Identifying competitive manufacturing countries.
I recently read about the Boston Consulting Group (BCG) report on global manufacturing cost competitiveness, which identified how the list of competitive countries has changed over the past decade.
This report is important because many executives still consider that China is low cost, while western Europe and other developed countries are expensive. Based on this consideration, companies continue to outsource production and develop long supply chains in the hope of gaining a competitive edge against other businesses and thereby increase profits.
The BCG report identifies that Brazil is now a high cost country, Mexico is cheaper than China and eastern Europe is comparable with America. Does it mean that factories in the ‘old’ low cost countries must be closed and production facilities moved? And if so, what are the potential changes for global supply chains?
A statement in the report reminds us not to be hasty. “When companies build new manufacturing capacity, they are typically placing bets for twenty five years or more; they must carefully consider how relative cost structures have changed and how they are likely to evolve in the future”. Not many years ago, the UK was considered to be non-competitive and that manufacturing should be allowed to fade away as new services business grew; now the UK is the lowest cost manufacturing country in Europe.
Is the BCG Index valid?
The BCG Global Manufacturing Cost-Competitiveness Index measures cost-competitiveness under four direct economic drivers: wages, productivity growth, energy costs and currency exchange rates.
Of the twenty five countries studied, the least competitive is Australia, with a manufacturing cost structure nearly thirty percent higher than America. This appears to be a bleak situation, but is it?
Since 2002, Australia has lived with a resources ‘boom’ (also called a curse). The four stages of a ‘boom’ are: increased demand with increased prices; investment to ‘catch-up’ with demand; increased production and finally the crash, as production exceeds demand and prices collapse.
The decade covered by BCG was in the second phase of the ‘boom’ – investment on equipment and high wages, without an increase in output; productivity growth was therefore low. This is now rising as the industry moves into phase three; high production and lower wages, as thousands of workers are retrenched.
Australia escaped the GFC of 2008, but as a ‘safe’ financial centre which pays higher interest rates than other developed countries, it has high currency exchange rates. These rates should decrease as the economy shifts away from excessive reliance on mineral exports.
So, just by rebalancing the economy, Australia is likely to move up the BCG Index. This illustrates that the BCG Index (and similar reports) must be treated with great caution as it only measures four selected factors over a period of time; not whether an economy is inherently competitive.
The lesson for logisticians is to be careful in selecting documents that appear to support your proposal.
Always analyse the underlying validity of what is being stated, because if you do not, then someone else will!