Boston Consulting Group, BCG, just released a "must read" report "The Shifting Economics of Global Manufacturing" if your company manufactures in multiple international locations. What is so great about this report is that it presents, analyzes and summarizes a 2014 study on the cost competitiveness of the top 25 exporting nations, an update of the previous study done in 2004. It is

• available online at the BCG Perspectives website (no cost)
• contains an interactive Cost competitiveness Index tool
• a readable 12 to 15 pages in length
• has great illustrative graphics

(Disclaimer: GEA receives no compensation and does not have a business relationship with BCG. We are excited about good work on a critical topic for manufacturers around the world. This includes the global HVAC industry. Our compliments and thanks to BCG for this fine work and the sponsors who paid for the study.)

The study analyzed manufacturing costs for the world's 25 leading exporting economies along four key dimensions: manufacturing wages, labor productivity, energy costs, and exchange rates.

What BCG found was a lot of change. Who would have thought a decade ago that Brazil would now be one of the highest-­cost countries for manufacturing or that Mexico could be cheaper than China or that China's estimated manufacturing-cost advantage over the U.S. has shrunk to less than 5 percent? Brazil is now estimated to be more expensive than much of Western Europe.

Cost structures in Mexico and the U.S. improved more than in all of the other 25 largest exporting economies. Because of

• low wage growth,
• sustained productivity gains,
• stable exchange rates, and
• a big energy-cost advantage,

these two nations are the current rising stars of global manufacturing. BCG estimates that Mexico now has lower average manufacturing costs than China on a unit-cost basis.

The authors conclude "These dramatic changes in relative costs could drive a large shift in the global economy as companies are prompted to reassess their manufacturing footprints. (See Exhibit 3.)

One implication is that global manufacturing could become increasingly regional. Because relatively low-cost manufacturing centers exist in all regions of the world, more goods consumed in Asia, Europe, and the Americas will be made closer to home."

There are profound implications for manufacturers with operations in all countries. They must (continue to):

Enhance productivity. As once-enormous gaps between wages in developed and developing economies continue to shrink, improving the value added by each worker is becoming an increasingly important factor in manufacturing competitiveness across the globe

Account for the full costs. While direct costs such as labor and energy will continue to have a strong influence on decisions about where to manufacture, logistics, obstacles to efficiently conducting business, and the hidden costs and risks of managing extended global supply chains, for example, can offset much of the savings from labor or favorable exchange rates. It is also crucial to take into account hidden cost advantages of operating shorter supply chains, such as speed to market, greater flexibility, and a better ability to customize products for specific markets.

Consider the implications for the broader supply chain. Reliable local suppliers may not yet be available to provide important inputs. In other cases, deconstructing the value chain could involve added logistics costs or unanticipated tariffs, duties, or other penalties.

Promote better business environments. Maintain a dialogue with relevant regulators and policymakers in countries in which you manufacture.

Reevaluate your business model. To take full advantage of production in an economy, a one-size-fits-all model that uses the same processes and materials is unlikely to be optimal. Many companies should consider adjustments in their products or business models to better meet the needs of that manufacturing environment. It may make sense to use different materials that are locally available.

The shifting economics of global manufacturing requires approaching the world with a fresh mindset. Rather than seeing the globe in terms of low cost versus high cost, manufacturing investment and sourcing decisions should increasingly be based on a more current and sophisticated understanding of competitiveness within regions.

Read the complete report here

Editor's Note: CR4 would like to thank Larry Butz, President, GEA Consulting Associate, for contributing this blog entry.