For decades, it’s been widely accepted that countries with well-developed industries, like the United States and Britain, outsource much of their production and jobs to low-cost regions like Asia and South America. The U.S. alone outsourced more than two million jobs in 2013.
But according to a new report by Boston Consulting Group (BCG), things are changing. Wages, productivity, energy costs, currency values, and other factors are causing several economies—traditionally regarded as low-cost—to lose their footing.
“Many companies are beginning to see the world in a new light,” says Harold Sirkin, co-author of the report and a senior partner at BCG. “They are finding that many old perceptions of low-cost and high-cost countries are out of date, and they are starting to realign their global sourcing and production networks accordingly.”
BCG’s latest Manufacturing Cost-Competitiveness Index indicates that several historically low-cost manufacturing economies, such as Brazil (which is “now estimated to be more expensive than much of Western Europe”), Russia, and the Czech Republic, are no longer considered to be cheaper than the U.S.
In fact in some cases, they’re actually more expensive.
China, another “low-cost” nation, is one of the countries facing the most pressure when it comes to change in cost competitiveness. In 2013, the U.S. Bureau of Labor Statistics stated that utility costs in China had risen by 15 percent between 2010 and 2011, and that the price of land used for industrial purposes, when compared to similar land in the U.S., had also gone up significantly. Today, China’s estimated manufacturing-cost advantage over the U.S. has shrunk to less than five percent.
While China and other regions are seeing their competitiveness deteriorate, several economies are improving. Historically high-cost nations like the U.S. and the U.K have significantly increased their cost-competitiveness. And Mexico, whose manufacturing economy was once in peril, is now considered a rising global star, with manufacturing costs estimated to be lower than China’s.
These changes in cost competitiveness are causing a number of companies to alter their investment and sourcing strategies.
The change in positions between Mexico and China, for example, has caused some companies to expand their production in Mexico and change their investment plans.
Currently, manufacturing in Mexico is around four percent cheaper on average than China, and Mexican labor costs are estimated to be 13 percent lower. Asian technology companies like Foxconn and Sharp are moving into Mexico, with one-third of the investment in Mexican manufacturing coming from these tech companies. As a result, Mexican exports of electronics more than tripled to $78 billion from 2006 to 2013.
The U.K., now considered to be the lowest-cost manufacturing economy of Western Europe, has also seen a change to its landscape due in part to its cost competitiveness and the ongoing re-shoring movement. A number of global automakers are expanding their production in Britain to take advantage of the country’s new position.
Jaguar Land Rover, a division of India’s Tata Motors, is one company that is heavily investing in Britain. It is building a new $840 million state-of-the-art plant in Wolverhampton to create new high-tech, low-emission engines, and the company says it will create 1,700 jobs by 2015 at its Solihull facility.
Other companies, like Nissan, Honda, and BMW have also invested in auto manufacturing in the U.K., and the British automotive industry is estimating that it will produce over 2 million cars annually by 2017.
Auto manufacturing isn’t the only area that is seeing gains in Britain. The U.K.’s direct-manufacturing cost structure has improved by 10 percent relative to other leading Western European manufacturing export economies, and the U.K. holds the competitive advantage over Eastern Europe and China.
As a result of these changes in relative costs, analysts are predicting that there is going to be a global move away from outsourcing manufacturing. Low-cost manufacturing centers are starting to exist in all regions of the world, meaning that more goods consumed in Asia, Europe, and the Americas will be made closer to home.
“There is a growing realization that, all other things being equal, it may be more effective to manufacture your goods close to your customers,” says Sukand Ramachandran, a partner at BCG in London. “That trend has been apparent in the U.S. for about a year and a half, and we’re now starting to see it in Europe too.”
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