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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    Adapting to Rapidly Shifting Cost Competitiveness

    A worldview that neatly divided the globe into high-cost and low-cost manufacturing regions has served companies well for the past three or four decades. But as we have observed through the BCG Manufacturing Cost-Competitiveness Index, companies should view the world in a new light.

    A decade ago, very few would have anticipated the dramatic and sustained shifts in wage and energy costs that have since taken place in the developed and developing worlds alike. However, in our rapidly changing global economy, there is reason to expect that volatility will continue and that relative cost competitiveness will remain dynamic. Neither companies nor policy makers can be complacent about their competitive position.

    Economies that have already fallen behind in cost competitiveness need to take action now to keep their manufacturing bases from deteriorating further. Those that are well positioned cannot rest on their laurels.

    There are profound implications for manufacturers with operations in all countries. They include the following:

    • Enhance productivity. As once-enormous gaps between wages in developed and developing economies continue to shrink, improving the value added by each worker is becoming an increasingly important factor in manufacturing competitiveness across the globe. Conduct a fresh assessment across your manufacturing footprint of the potential cost benefits of greater automation and other measures that can significantly improve productivity.
    • Account for the full costs. While direct costs such as labor and energy will continue to have a strong influence on decisions about where to manufacture, it is important to take full account of other factors. Logistics, obstacles to efficiently conducting business, and the hidden costs and risks of managing extended global supply chains, for example, can offset much of the savings from labor or favorable exchange rates. It is also crucial to take into account hidden cost advantages of operating shorter supply chains, such as speed to market, greater flexibility, and a better ability to customize products for specific markets.
    • Consider the implications for the broader supply chain. Although direct costs may now be relatively cheaper in a given economy, companies must also consider their needs for components and materials. Reliable local suppliers may not yet be available to provide important inputs. In other cases, deconstructing the value chain could involve added logistics costs or unanticipated tariffs, duties, or other penalties. Companies will need to understand the implications of their network decisions from an end-to-end, supply-­chain perspective to avoid any surprises.
    • Promote better business environments. Maintain a dialogue with relevant regulators and policy makers in countries in which you manufacture. Actively encourage them to reduce barriers to business and to adopt measures that will improve global competitiveness, such as developing infrastructure and reducing corruption.
    • Reevaluate your business model. To take full advantage of production in an economy, a one-size-fits-all model that uses the same processes and materials is unlikely to be optimal. Many companies should consider adjustments in their products or business models to better meet the needs of that manufacturing environment. It may make sense to use different materials that are locally available, for example, or to take advantage of new manufacturing technologies such as robotics and 3D printing when capital is cheaper than labor. Identifying and making such changes will allow companies to better meet the needs of the local market—often at a better cost position than if they use the same materials or processes that they use elsewhere.
    • Realign the global footprint. It may be time to reassess your company’s global production and sourcing networks and align them with the shifting economics of global manufacturing. Map current and future demand for products in each region of the world and evaluate the optimal sources for goods and services on a global basis.

    For many companies, the shifting economics of global manufacturing requires approaching the world with a fresh mind-set. Rather than seeing the globe in terms of low cost versus high cost, manufacturing investment and sourcing decisions should increasingly be based on a more current and sophisticated understanding of competitiveness within regions. Companies that build production capacity based on outdated concepts of cost competitiveness—and that fail to factor in scenarios for long-term trends—risk placing themselves at a serious disadvantage for two to three decades. The winners are likely to be companies that align their operations with the shifting economics of global manufacturing—and that build in the flexibility to shift gears as those economics continue to evolve.