligence Unit
ILO = International Labour Organization (United Nations)
OECD = Organisation for Economic Co-operation and Development
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