November 24, 2014

The Shifting Economics of Global Manufacturing: reasons and lessons

The Boston Consulting Group recently published a great analysis about the changing landscape of global manufacturing. The reasons and adoption tactics can be important for all manufacturing companies around the globe.

BCG says there are four "forces that are redrawing the competitiveness map":

#1 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." See also our blog post: Will Eastern Europe provide lower labour costs than China?
#2 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."

#3 Labour 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."
#4 Energy costs
"... 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."
The result on the global map is the following:

BCG also suggests some adoption strategies to shifting cost competitiveness for manufacturers:
  • Enhance productivity. "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."
  • 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."

What is your opinion? How should manufacturers respond to global changes in cost competiteveness?

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