Manufacturing

China vs. the U.S.: It's Just as Cheap to Make Goods in the USA


An employee of Rebecca Minkoff handbags at the Baikal manufacturing facility in New York

Photograph by Atisha Paulson/Bloomberg

An employee of Rebecca Minkoff handbags at the Baikal manufacturing facility in New York

An entire generation of Americans has come of age laboring under the assumption that the U.S. can’t compete in the manufacturing arena with low-cost competitors such as China and Brazil. That may have been true a decade ago, but it’s no longer true today.

I recently completed a review of manufacturing costs in the top 25 export economies with my colleagues Justin Rose and Michael Zinser. Our research shows that when the most important economic factors are considered—total labor costs, energy expenses, productivity growth, and currency exchange rates—Brazil is one of the highest-cost manufacturing nations in the world, Mexico is cheaper than China, China is virtually even with the U.S. (as are most of the traditionally “low-cost” countries of eastern Europe), and the low-cost leader in western Europe is none other than the country that launched the Industrial Revolution: the United Kingdom.

So throw away the old playbook. Welcome to the new era.

The country with the lowest manufacturing costs, we found, is not China. It’s Indonesia, then India, Mexico, and Thailand. China comes next—with Taiwan’s costs just a tad higher and the U.S.’s a bit more than that, ranking America No. 7 in our study.

As Chinese labor costs rise, American productivity improves, and U.S. energy expenses fall, the difference in manufacturing costs between China and the U.S. has narrowed to such a degree that it’s almost negligible. For every dollar required to manufacture in the U.S., it now costs 96¢ to manufacture in China, before considering the cost of transportation to the U.S. and other factors. For many companies, that’s hardly worth it when product quality, intellectual property rights, and long-distance supply chain issues are added to the equation.

For the record, the countries with the highest manufacturing costs of the 25 nations we studied were Australia, Switzerland, Brazil, France, Italy, Belgium, and Germany—all of which have costs 20 percent to 30 percent higher than the U.S.’s.

Previous cheaper havens, including Brazil, China, the Czech Republic, Poland, and Russia, experienced a significant increase in relative manufacturing costs since 2004 because of some combination of sharp wage increases, lagging productivity growth, unfavorable currency swings, and dramatic increases in energy costs.

Several countries that were relatively expensive a decade ago, most in western Europe, have become more expensive compared with America. Manufacturing costs in Belgium and Sweden rose 7 percentage points from 2004-2014 relative to the U.S., and in France and Italy they rose 10 percentage points. Largely because of productivity gains, the U.K. held its own.

The two countries making the greatest strides in manufacturing competitiveness were Mexico and the U.S. The key reasons were stable wage growth, sustained productivity gains, steady exchange rates, and the big energy advantage the U.S. has captured since the shale-gas boom began.

The new data are more than food for thought; they’re food for action.

Many companies continue to make manufacturing investment decisions based on conditions a decade or more ago. They still see North America as high cost and Latin America, eastern Europe, and Asia, especially China, as low cost. The new data show there’s a competitive marketplace of manufacturing opportunities today, with high-cost and low-cost countries virtually everywhere.

When companies build new manufacturing plants, they’re typically placing bets for 25 years or more. They need to carefully consider how relative cost structures are changing and how these changes are likely to continue in the future.

Hal_sirkin
Harold L. Sirkin is a Chicago-based senior partner of The Boston Consulting Group (BCG), a professor at Northwestern University’s Kellogg School of Management, and co-author, most recently, of The U.S. Manufacturing Renaissance: How Shifting Global Economics Are Creating an American Comeback (Knowledge@Wharton, November 2012).

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