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The Shifting Economics of Global Manufacturing

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BCG's 2015 analysis of the changing cost competitiveness of the world’s top 25 export economies.

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The Shifting Economics of Global Manufacturing

  1. 1. The Shifting Economics of Global Manufacturing An Analysis of the Changing Cost Competitiveness of the World’s Top 25 Export Economies July 2015 – Selected highlights 2015 Edition
  2. 2. 1 Copyright©2015byTheBostonConsultingGroup,Inc.Allrightsreserved. Summary: Short-term turbulence in manufacturing costs have not altered the competitive balance among major export nations BCG's 2014 Global Manufacturing Cost- Competitiveness Index highlighted striking shifts over the previous decade In the past year, high volatility in exchange rates and significant decreases in energy costs have had varying short-term impacts on relative competitiveness Primarily because of the strengthening dollar, the U.S. has seen the largest relative decline in competitiveness in the past year Despite significant currency swings, overall global competitiveness has not fundamentally shifted Furthermore, we believe that the fundamental longer-term trends are unchanged Manufacturers should stay the course on long-term strategy, but also should consider a variety of hedging options • Rapid changes in wages, labor productivity, energy costs, and exchange rates had driven dramatic changes in relative manufacturing-cost structures • Significant convergence among regions had occurred from 2004-2014 – competitiveness was no longer concentrated in a single region or country • All of the top 25 largest global exporters' currencies depreciated versus the U.S. dollar, in many cases reversing a long-term trend of appreciation versus the U.S. dollar • Energy-cost changes have been less impactful in shifting relative competitiveness – so far – Manufacturers in all regions have benefited from lower global oil prices – Industrial buyers typically purchase the majority of their natural gas on a longer-term basis, limiting the impact of current volatility • U.S. competitiveness decreased by around 6-12 percentage points versus a number of the top ten exporters, such as Germany, the Netherlands, Italy, and France • Other major exporters – such as China, India, South Korea, and Mexico – saw much smaller changes as a result of less exchange-rate fluctuation • In aggregate, however, only two of the top 25 exporters saw their competitiveness tip versus the U.S., becoming more favorable on a relative basis • Previously high-cost manufacturers – such as France, Brazil, Germany, Italy, and Australia – continue to lag the U.S. by 10-20 points even after adjusting for exchange rates • Wage growth continues in traditionally low-cost economies and remains well above the median of higher-cost economies • The productivity-adjusted wage gap continues to shrink as productivity growth lags wage gains • The U.S. continues to reap benefits from low-cost energy, with massive North American reserves providing long-term energy-cost stability – regardless of global price changes • Work toward longer-term geographic supply-chain diversification • Actively manage against volatility with longer-term purchases and hedging instruments • Reduce exposure to wage rates by focusing on productivity gains and greater use of automation (e.g., robotics)
  3. 3. 2 Copyright©2015byTheBostonConsultingGroup,Inc.Allrightsreserved. BCG's Global Manufacturing Cost-Competitiveness Index covers 25 economies with ~90% of total exports of manufactured goods Australia China India Indonesia JapanSouth Korea Taiwan Thailand Brazil Canada Mexico United States Austria Belgium Czech Republic France Germany Italy NetherlandsPolandSpainSweden United Kingdom Switzerland Russia Source: OECD.
  4. 4. 3 Copyright©2015byTheBostonConsultingGroup,Inc.Allrightsreserved. Recall: From 2004 to 2014, the U.S. (and Mexico) became increasingly competitive versus all other major mfg economies Source: BCG. Unchanged or improved Declined 1-4 points Declined 5-9 points Declined 10-14 points Declined 15 or more points Outside top 25 exporters
  5. 5. 4 Copyright©2015byTheBostonConsultingGroup,Inc.Allrightsreserved. In the past year, many economies have seen their competitiveness improve, especially versus the U.S. Source: BCG. 2015 Edition Unchanged or declined Improved 1-4 points Improved 5-9 points Improved 10-14 points Outside top 25 exporters
  6. 6. 5 Copyright©2015byTheBostonConsultingGroup,Inc.Allrightsreserved. Five elements underlie these manufacturing cost- competitiveness swings Two factors are impacting short-term cost volatility Three factors continue to consistently drive long-term cost convergence Currency swings Global energy prices Relative productivity growth Wage growth Natural-gas resources Significant year-to-year volatility is expected to continue – however, long-term trends should remain consistent 1 2 3 4 5 Source: BCG.
