Why the ‘Made in China’ model is weakening

China—a low-cost maker of goods—is falling behind in the global manufacturing race as rising wages and energy costs put pressure on the Asian country, synonymous with making super cheap stuff.

China is among several economies whose manufacturing price advantage over the U.S. is eroding, according to new data released Tuesday from The Boston Consulting Group. Other countries that are becoming less cost competitive include Brazil, Russia, the Czech Republic and Poland.

On the flip side, moderate wage growth and lower energy prices are making the U.S. and Mexico more desirable manufacturing destinations. The upshot? More U.S. businesses are likely to produce goods closer to home in the coming years.

“This means companies will start to move manufacturing out of those expensive countries if they can, to cheaper countries like the U.S.,” said Hal Sirkin, a senior partner at The Boston Consulting Group.

Recent U.S. government data show similar gains. Industrial production increased 0.4 percent in July for its sixth-consecutive monthly gain, the Federal Reserve reported last week. Manufacturing output advanced 1 percent in July, its largest increase since February.

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“It used to be a simple rule: Manufacturing is cheaper in Asia and South America,” Sirkin said. “But it’s fundamentally changed.”

Less ‘Made in China’

While thousands of U.S. manufacturing jobs that were lost to overseas production won’t be recovered overnight, the landscape is changing. And the manufacturing shifts are especially dramatic in China.

Wages in the most populous nation are soaring. By comparison, Mexican manufacturing labor in 2000 was roughly twice as expensive as in China. But since 2004, Chinese wages have grown nearly five fold, and Mexican wages have risen by only 67 percent—less than 50 percent in dollar terms.

Higher energy costs also are dampening China’s manufacturing prowess. The cost of industrial electricity rose by about 66 percent in China and 132 percent in Russia. The cost of natural gas soared by about 138 percent in China and 202 percent in Russia from 2004 to 2014, according to Boston Consulting research.

While Russia is a key exporter of natural gas, higher production of U.S. shale gas has pushed U.S. energy prices down sharply. Russia, meanwhile, still relies on conventional natural gas, which has become more expensive.

According to Boston Consulting’s global manufacturing cost-competitive index—with the U.S. pegged at 100—China came in at 96 this year. In other words, it’s 4 percent more expensive to manufacture in America versus China. China’s reading used to be lower in the 80s, which means the cost of making goods in the U.S. compared to China has since narrowed.

“We see China as getting much more expensive,” said Sirkin, co-author of several reports on the shifting economics of global manufacturing.

via Why the ‘Made in China’ model is weakening.