World Economy

UK and US rival emerging markets in manufacturing


The U.S. and the U.K. have become dramatically more competitive in the manufacturing sector over the past decade, Britain becoming the cheapest manufacturing country in western Europe while the U.S. rivals many emerging markets.

Simon Dawson | Bloomberg via Getty Images

According to the Boston Consulting Group (BCG), manufacturing cost competitiveness across the globe has shifted to such an extent over the past ten years that traditional perceptions regarding where the low-cost nations were to be found no longer hold.

The BCG found that not only was the U.K. the cheapest location in western Europe but that eastern European costs were on a par with the U.S. Brazil is now one of the highest-cost nations, while Mexico is lower than China.

The BCG's Global Manufacturing Cost-Competitiveness Index examines changes in production costs over the last decade in the 25 largest goods-exporting nations, looking at wages, productivity growth, energy costs and currency exchange rates.

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Harold L. Sirkin, a BCG senior partner, said the index showed that "there are now high- and low-cost countries in nearly every region of the world."

"Many companies are making manufacturing investment decisions on the basis of a decades-old worldwide view that is sorely out of date," he said. "They still see North America and western Europe as high cost and Latin America, eastern Europe, and most of Asia - especially China - as low cost."

Rising wages and energy costs have put pressure on countries such as China and Russia. China remains the number one country in terms of manufacturing competitiveness, but China's manufacturing-cost advantage over the U.S. has shrunk to less than 5 percent.

The U.S. along with Mexico are singled out by BCG as "rising stars" as cost structures have significantly improved compared to all other leading exporters.

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In a note the BCG said, "The key reasons were stable wage growth, sustained productivity gains, steady exchange rates, and a big energy-cost advantage that is largely driven by the 50 percent fall in natural-gas prices since large-scale production of U.S. shale gas began in 2005. Mexico now has lower average manufacturing costs than China."

Commenting on BCG's findings, Chris Williamson, chief economist at Markit, told CNBC: "It's easy to see why the trend towards 'reshoring' production from Asia, and in particular China, to the U.S. is gaining popularity. This research suggests that China's manufacturing cost advantage relative to the U.S. has dwindled...based on wage, exchange rate, energy cost and productivity differentials.

"Once you factor in other considerations, such as a transport costs, lead-times to sales outlets and the ability to closely monitor quality control, many U.S. companies will see the choice of setting up a new production facility at home rather in Asia as a 'no-brainer'."

The U.K. was dubbed as "holding steady" by BCG, arguing that the U.K. has seen decent productivity growth in the last decade. British manufacturing output grew by 1 percent in February from January, its biggest increase since September 2013 and 3.8 percent higher than in February 2013, the Office for National Statistics announced earlier this month.

Michael Zinser, another BCG partner said in a note "These changes should drive companies to rethink their sourcing strategies, as well as where to build future capacity. Many will opt to manufacture in competitive countries closer to where goods are consumed."