  7. 7. 6 Copyright©2015byTheBostonConsultingGroup,Inc.Allrightsreserved. Most global currencies this year have seen a reversal of the long-term trend of appreciation versus the U.S. dollar -4 -3 -2 -1 0 1 2 3 4 -40 10 0 -10 Italy France South Korea Japan Germany China Czech Republic Austria Sweden Poland Indonesia Thailand Brazil Spain Australia Canada India Taiwan Mexico Russia Switzerland United Kingdom Belgium Compound annual change in currency value versus the USD ('04-'14) Netherlands Change in currency value versus the USD ('14-'15) Strong dollar: The U.S. dollar strengthened versus all of the top 25 export economies' currencies in the past year Reversal: 19 of 25 economies saw the long-term appreciation trend reversed Currency changes alone have improved the cost position of many economies by 4-6 percentage points Continued depreciation vs. the U.S. dollar 1 Sources: U.S. Economic Census; BLS; BEA; ILO; Euromonitor; EIU; BCG.
  8. 8. 7 Copyright©2015byTheBostonConsultingGroup,Inc.Allrightsreserved. The U.S. dollar strengthened versus the top exporters' currencies in 2015 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1.5 1.2 1.4 1.3 1.1 1.0 0.9 0.8 0.0 JPY MXN CAD EUR Exchange rate per USD '04 – '14 CAGR '14 – '15 % ∆ 0.7% 1.6% -1.6% 0.2% -18.4% -13.9% -11.4% -13.1% 1 Sources: U.S. Economic Census; BLS; BEA; ILO; Euromonitor; EIU; BCG.
  9. 9. 8 Copyright©2015byTheBostonConsultingGroup,Inc.Allrightsreserved. Oil and natural-gas prices have fallen significantly in the past year, but the declines have had limited impact so far High volatility in global oil with ~50% price drop since 2014 Natural-gas prices significantly declined across major regions If prices remain low, and as longer-term price agreements expire, economies with high energy costs could see their competitiveness increase by 2-3 percentage points over time 0 50 100 150 May-15Mar-15Jan-15Nov-14Sep-14Jul-14May-14Mar-14Jan-14 Crude-oil price1 ($/barrel) -45% 1Simple monthly average of three spot prices (Dated Brent, West Texas Intermediate, and the Dubai Fateh). 0 5 10 15 20 Natural-gas price ($/MMBTU) -24% -29% -41% Indonesian Liquefied Natural Gas Russian Natural Gas Henry Hub Natural Gas in the U.S. April 2015 Avg. 2014 2
  10. 10. 9 Copyright©2015byTheBostonConsultingGroup,Inc.Allrightsreserved. Traditionally low labor-cost economies continue to see productivity lag labor-cost increases 23.9 26.5 18.4 29.8 33.6 23.3 27.127.8 23.8 0 10 20 30 40 50 Productivity-adjusted manufacturing wages ($) -9% +25% -17% +27% +2% +26% 0.8 3.0 5.5 1.2 5.9 14.2 1.2 6.0 14.6 0 10 20 30 40 50 Productivity-adjusted manufacturing wages ($) +156% +3% +98% +4% +46% +2% High-cost countries more successfully offset wage increases with productivity... ...narrowing the productivity-adjusted wage gap with low-cost countries United States China IndonesiaNetherlands ThailandUnited Kingdom 2004 2014 2015 2004 2014 2015 2004 2014 2015 2004 2014 2015 2004 2014 2015 2004 2014 2015 43 Sources: U.S. Economic Census; BLS; BEA; ILO; Euromonitor; EIU; BCG.
