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The Shifting Economics of Global Manufacturing An Analysis of the Changing Cost Competitiveness of
the World’s Top 25 Export Economies
April 2014
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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
much as possible
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BCG's Global Manufacturing Cost-Competitiveness Index covers
countries with ~90% of total exports of manufactured goods
Australia China
India
Indonesia
Japan South Korea
Taiwan
Thailand
Brazil Canada
Mexico
United States
Austria Belgium Czech Republic
France
Germany
Italy
Netherlands Poland Spain Sweden
United Kingdom
Switzerland
Russia
Source: OECD.
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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
$0.29
1.00
0.15
22.2
5.4
21.1
3.3
Median
Sources: U.S. Economic Census; BLS; BEA; ILO; Euromonitor; EIU; BCG.
Labor productivity
Value-added economic output
per manufacturing worker
0.59
• Highly variable
• Gains in most countries, but
some developed countries
are decreasing
Energy costs
Electricity and natural-gas input
costs
11.4 12.6
• North American energy
revolution driving down cost
• Costs in the rest of the world
steadily increasing
Local wages ($)
Manufacturing
wage rates
Average hourly salary for a
manufacturing worker
17.64
• Increasing across all
countries Macro trend
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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
Source: BCG.
Unchanged or improved
Declined 1%–5%
Declined 5%–9%
Declined 10%–15%
Declined >15%
Outside top 25 exporters
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Four country categories emerge from these dramatic shifts
Category themes
Under pressure
Losing ground
Holding steady
Rising stars
Characteristics
• Traditionally low-cost countries
whose deteriorating
competitiveness is driven by a
wide range of factors
• Traditionally high-cost countries
whose competitiveness
continues to deteriorate owing
to the lack of productivity gains
and energy cost increases
• Countries roughly maintaining
their relative competitiveness
versus global leaders
• Increasing competitiveness
versus all others
• Moderate wage growth,
sustained productivity gains,
stable foreign-exchange rates,
and energy advantages
Countries
China Czech
Republic Poland Russia Brazil
Belgium France Italy Sweden Switzerland
India Indonesia Netherlands
Mexico United States
Source: BCG.
United Kingdom
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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.
"Under Pressure"
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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.
"Under Pressure"
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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)
+4
+7
2014
121
2004
117
2014
101
2004
94
Other Electricity
Natural gas Labor2
Germany Poland
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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.
"Losing Ground"
+10
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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
Dramatic decline (>100%) Slight decline (<10%) Significant decline (>10% and <100%)
Sources: U.S. Economic Census; BLS; BEA; ILO; Euromonitor; EIU; BCG.
"Losing Ground"
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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.
United Kingdom
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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$,
2004–2014 (%)
Energy costs
Change in
natural-gas cost,
2004–2014 (%)
Wage rate Raw-wage growth,
2004–2014 (%)
Sources: U.S. Economic Census; BLS; BEA; ILO; Euromonitor; EIU; BCG.
"Holding Steady"
• Consistently middle of the
pack versus the other top 25
export economies
• No major swings in any of
the key drivers
• Energy cost increases in line
with majority of other
countries
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0 100 200 300 400
-50 0 50 100 150
-50 0 50
-100 -50 0 50 100 150 200 250
Different underlying dynamics can be seen in the key drivers
for holding-steady countries (II/II)
Productivity Productivity growth,
2004–2014 (%)
Exchange rate Change in exchange
rate versus US$,
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
Wage growth among the highest
of all the top 25 exporters...
...is offset by large productivity
increases...
...and favorable currency
swings
Moderately rising energy costs
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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.
Key driver
Wages
Absolute productivity
Currency
Natural-gas cost
Electricity cost
U.S. change
(2004–2014)
+27%
+19%
Flat
–25%
+30%
Mexico change
(2004–2014)
+67%
+53%
–11%
–37%
+55%
Top 25 average
change (2004–2014)
+71%
+27%
+7%
+98%
+75%
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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
export economies
Country 2014 index rank
2014 mfg-cost
index
Delta in mfg-cost
index ('04–'14)
Trend in index
('04-'14)
China 1 96 +9
United States 2 100 N/A
South Korea 3 102 +4
United Kingdom 4 109 +1
Japan 5 111 +4
Netherlands 6 111 –1
Germany 7 121 +4
Italy 8 123 +10
Belgium 9 123 +7
France 10 124 +10
Source: BCG.
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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.
Delta
–17%
–13%
–9%
–9%
–1%
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The BCG analysis considered two future scenarios: analyst
forecasts and momentum case
0
100
120
140
80
Projected manufacturing-cost index, 2018 (U.S. = 100)
124
France Belgium
123
109
Nether-
lands
United
States
102
Germany United
Kingdom
100
121
China
111
123
96
South
Korea
Italy Japan
111
Comments
• Analyst forecasts built
on EIU forecasts
• Momentum case
based on same rate of
change as prior ten
years
• In almost all forecasts,
nearly all of the top 10
exporters are
positioned to continue
to lose ground
• The momentum case
demonstrates the
substantial downside
risk
2014 value 2018 projection with EIU forecasts 2018 projection under the momentum case1
Source: BCG. 1Estimate projects growth rates of 2004–2014 to 2018.
102
97
106 103
112 112
123 121
128
124
128
124
130
125
111 108
113
110
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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
Source: BCG.
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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
Source: BCG.
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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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Dave Fondiller
Director, Public Relations and Communications
212 446-3257
Alexandra Corriveau
Media Relations Manager, the Americas
212 446-3261
Eric Gregoire
Global Media Relations Manager
617 850-3783
Media contacts
bcg.com | bcgperspectives.com
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