The Boston Consulting Group just updated their manufacturing cost index. It shows that producing in Mexico can be cheaper than in China. And that China costs are nearly on par with those of the US — the difference is only 4%!
The BCG cost index helps buyers look beyond wages (which often make a small portion of a product’s total cost). However, buyers still need to add a lot of factors in their calculations of the cheapest production area — ideally they would use Womack & Jones’ formula.
What is particularly interesting is the trends. Some countries like the US and Mexico have made great progress in terms of cost competitiveness, as is illustrated in this article (see the map).
It matches the changes in strategies I have noticed among foreign buyers and manufacturers. I could sum it up this way:
Before 2005 | 2005-2009 | Since 2010 |
| Feeling: “China is so cheap, let’s move all we can over there” | Feeling: “China is still cheap, but for how long?” | Feeling: “China is getting expensive and the trend is not stopping” |
| Strategies: Starting factories in China, switching OEM production to China | Strategies: Keep moving production over to China, but with less of a long-term commitment | Strategies: Work on productivity gains for China operations; productions that really need to be in China to be in inland provinces |
Naturally, these trend impact different industries in very different ways. For those electronics or power tools buyers, China is still the center of the world. In certain textiles categories, though, the rest of Asia was already attractive ten years ago.
What do you see?
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Sourcing has become more nuanced since 2010. There are still good deals to be made in third tier cities, but this adds higher transportation cost and complexity. About 2/3 of sourcing agencies I knew have shut down or switched to market entry consulting with varying results.
Yes that’s also what I see.
I agree with Manuel’s comments. In 1999 when we entered the China export market, it seemed like any idiot could make money. Between 2005 – 2008 the economic changes made it tough for the idiots, but if you were reasonably smart and hard working there were still plenty of opportunities. Today, I believe that success requires the right opportunity and good collaboration with suppliers to continuously improve. In our business (truck brakes) we have always been more competitive in the USA production environment for high volume products, while the Chinese were more competitive in medium volume products. (Our product is very simple, and has relatively low dollar value per pound of product.) Today, if you’re already in place in China it’s essential to work with suppliers to improve process quality and squeeze out costs. Thankfully several of our critical suppliers have been aggressive in making improvements, and our best supplier runs their factory with a level of discipline that I wish I could do in our own shop. Over the long haul, success will depend on long term sustainable advantages – such as access to particular raw materials, expertise in the relevant process technology, or product expertise.
Thanks a lot, Brad. This rings very true to me.
The manufacturers I know here in China have been wondering for a few years whether to move to another low-cost country. But their conclusion is to stay in China for now, since moving is a huge headache and since their own supply base will remain in China.
Why dont supply chains move to other low cost countries then? Couldnt this then entice manufacturers to move?
Moving a factory, or an entire supply chain, to another country is extremely difficult.
Most of the time, the components still need to be purchased from China, which makes moving much less interesting. For example, in India they even have to buy nails from China…