  11. 11. 10 Copyright©2015byTheBostonConsultingGroup,Inc.Allrightsreserved. There has been limited global activity to take advantage of shale gas reserves outside of the U.S. Dimension Potential resources Well costs Service availability Midstream availability Regulatory framework Price environment Ease of business Political support Acceptability by population U.S. Poland Australia Favorable Barrier Done 2016-2018 2018-2021 UK 2019+Commercial prod (100Kb/d) timeline Trend China 2017-2020 5 Source: BCG
  12. 12. 11 Copyright©2015byTheBostonConsultingGroup,Inc.Allrightsreserved. BCG's index shows the manufacturing-cost competitiveness of the top 25 export economies relative to the U.S. 110 130 120 100 140 90 80 0 Manufacturing-cost index, 2015 (U.S. = 100) CzechRepublic 99 France 113 SouthKorea 104 Japan 107 UnitedStates 100 Germany 115 China Spain 107 Australia Brazil 119 Switzerland 88 129 India Thailand 88 Taiwan 83 92 Mexico Indonesia 90 Russia 117 98 90 Canada Poland 106 UnitedKingdom 109 107 Belgium Sweden 120 Netherlands 108 106 Italy Austria 114 97 OtherNatural gasElectricityLabor1 Sources: U.S. Economic Census; BLS; BEA; ILO; Euromonitor; EIU; BCG. Note: Index covers four direct costs only. No difference assumed in other costs (for example, raw-material inputs, machine and tool depreciation); cost structure calculated as a weighted average across all industries. 1Productivity-adjusted. Tipped relative to the U.S. 2015 Edition
  13. 13. 12 Copyright©2015byTheBostonConsultingGroup,Inc.Allrightsreserved. A stronger U.S. dollar has caused significant year-over-year improvements in competitiveness for many economies 3 2 11 0 -1-1 -2-2 -3-3-3 -4-4 -5 -6-6 -7 -8-8 -9-9 -10-10 -12 -15 -10 -5 0 5 10 Change in mfg-cost index ('14-'15) Russia Belgium UnitedStates France Austria Spain CzechRepublic Netherlands China Australia Brazil SouthKorea Japan UnitedKingdom India Switzerland Canada Indonesia Mexico Germany Thailand Sweden Poland Taiwan Italy Improved competitiveness Weakened competitiveness Sources: U.S. Economic Census; BLS; BEA; ILO; Euromonitor; EIU; BCG. Note: Index covers four direct costs only. No difference assumed in other costs (for example, raw-material inputs, machine and tool depreciation); cost structure calculated as a weighted average across all industries. 1Productivity-adjusted.
  14. 14. 13 Copyright©2015byTheBostonConsultingGroup,Inc.Allrightsreserved. Despite gains, European producers remain disadvantaged in cost competitiveness versus China and the U.S. Country 2015 index rank 2015 mfg-cost index Change in mfg- cost index ('14-'15) Change in mfg- cost index ('04–'14) China 1 97 +1 +9 United States 2 100 N/A N/A South Korea 3 104 (2) +4 Netherlands 4 106 (6) +1 United Kingdom 5 107 (2) (1) Japan 6 107 (4) +4 France 7 113 (12) +4 Italy 8 114 (9) +10 Germany 9 115 (6) +7 Belgium 10 120 (4) +10 Source: BCG.
  15. 15. 14 Copyright©2015byTheBostonConsultingGroup,Inc.Allrightsreserved. This research is part of BCG’s series on the shifting dynamics of global manufacturing Authors of This Analysis Harold L. Sirkin Senior partner and coauthor of The U.S. Manufacturing Renaissance: How Shifting Global Economics Are Creating an American Comeback (Knowledge@Wharton, November 2012) BCG Chicago Michael Zinser Partner, coleader of the Manufacturing practice, and coauthor of The U.S. Manufacturing Renaissance: How Shifting Global Economics Are Creating an American Comeback BCG Chicago Justin Rose Partner and coauthor of The U.S. Manufacturing Renaissance: How Shifting Global Economics Are Creating an American Comeback BCG Chicago Selected Publications and Research in the Series Takeoff in Robotics Will Power the Next Productivity Surge in Manufacturing (press release) An analysis by The Boston Consulting Group February 2015 The Shifting Economics of Global Manufacturing: How Cost Competitiveness Is Changing Worldwide A report by The Boston Consulting Group August 2014 The U.S. Skills Gap: Could It Threaten a Manufacturing Renaissance? A report by The Boston Consulting Group August 2013 Behind the American Export Surge: The U.S. as One of the Developed World's Lowest-Cost Manufacturers A report by The Boston Consulting Group August 2013 U.S. Manufacturing Nears the Tipping Point: Which Industries, Why, and How Much? A report by The Boston Consulting Group March 2012 Made in America, Again: Why Manufacturing Will Return to the U.S. A report by The Boston Consulting Group August 2011 Note: Publications are available on BCG's thought-leadership portal, www.bcgperspectives.com, and at www.bcg.com. To request a more detailed overview of the research, please contact BCG-Info@bcg.com. To request a media interview, please contact Eric Gregoire at gregoire.eric@bcg.com. To discuss the findings with a BCG expert, please contact Payal Sheth at sheth.payal@bcg.com.

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