Despite a Strong Dollar, the U.S. Retains a Big Manufacturing Cost Advantage over Europe, Japan, and Other Developed Countries

Wide Swings in Currency Values over the Past Year Have Shifted Global Manufacturing Costs, but Not Enough to Change the Competitive Balance Among Most Major Export Economies, BCG Finds

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. These are among the findings of new research released today by The Boston Consulting Group (BCG).

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.

The findings 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.

“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 L. 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.”

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, 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 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 (see the exhibit below).

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 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 (Knowledge@Wharton, 2012). “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.

To view highlights from the research, please visit SlideShare at bit.ly/1Mi2kez.

To arrange an interview with one of the authors, please contact Eric Gregoire at +1 617 850 3783 or gregoire.eric@bcg.com.”

About The Boston Consulting Group
The Boston Consulting Group (BCG) is a global management consulting firm and the world’s leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 82 offices in 46 countries. For more information, please visit bcg.com.

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