The Shifting Economics of Global Manufacturing

The Shifting Economics of Global Manufacturing

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The Shifting Economics of Global Manufacturing

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  • Forces That Are Redrawing the Competitivess Map

    Four factors are most responsible for the dramatic shifts in manufacturing competitiveness from 2004 to 2014. (See Exhibit 4.) The factors are now blurring the traditional boundaries between low-cost and high-cost regions.

    • Wages. The range of hourly pay differentials for manufacturing workers remains enormous. But rapidly rising wages have significantly eroded the competitive advantage of a number of major exporters. Although manufacturing wages rose in all 25 countries from 2004 to 2014, nations such as China and Russia have experienced more than a decade of annual increases ranging from 10 to 20 percent. In other economies, wages have only risen by 2 to 3 percent per year.
    • Exchange Rates. Changing currency values can make an economy’s exports either more expensive or cheaper in international markets. Currency shifts from 2004 to 2014 have ranged from a nearly 26 percent devaluation of the Indian rupee against the U.S. dollar to a 35 percent increase in the Chinese yuan.
    • Labor Productivity. Gains in output per manufacturing worker—or productivity—have varied widely around the world from 2004 to 2014 and explain some of the biggest shifts in total manufacturing costs. Manufacturing productivity rose by more than 50 percent in countries such as Mexico, India, and South Korea from 2004 to 2014 but shrank in others, such as in Italy and Japan. Some economies with low wage rates are not particularly competitive in terms of unit labor costs when wages are adjusted for productivity.
    • Energy Costs. Prices for natural gas have fallen by 25 to 35 percent since 2004 in North America because of large-scale production of shale gas resources. In contrast, they have risen by 100 to 200 percent in economies such as Poland, Russia, South Korea, and Thailand. This has had a significant impact on the chemicals industry, which uses natural gas as a feedstock for production. Likewise, the industrial price of electricity has risen sharply in manufacturing economies such as Australia, Brazil, and Spain. As a result, overall energy costs in many countries outside of North America are between 50 to 200 percent higher than they were in 2004. This has caused major changes in competitiveness in energy-dependent industries.

    To compare cost shifts in each of these four dimensions from 2004 to 2014 for the world’s 25 leading exporters of manufactured goods, we used the U.S. as the baseline. We aggregated scores for the four dimensions into an overall manufacturing-cost-competitiveness score for each economy in relation to the U.S. The score for the U.S. remains 100. If an economy has a score of 110 in our Manufacturing Cost-Competitiveness Index, its average manufacturing costs are 10 percent higher than in the U.S.

    Of course, factors other than wage rates, productivity, exchange rates, and energy costs also weigh heavily on corporate decisions about where to focus supply chains. Logistics costs, the overall ease of doing business, and the presence of corruption—among other issues—can affect the attractiveness of potential locations. In our research, we have found that manufacturing growth in a number of countries that have very attractive direct costs is stunted because of weaknesses in these areas. (See Exhibit 5.) These factors are local in nature—and can vary widely in different locations even within countries. Therefore, we have not modeled them into our cost index. Wise manufacturers, however, must account for these factors when they make decisions.