Heard off the Street: Competitiveness gap may be narrowing

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The combination of higher wages in China and the U.S. energy boom is shrinking the manufacturing competitiveness gap between the world’s two largest economies, according to a new study by the Boston Consulting Group.

“Companies used to believe the default location to manufacture was China. China is getting more expensive, and there are other options,” said Harold L. Sirkin, the firm’s senior partner and coauthor of the report.

He said hourly wages in China’s major manufacturing centers are forecast to hit $6.15 next year vs. 58 cents an hour in 2001, when China joined the World Trade Organization. Because the U.S. labor productivity rate is three times higher than that of China, the equivalent of one U.S. factory worker costs Chinese manufacturers over $18 an hour.

China’s electricity costs have increased 66 percent since 2004 while its natural gas costs have more than doubled over the same period, according to the study.

By comparison, U.S. manufacturing wages rose 27 percent over the last 10 years while U.S. natural gas costs fell 25 percent, the consulting firm found.

Energy costs are another reason why the competitiveness gap is narrowing. Mr. Sirkin said U.S. manufacturers pay 40 percent of what the rest of the world pays for natural gas.

“That’s why we’re seeing plants show up in the United States: because companies are beginning to figure out that China is not always the right answer,” Mr. Sirkin said.

“If you’re a huge user of natural gas like a steel mill, that’s a huge advantage,” he said.

The trend has prompted about 300 companies to “reshore” manufacturing plants from China or other parts of Asia to the United States, according to Mr. Sirkin. The energy edge makes the United States a good place for plastics and fertilizer manufacturers that use large amounts of natural gas, he said.

While manufacturers are understandably eager to capitalize on China’s huge and growing market by having production facilities there, “that doesn’t mean you have to put all your production in China,” Mr. Sirkin said.

Boston Consulting looked at four major determinants of manufacturing costs: wages, labor productivity, energy costs and currency exchange rates. Based on those factors, it ranked the United States and Mexico as rising stars versus the rest of the world.

China was lumped into a group of traditionally low-cost countries whose competitive advantages are under pressure. That group also includes Brazil, Russia, Poland and the Czech Republic. Their problems include significant wage increases, productivity gains that lag behind their competitors, currency valuation issues and rising energy costs.

Those same factors are trending favorably for Mexico and the United States, the report concluded. While China still has a slight advantage over the United States, overall U.S. manufacturing costs are 10 to 25 percent lower than those in 10 other countries that are major exporters, the study concluded. Those countries include South Korea, Japan, Germany and Canada.

Boston Consulting partner Michael Zinser, a co-author of the study, said the findings “represent a significant shift in the economics of global manufacturing.”

The report concluded that Brazil is now one of the highest-cost countries; that Mexico has lower manufacturing costs than China; and that the United Kingdom is the lowest-cost location in Western Europe.

Brazil’s electricity costs jumped 90 percent over the last decade while its natural gas costs rose nearly 60 percent. While productivity rose 3 percent over the 10-year period, the small increase was overwhelmed by manufacturing wage costs, which more than doubled, according to the report. At that same time, there was a 20 percent swing against Brazil in the exchange rate between the U.S. dollar and the Brazilian real.

Mr. Sirkin said the four measures account for about 85 to 90 percent of the thinking that traditionally goes into decisions about where to locate a manufacturing plant or where to look for suppliers. He cautioned that there are myriad other factors that can significantly influence that decision.

They include transportation; a country’s political and social stability, the business climate, the condition of roads, ports and other infrastructure; and the availability of workers who have the skills manufacturers require.

He said when companies decide where to build manufacturing plants, they are making bets for 25 years or more. Those decisions should reflect not only how much relative costs have changed in countries, but also how much they are likely to change in the future.

“Many companies are making manufacturing investment decisions on the basis of a decades-old worldview that is sorely out of date,” Mr. Sirkin said. “There are now high- and low-cost countries in nearly every region of the world.”

Len Boselovic: 412-263-1941 or lboselovic@post-gazette.com

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