#545 – U.S. Retains a Big Manufacturing Cost Advantage

A little more good news for American manufacturing! While currency value fluctuations can affect cost-competitiveness, other key factors, including productivity growth, wages, and energy costs have helped the United States remain competitive among the largest export economies.

U.S. Retains a Big Manufacturing Cost Advantage
The Boston Consulting Group www.bcg.com

The rise of the U.S. dollar against the euro and other world currencies over the past year has reduced the cost-competitiveness of U.S. manufacturing compared with economies such as Germany, France, Japan, Australia, and Brazil. But the U.S. still maintains a very significant cost advantage over these economies, and therefore manufacturers are unlikely to shift production to other nations.

The findings (of new research from The Boston Consulting Group) 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.

Several factors have 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 percent over the past year. In the Netherlands, productivity-adjusted wages declined by 17 percent.

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 percent 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 percent 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 percent 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 percent against the yen, but Japan’s manufacturing cost structure remains 7 percentage points higher than that of the U.S. The dollar gained 14 percent against the Canadian dollar, but that nation’s cost-competitiveness improved by 6 points. The U.S. dollar rose 20 percent against the Brazilian real and 10 percent against the Australian dollar, but manufacturing costs in those countries remain 17 percent higher and 19 percent higher, respectively, than those in the U.S.

“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. “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.”

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