The Shifting Economics of Global Manufacturing...The Shifting Economics of Global Manufacturing An...

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

the World’s Top 25 Export Economies

April 2014

1

Copyr

ight

© 2

014 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.


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

2

Copyr

ight

© 2

014 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.


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.

3

Copyr

ight

© 2

014 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.


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

4

Copyr

ight

© 2

014 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.


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

5

Copyr

ight

© 2

014 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.


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

6

Copyr

ight

© 2

014 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.


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"

7

Copyr

ight

© 2

014 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.


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"

8

Copyr

ight

© 2

014 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.


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.

9

Copyr

ight

© 2

014 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.


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


+4

+7

2014

121

2004

117

2014

101

2004

94

Other Electricity

Natural gas Labor2

Germany Poland

10

Copyr

ight

© 2

014 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.


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


115

2014

117

123

112 115

2014

Other Electricity Natural gas Labor2

Belgium France Italy Sweden Switzerland


"Losing Ground"

+10

11

Copyr

ight

© 2

014 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.


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%)


"Losing Ground"

12

Copyr

ight

© 2

014 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.


Diverse countries have been holding steady in

competitiveness

120

110

90

0

100

80


+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


United Kingdom

13

Copyr

ight

© 2

014 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.


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 (%)


"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

14

Copyr

ight

© 2

014 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.


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 (%)


"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

15

Copyr

ight

© 2

014 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.


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%

16

Copyr

ight

© 2

014 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.


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.

17

Copyr

ight

© 2

014 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.


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.

18

Copyr

ight

© 2

014 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.


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%

19

Copyr

ight

© 2

014 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.


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

20

Copyr

ight

© 2

014 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.


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.

21

Copyr

ight

© 2

014 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.


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.

22

Copyr

ight

© 2

014 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.


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


August 2013

U.S. Manufacturing Nears the Tipping Point: Which Industries,

Why, and How Much?


March 2012

Made in America, Again: Why Manufacturing Will Return to the

U.S.


August 2011

Note: Publications are available on BCG's thought leadership portal, www.bcgperspectives.com, or at www.bcg.com.

https://www.bcgperspectives.com/content/articles/lean_manufacturing_energy_environment_how_cheap_natural_gas_benefits_budgets_us_households/

https://www.bcgperspectives.com/content/articles/lean_manufacturing_energy_environment_how_cheap_natural_gas_benefits_budgets_us_households/

http://www.bcg.com/media/pressreleasedetails.aspx?id=tcm:12-144944








https://www.bcgperspectives.com/content/articles/lean_manufacturing_us_skills_gap_could_threaten_manufacturing_renaissance/




https://www.bcgperspectives.com/content/articles/lean_manufacturing_sourcing_procurement_behind_american_export_surge/





https://www.bcgperspectives.com/content/articles/manufacturing_supply_chain_management_us_manufacturing_nears_the_tipping_point/

https://www.bcgperspectives.com/content/articles/manufacturing_supply_chain_management_us_manufacturing_nears_the_tipping_point/

https://www.bcgperspectives.com/content/articles/manufacturing_supply_chain_management_made_in_america_again/

https://www.bcgperspectives.com/content/articles/manufacturing_supply_chain_management_made_in_america_again/

http://www.bcgperspectives.com/

http://www.bcg.com/

23

Copyr

ight

© 2

014 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.


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

24

Copyr

ight

© 2

014 b

y T

he B

osto

n C

onsultin

g G

roup,

Inc.

All

rights

reserv

ed.


Dave Fondiller

Director, Public Relations and Communications

[email protected]

212 446-3257

Alexandra Corriveau

Media Relations Manager, the Americas

[email protected]

212 446-3261

Eric Gregoire

Global Media Relations Manager

[email protected]

617 850-3783

Media contacts

mailto:[email protected]



bcg.com | bcgperspectives.com

Thank you

The Shifting Economics of Global Manufacturing...The Shifting Economics of Global Manufacturing An...

Documents

Transcript of The Shifting Economics of Global Manufacturing...The Shifting Economics of Global Manufacturing An...