US manufacturers gain as China’s cost advantage erodes
Rising wages and energy costs narrows the gap from 14% to 5%.
So says a new study, which found that rising wages and higher energy costs have diminished China’s long-standing edge over the United States. So has a boom in US shale gas production. It’s reduced US natural gas prices and slowed the cost of electricity.
The Boston Consulting Group’s study of manufacturing costs in the 25 biggest exporting countries shows only seven had lower manufacturing costs than the US did this year. And since 2004, US manufacturers have improved their competitiveness compared with every major exporter except India, Mexico and the Netherlands.
In 2004, for example, manufacturing in China cost 14% less than manufacturing in the US. By this year, the China advantage had narrowed to 5 per cent. If the trends continue, Boston Consulting found, US manufacturing will be less expensive than China’s by 2018.
Over the past decade, labour costs, adjusted to reflect productivity gains, shot up 187% at factories in China, compared with 27% in the US. The value of China’s currency has risen more than 30% against the US dollar over the past decade.
The higher Chinese currency made goods produced in China and sold abroad comparatively more expensive. And foreign goods became comparatively more affordable in China.
Chinese electricity costs rose 66%, more than double the United States’ 30% increase. The start of large-scale US shale gas production in 2005 has helped contain electricity bills in the US and neighbouring Canada and Mexico.
China, too, has reserves for shale gas. But it will need years to develop them.
“This is not something you can turn on overnight,” said Justin Rose, a partner at Boston Consulting and co-author of the study.
Brazil has lost even more ground than China. In 2004, manufacturing was 3% cheaper in Brazil than in the United States. By 2014, Brazil was 23% more expensive. Brazilian factories didn’t improve efficiency enough to offset rising energy and labour costs.
The countries where manufacturing was cheaper than in the US are Indonesia, India, Mexico, Thailand, China, Taiwan and Russia.
Australia was the most expensive country for manufacturing. Its costs were 30 per cent higher than those in the US.
The survey doesn’t include transportation costs, which vary depending on where goods are shipped. Several countries also face obstacles not captured by Boston Consulting’s manufacturing cost index – from corruption to inefficient government bureaucracies.