When Cheap Is Not So Cheap

  • SumoMe

WHEN managers are choosing where to locate a new factory, their decision depends on many things. Cost is one of them. But costs come in many forms and change constantly. Alongside labour costs, there are also those for raw materials, energy, transport and much else besides. Currencies move too. Yesterday’s low-cost location may turn out to be tomorrow’s money-pit.

cash4wealth

cash4wealth

Rising Chinese wages have received much attention in recent years, with observers wondering what the next cheap Asian country will be to take a chunk of China’s manufacturing job-growth. Average factory wages have more than quintupled, in nominal, renminbi-denominated terms since 2004. Productivity levels have also grown, but China’s currency has appreciated, offsetting some of the savings. Other countries are also said to be moving up and down the cost rankings. For example, America and Mexico are becoming increasingly affordable, Brazil less so.

A new study by the Boston Consulting Group (BCG), a management consultancy, has crunched the numbers in an attempt to determine which countries the many variables currently favour (see chart). BCG looked at the world’s 25 biggest exporters and created an index of manufacturing costs including productivity-adjusted wages, electricity, natural gas and currency movements, based on the typical American company.

BCG reckons that America and Mexico really are “rising stars”. American wage restraint and newly cheap energy have improved its attractiveness to manufacturers. And Mexican wages have grown less than 50% in dollar terms over a decade, leaving them 13% cheaper (adjusted for productivity) than China’s. Relative drops in Mexico’s energy prices, which were traditionally considered relatively high, have also boosted the country’s competitiveness.

In contrast, five locations traditionally considered low-cost are now under pressure. Besides China, they are Brazil, Russia, Poland and the Czech Republic. Brazil was never particularly cost-competitive, and corruption and politics deter investment in Russia despite low energy costs. But the declining allure of the the two central and eastern European countries is a greater surprise. Poland has seen big gains in productivity, but wages have risen even faster. A strengthening currency, the result of the country’s flourishing economy, has also added to the pressure.

Costs matter in different ways to different manufacturers; low-cost labour matters more to firms that make clothes, whereas cheap energy is much more important to the chemicals industry, notes Justin Rose of BCG. There is much that even a well-designed index of costs cannot capture. Proximity to European markets, for example, remains a great strength for Poland and the Czech Republic, while it is hard to quantify the biggest drags on Russia’s growth.

cash4wealth

cash4wealth

Once they are established, local clusters—of employees, infrastructure and know-how—become a durable advantage, as in China’s case. But Mr Rose argues that as the cost advantage of a country like China or Russia deteriorates, hard-to-measure factors such as corruption assume greater significance. If a “low-cost” country is just a few percentage points cheaper when it comes to routine costs, but more troublesome in other ways, the comparison can become “a wash”, he says. That bodes ill for the likes of China and Russia, where costs are rising but the risks of doing business remain high; and it may help insulate the Czech Republic and Poland. All the same, in all these cases, what may have seemed cheap at first is now starting to look rather more expensive.

Courtesy: The Economist

Share Button

Incoming search terms:

  • sake inligting
  • sake inligting in n besigheid