INSIGHT: US to eclipse China as global low-cost manufacturer

By Joe Kamalick

WASHINGTON (ICIS)–Manufacturing costs in the US are almost at parity with those in China, a Boston Consulting Group (BCG) study has found, and the US could overtake the Middle Kingdom as global low-cost production leader by the end of this decade.

In its landmark study, BCG said that long-held conventional views of low-cost manufacturing around the world no longer are valid, and there has been a sea change in production costs, especially in the wake of the US energy renaissance.

“For the better part of three decades, a rough, bifurcated conception of the world has driven corporate manufacturing investment and sourcing decisions,” BCG said in its analysis.

“Latin America, Eastern Europe and most of Asia have been viewed as low-cost regions,” while “The US, western Europe, and Japan have been viewed as having high costs,” the study notes.

“But this worldview now appears to be out of date,” BCG says.

“Years of steady change in wages, productivity, energy costs, currency values and other factors are quietly but dramatically redrawing the map of global manufacturing cost competitiveness.”

In the study, BCG looked at manufacturing costs in the world’s 25 leading exporting economies and measured four criteria:  manufacturing wages, labour productivity, energy costs and exchange rates.

The resulting “Manufacturing Cost-Competitiveness Index” has “revealed shifts in relative costs that should drive many companies to rethink decades-old assumptions about sourcing strategies and where to build future production capacity”, the analysis says.

BCG analysed those four criteria in the 25 top exporting nations for the period 2004 through 2014.

Among other findings, BCG said that “Several economies that traditionally have been regarded as low-cost manufacturing bases appear to be under pressure as a result of a combination of factors that have significantly eroded their cost advantages since 2004”.

“For example,” says BCG, “at the factory gate, China’s estimated manufacturing-cost advantage over the US has shrunk to less than 5%.”

Much of that sea-change in cost profile can be attributed to sharply lower US energy costs, BCG said.

“Prices for natural gas have fallen by 25% to 35% since 2004 in North America because of large-scale production of shale gas resources,” the study notes. “In contrast, they have risen by 100% to 200% in economies such as Poland, Russia, South Korea and Thailand.”

“This has had significant impact on the chemicals industry, which uses natural gas as a feedstock for production,” BCG noted.

In the costs analysis, BCG chose the US as the baseline manufacturing region, assigning it a score of 100.

On that scale, China’s rating is 96%, just four percentage points below that of the US.

While still marginally more cost-effective than the US, China’s advantage has shifted dramatically and is expected to weaken still further in just a few years.

BCG noted that China’s estimated manufacturing-cost advantage over the US has shrunk from 14% in 2004 to just 4% in 2014.

“The cost gap with China has shrunk dramatically,” says the analysis, “and, if the trend of the last ten years continues, it will disappear before the end of the decade.”

In addition to the shale gas cost advantage, BCG argues that the US also benefits in the manufacturing cost analysis from its labour force.

“Labour is one key to the growing US competitive advantage,” says BCG. “The US has one of the developed world’s most flexible labour markets, ranking as the most favorable economy in terms of labour regulation among the top 25 manufacturing exporters.”

“The US also has by far the highest worker productivity among the world’s 25 biggest manufactured-goods exporters,” BCG said, adding: “Adjusted for productivity, US labour costs are an estimated 20% to 54% lower than those of western Europe and Japan for many products.”

But the BCG study cites the shale gas boom as perhaps the most telling factor in the shifting ground of manufacturing costs.

“While industrial prices for natural gas have risen around the world, they have fallen in the US by around 50% since 2005, when large-scale recovery from shale deposits began in earnest,” the study notes.

“Natural gas currently costs more than three times as much in China, France and Germany than in the US – and nearly four times as much in Japan.”

“In addition to being an important feedstock for industries such as chemicals, low-priced shale gas has also helped keep electricity prices in the US below those of most other major exporters,” the study says.

“That translates into a sizable cost advantage for energy-intensive industries such as steel and glass,” BCG added.

The analysis notes that because of its low cost, natural gas accounts for only 2% of average US manufacturing costs, and electricity represents just 1% of those costs.

“But in most other major goods-exporting countries, natural gas accounts for 5% to 8% of manufacturing costs and electricity for 2% to 5%,” says BCG.

That energy cost advantage, says the study, is likely to persist for some time.

“Because of its reserves, US prices [for natgas] are expected to remain within a range of $4 to $5 per thousand cubic feet for several decades,” the analysis says. 

“What’s more,” the study concludes, “because it will take time before other nations are able to begin large-scale recovery of shale gas or before the US can export domestic supplies, the cost advantage will remain largely exclusive to North America for at least five to ten years.”

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy