Republished from thecitywire.com, on August 19, 2015, by The City Wire Staff
A new study shows it is still cheaper to make goods in the U.S. even with the rise of the U.S. dollar against the euro and other world currencies over the past year that has reduced U.S. manufacturing cost-competitiveness compared with economies such as Germany, France, Japan, Australia and Brazil.
The report from The Boston Consulting Group (BCG) of Chicago found that the U.S. still maintains a very significant cost advantage over these economies, and therefore manufacturers are unlikely to shift production to other nations.
“While the major drop in the euro has reduced costs for European exporters, they’re still about 10 percent more expensive on average than U.S.-based manufacturers,” said Harold Sirkin, a BCG senior partner and a coauthor of the analysis. “The U.S. remains one of the lowest-cost locations for manufacturing in the developed world.”
“The underlying trends that have driven the improvement in U.S. cost competitiveness over the past decade have not changed,” said Justin Rose, a BCG partner who, along with Sirkin and Michael Zinser, is a coauthor of “The U.S. Manufacturing Renaissance: How Shifting Global Economics Are Creating an American Comeback.”
“Manufacturers know that sharp gains in the dollar can quickly reverse,” Rose said. “So they are far more likely to focus on trends in wages, productivity, and energy costs when making long-term decisions over where to locate plants.”
The authors note that while manufacturers should consider hedging options to cope with exchange-rate volatility and energy-price changes, they should stick with their long-term strategies for managing global manufacturing footprints and geographically diversifying their supply chains. They should also reduce their exposure in low-cost economies where wages are rising quickly if those goods are being exported around the world. Instead, companies should focus on increasing productivity and making greater use of automation, such as robotics.
Zinser was in Northwest Arkansas in early July to speak at the third annual U.S. Manufacturing Summit conducted by Wal-Mart Stores. The Bentonville-based global retailer announced in 2013 a pledge to buy $250 billion in U.S. made products in 10 years. The Boston Consulting Group predicted that the $250 billion investment would create one million jobs, including jobs in manufacturing and related services.
Wal-Mart officials said in October 2014 there were 150 projects being worked. Recent successes touted by Wal-Mart include a $16 million hosiery plant in Hildebran N.C., and a $21 million investment by Korona Candles in Dublin, Va.
American manufacturing has seen a steady gain in jobs since hitting a low of 11.453 million in February 2010. However, millions more jobs will have to be added to return to job levels of just 10 years ago. According to the U.S. Bureau of Labor Statistics, U.S. manufacturing employment in July was 12.35 million, up from 12.191 million in July 2014, but below the 14.226 million in July 2005 and well below the 17.322 million in July 2000.
The findings, first released in July, are based on an updated assessment of direct manufacturing costs based on BCG’s Global Manufacturing Cost-Competitiveness Index. Introduced in mid-2014, the index tracks changes in production costs in the world’s 25 largest export economies.
The index covers four primary drivers of manufacturing competitiveness: wages, productivity growth, energy costs, and currency exchange rates.
Research conducted last year found that manufacturing cost competitiveness around the world had changed dramatically over the previous decade. Several economies traditionally regarded as having high costs, such as the U.S., had become much more competitive. Most emerging markets known for low costs —particularly the largest market, China — had become far more expensive.
Since mid-2014, the manufacturing cost advantages of China, South Korea, India, and Mexico have narrowed considerably against European economies and Japan, though not against the U.S., because their currencies have remained relatively stable against the dollar.
Switzerland and South Korea lost competitive ground against all major goods-exporting economies mainly because of currency fluctuations. The decline in the euro did tip the competitive balance in two European economies — the Czech Republic and Poland — where average manufacturing costs are now lower than in the U.S.
Several factors have also enabled the U.S. and other developed economies to retain their competitiveness relative to many of their trade partners.
One factor is differences in labor productivity. In the U.S., increases in labor productivity continue to largely offset increases in wages. In the UK, where the pound has risen sharply against the euro and moderately against the dollar, manufacturing wages adjusted for productivity dropped by 9% over the past year. In the Netherlands, productivity-adjusted wages declined by 17%.
The U.S. also has a big energy-cost advantage that has largely been driven by the sharp fall in U.S. natural-gas prices since large-scale production of U.S. shale gas began in 2005. Natural gas is a key input in industries such as chemicals and plastics, and a major factor in sectors that use a lot of electricity, such as steel. The spot price of natural gas traded on the New York Mercantile Exchange has dropped by more than 40%, to about $2.75 per million British thermal units, over the past year.
As a result of these factors, most European economies have been unable to close the cost gap with the U.S. The 18% decline in the euro against the U.S. dollar between mid-2014 and mid-2015 translated into an improvement for most European exporters in the BCG Global Manufacturing Cost-Competitiveness Index of around 6 to 12 percentage points relative to the U.S. since 2014. Even after adjusting for changes in exchange rates, however, direct manufacturing costs were around 10% to 20% higher in economies such as France, Germany, Italy, and Belgium.
A similar pattern applied to several other developed economies. The U.S. dollar gained around 13% against the yen, but Japan’s manufacturing cost structure remains 7% higher than that of the U.S. The dollar gained 14% against the Canadian dollar, but that nation’s cost-competitiveness improved by 6 points.
The U.S. dollar rose 20% against the Brazilian real and 10% against the Australian dollar, but manufacturing costs in those countries remain 17% higher and 19% higher, respectively, than those in the U.S.