Rising labour and energy costs weakened the competitiveness of emerging economies that a decade ago offered companies some of the lowest-cost manufacturing options in the world, according to research by the Boston Consulting Group.
Traditionally low-cost nations that have come under pressure include Brazil, Russia and China, BCG suggested. Based on productivity gains and labour, natural gas and electricity costs, China and Russia in 2014 were barely more cost-competitive than the US.
India and Indonesia held on to their global cost-competitiveness. Indonesia ranked as the most cost-competitive of the 25 largest export nations listed on the index. India was second.
Two rising stars on the index were the US and Mexico. Moderate wage growth, sustained productivity gains, stable foreign exchange rates and energy advantages boosted the two countries’ global competitiveness.
The index shows “competitiveness is clearly global,” said Justin Rose, partner in BCG’s Chicago office. “In 2004, all the low-cost countries were in Asia. Now there are many choices.”
In the past two years, several business consultants have tracked rising costs in emerging economies that had been popular low-cost destinations for outsourced manufacturing jobs.
A 2012 PwC study found that rising labour and energy costs in China were eating into profits of US manufacturers. And research published by EY the same year found that companies looking for low-cost manufacturing sources in Asia were focusing on Indonesia, Malaysia and Vietnam rather than China. Outside of Asia, companies were interested in new manufacturing hubs in the Middle East and North Africa.
The Hay Group in 2013 predicted wages in Latin America to rise the most worldwide, by an average of 9%. Meanwhile, wages in developed economies, such as North America and several European countries, were expected to stagnate, according to the global management consulting firm.
Under pressure and losing ground
BCG’s published data, which goes back to 2004, shows Brazil’s manufacturing competitiveness is particularly under pressure. Between 2004 and 2014, wages more than doubled, the Brazilian real increased in value 20% compared with the US dollar, natural gas costs rose nearly 60%, and industrial electricity costs increased 90%, while productivity increased only 3%.
Brazil’s score on the manufacturing-cost index weakened to 123 in 2014, from 97 in 2004.
Labour costs that were rising quicker than productivity also hurt Russia’s competitiveness, according to the BCG index. In 2014, Russia’s score was 99, compared with 87 in 2004.
China’s score weakened to 96 in 2014, from 86 in 2004, partly because of labour cost increases but also because of electricity costs that went up about 70% and natural gas costs that more than doubled in the past decade.
Several European countries also saw their cost-competitiveness score on the index weaken in the past decade. Rising energy costs were to blame as well as wage increases that in these already high-cost countries exceeded productivity gains.
The scores of France, Italy and Switzerland each weakened by ten points in the past decade. In 2014, the index ranked Switzerland (score of 125) as the second-least cost-competitive of the 25 biggest export nations. Only Australia had a weaker score (130). France (124) came in one point and one place ahead of Switzerland. Italy scored 123 points, the same as Brazil.
Energy costs also increased in Indonesia, the Netherlands, the UK and India, but that did not substantially change those countries’ cost-competitiveness.
In 2014, Indonesia ranked the most cost-competitive among the 25 largest export nations with a score of 83. India, which experienced large wage increases and productivity gains in the past decade, was 2014’s runner-up with 87, the same score as in 2004.
The Netherlands scored 111 and the UK 109 with no major swings in any of the key drivers.
The US and Mexico increased their cost-competitiveness the most in the past decade, according to the BCG research. Both countries saw moderate wage growth, sustained productivity gains, stable foreign-exchange rates and energy advantages.
In 2014, the US, which is always given the standard score of 100, ranked ahead of several export powers that had been more cost-competitive a decade earlier, including Poland, Brazil and South Korea.
Related CGMA Magazine content:
“More US Manufacturers Want to Bring Back Production From China”: US manufacturers are increasingly planning to bring overseas production back to the US to reduce time to market and costs and improve product quality, research shows. Find out what would prompt companies to reshore even more manufacturing jobs.
“Mexico Rivalling China in Competition for Manufacturing Jobs”: Relatively low labour and energy costs are increasingly giving Mexico an edge over China, the low-cost manufacturer of choice in the past decade, research by the Boston Consulting Group suggests.
“US Offshoring Targets New Destinations”: Asia no longer tops the list of places where US tech companies plan to create manufacturing jobs, research by BDO suggests. Find out where the tech industry is looking to offshore next.
—Sabine Vollmer (email@example.com) is a CGMA Magazine senior editor.
Top ten competitors
The Boston Consulting Group’s global manufacturing cost-competitiveness index ranks exporting economies worldwide. In 2014, the ten most cost-competitive countries on the index are:
1. Indonesia (83)
2. India (87)
3. (tie) Mexico (91)
3. Thailand (91)
5. China (96)
6. Taiwan (97)
7. Russia (99)
8. United States (100)
9. Poland (101)
10. South Korea (102)