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Globalization's Old 'Race To The Bottom' Finds Unlikely Winners

This article is more than 9 years old.

Remember in the 1990s when activists were protesting the World Bank and International Monetary Fund as the architects of globalization? They were evil. The world was going to hell in a hand basket. Globalization was a race to the bottom, where the Chinese were getting all the jobs and the middle class American was moving into trailer homes.

But life, be it personal or socio-economic, does not move in a straight line. A new report by the Boston Consulting Group  is another case in point.  BCG's latest shows that China's economic rise and Europe's stunning economic decline, has led to major global shifts in manufacturing. Comparing 25 of the largest exporting economies over a 10 year period, BCG takes the old Happy Meal economic model to task.

Global automakers are expanding production in the U.K., which has emerged as one of Western Europe’s lowest-cost manufacturing locations, while at the same time they are slashing capacity in Australia, now one of the most expensive.

Making widgets in Mexico is becoming cheaper than making them in China.  Electronics manufacturers like Taiwan-based Foxconn and Sharp are expanding production there, not mainland China.  The expansion also comes at a time when markets for Foxconn equipment is expanding throughout the Americas. Logistically, Mexico makes sense even though Mexican workers earn more than their Chinese counterparts.

“Many companies are beginning to see the world in a new light,” said Harold L. Sirkin, a senior partner and co-author of the report titled The Shifting Economics of Global Manufacturing: How Cost Competitiveness Is Changing Worldwide. “They are finding that many old perceptions of low-cost and high-cost countries are out of date, and they are starting to realign their global sourcing and production networks accordingly,” Sirkin.

See: Cost Competitiveness Index

The study, completed in April, found that several economies still often perceived as low-cost manufacturing nations—mainly China and Brazil -- have solidly moved up the food chain. For some products, they are not any cheaper than the United States. And on other product lines, manufacturing in Brazil and China is even more expensive due to productivity constraints.

The rising cost of labor in both China and Brazil have also outpaced other large emerging markets, with Mexico being the largest benefactor.

“Improving the productivity of each worker is becoming an increasingly important factor in manufacturing competitiveness across the globe,” said Michael Zinser, a BCG partner. “This is especially true as the once-considerable wage gaps between developed and developing economies continue to shrink.”

The report says that Brazil is now one of the highest-­cost countries for manufacturing. And London may be an expensive place to live, but the U.K. itself has become a low-cost manufacturer in Western Europe.

The report was written for U.S. manufacturing executives and made public on Tuesday. It measures cost competitiveness compared with the U.S.

“A lot of factors other than wages and exchange rates weigh heavily on corporate decisions about where to locate production,” said Justin Rose, a BCG partner and coauthor. “These challenges must be overcome before they can translate low costs into a surge of investment and exports across a broad range of industries.”

The Boston Consulting Group listed Australia, Belgium, France, Italy, Sweden, and Switzerland as nations losing their competitive edge.

The credit crisis and ongoing restructuring of the U.S. economy has made manufacturing attractive here again. High tech, high skilled laborers, coupled with automated assembly lines have given the U.S. a competitive edge in some cases.  For example, roughly two years ago Caterpillar moved some of its China manufacturing to the south U.S. as its market for a particular tractor had dried up in Asia but was growing throughout the Americas.

Cost structures in both Mexico and the U.S. improved more than all of the other 25 largest exporting economies surveyed by the Boston Consulting Group.

On balance, much of the gains have also come at the expense of American wages. But besides stagnant wage growth, sustained productivity gains, a steady dollar, and energy-cost advantages have made life easier for American manufacturing.

Further south, Mexico is smiling on a costlier China.

"We estimate that Mexico now has lower average manufacturing costs than China on a unit-cost basis," BCG authors wrote.

Except for China and South Korea, the rest of the world’s top-ten goods exporters are 10% to 25% more expensive than the U.S. and Mexico.