China’s manufacturing edge is eroding. In Boston Consulting Group’s (BCG) latest study, the company reviewed manufacturing cost competitiveness and found that countries such as China, Brazil and Poland have been losing their cost advantages since 2004 due to wage increases, lagging productivity growth, unfavorable currency changes and increases in energy prices.
Mexico and the US are described as “rising stars” in the study. In fact, Mexico’s average manufacturing cost is now cheaper than China’s. At the same time, the manufacturing cost advantage of China against the US has declined to less than 5%. According to BCG, the improvement in the manufacturing cost in the US was primarily due to stable wage growth, sustained productivity gains, steady exchange rates, and a huge energy advantage because of the 50% decline in the price of natural gas. Of particular interest is that BCG notes that over the past decade, labour costs, adjusted to reflect productivity gains, increased 187% at factories in China, compared with 27% in the US. Plus, the value of China’s currency has risen more than 30% against the US dollar over the past decade as well. If the trend continues, US manufacturing will be less expensive than China’s by 2018.
Despite the cost advantage shifts, China currently maintains the top place in the study’s country rankings in terms of manufacturing competitiveness. Other Asian countries in the top ten include Japan and South Korea. In terms of low cost manufacturing, however, Indonesia, India and Thailand are better options than China.
However, as cost advantage continues to shift, there is cause to ask how this will affect a region that has thrived as the centre of global manufacturing? We are already seeing the affects particularly as China’s GDP growth has declined from its double-digit growth in years past while manufacturing activity has slowed. As reported in numerous reports and articles, the Chinese government has been focusing on balancing trade and encouraging domestic spending. Japan and South Korea have also followed the same path.
Because it can no longer compete simply on low costs, China, in particular, will need to diversify its manufacturing activity and utilise a knowledge-based workforce for advanced manufacturing production while expanding its service sector. Meanwhile, as manufacturing competitiveness shifts to other countries, supply chains will alter creating new or expanded demand for logistics and transportation services.