USA: Low-Cost Producer

Boston Consulting Group Estimates U.S. Will Have Lower Manufacturing Costs Than the U.K., Japan, Germany, France and Italy

By Joe Feeley

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In this month's news, we passed along a few findings from a Boston Consulting Group (BCG) analysis, The U.S. as One of the Developed World's Lowest-Cost Manufacturers. We couldn't give it a lot of space, but the report made a few other points that should interest you, since that’s a title many of us wouldn't have expected to see.

SEE ALSO: Manufacturing in the U.S.

BCG says the U.S. has a distinct production-cost advantage compared with other developed economies that are leading manufacturers. It estimates that, due to labor, natural gas and electricity, average manufacturing costs in the U.K. will be 8% higher than in the U.S. by 2015. Costs will be 10% higher in Japan, 16% higher in Germany and in France, and 18% higher in Italy.

Labor is a key driver. BCG argues that the U.S. labor market is more attractive than all other major manufacturers among the developed economies, especially when factory wages are adjusted for output per worker. "The productivity gap between these nations and the U.S. has widened considerably over the past 10 years. We project that by 2015, average labor costs will be around 16% lower in the U.S. than in the U.K., 18% lower than in Japan, 34% lower than in Germany, and 35% lower than in France and Italy."

An added advantage of the U.S. labor market, adds BCG, is its relative flexibility. The Fraser Institute ranks the U.S. as the world’s third-most-favorable economy in terms of labor market regulation. In contrast, Japan and the U.K. are 14th and 15th, Italy is 72nd, France ranks 94th, and Germany is 112th.

"A major reason for this high ranking is that it is far easier and less costly in the U.S. than in most other advanced economies to adjust the size of the workforce in response to business conditions."

If this plays out like BCG says, it will have a big impact on U.S. jobs. "We estimate that the increase in U.S. exports and in the domestic production of goods that otherwise would have been imported will create between 600,000 and 1.2 million direct factory jobs. Another 1.9 million to 3.5 million jobs could be created indirectly in related services such as retail, transportation and logistics." The U.S. unemployment rate could drop 2 to 3 percentage points.

The report predicts a positive impact on U.S. machinery, a broad category that includes construction and industrial machinery to engines and air conditioners.

The U.S. would have a manufacturing cost advantage in machinery of around 7% over Japan, where machinery is a $143 billion export industry. Costs will be around 14% higher in Germany, which exported $216 billion in machinery in 2011; 14% higher in France; and 15% higher in Italy.

Projected total costs for machinery production will be around 8% lower in China in 2015. But, the report says, when other costs are considered, it likely will be more cost-effective to produce much of the machinery that is sold in the U.S. in the U.S.