We’re all familiar with the reasons why the U.S. outsources large parts of its manufacturing resources overseas. But the surprising results from two recent reports suggest the global supply chain game is about to get turned upside down. Will businesses be ready?
On April 25, the Boston Consulting Group announced a new Cost-Competitiveness Index that found when it comes to manufacturing costs, “Mexico is less expensive than China, the UK is the low-cost manufacturer of Western Europe, and many emerging markets known for low costs are no longer cheaper than the U.S.”
In addition, China, Brazil and Russia, traditionally regarded as “low cost” manufacturers, have seen their cost advantages erode significantly since 2004. The erosion has been driven through sharp wage increases, slow productivity growth, unfavorable currency swings, and a dramatic rise in energy costs. As a result, China’s manufacturing cost advantage over the U.S. has shrunk to less than five percent.
As a result, a growing number of companies are considering restoring production back to the U.S. to reduce risk, improve customer service, and surprisingly, to reduce supply chain costs due to savings in logistics. In fact, “more than half of U.S. manufacturing executives at companies with sales greater than $1 billion are planning or at least considering bringing back production to the U.S. from China,” according to the survey by The Boston Consulting Group.
A second report from the International Comparison Program of the World Bank indicates China could surpass the U.S. as the world’s biggest economy this year – the first time since 1872 the U.S. will not be the global leader. The report also indicates that India moves into third place ahead of Japan with Russia at sixth and Brazil at seventh.
Impact to Global Business
As our economies evolve, we can only expect to see increased globalization. As China and India move into one and three respectively in GDP, and the middle class in these countries continue to rise, we will see an increase in consumer demand. And as manufacturing costs are shifting, and the benefits of outsourcing to “low cost” manufacturing countries start to diminish, expect to see near-shoring move closer to the end customer (See: The emergence of the demand network).
Businesses with the latest tools and processes will respond to these changes in real-time, mitigate supply chain risks and maximize opportunities. Or as the famous Chinese proverb so eloqently puts it: “When the winds of change blow, some people build walls and others build windmills.”
Follow me on Twitter @howellsrichard.
This story originally appeared on SAP Business Trends.