The Shifting Economics of Global
Manufacturing An Analysis of the Changing Cost Competitiveness of the World’s Top 25 Export Economies April 2014 – Selected highlights

1 Copyright©2014byTheBostonConsultingGroup,Inc.Allrightsreserved. Summary: A significant
reordering of national manufacturing competitiveness has occurred over the past decade Striking shifts have taken place in the competitiveness of the top 25 export economies during the past ten years Manufacturing competitiveness has become truly global Of the world's top 10 exporters, China, the U.S., and South Korea stand apart from the pack Dramatic historical volatility can be seen in the major drivers of competitiveness Manufacturers must have a global perspective to remain competitive as the economics continue to shift • Rapid changes in wages, labor productivity, energy costs, and exchange rates have driven dramatic changes in relative manufacturing-cost structures • These changes have led to four emergent categories of relative competitiveness – Under Pressure. Traditional low-cost countries whose costs are rising quickly – Losing Ground. Traditional high-cost countries that are falling further behind – Holding Steady. A mix of low- and high-cost countries that are maintaining their position – Rising Stars. Mexico and the United States—improved competitiveness versus all others • Manufacturing competitiveness is no longer concentrated in a single region or country • East and South Asian countries joined by North American, western European, and eastern European countries are at the top of the rankings • The gap between China and the U.S. in overall manufacturing cost—before transportation—is less than 5 points today • South Korea, the next-most-competitive major exporter, is ~2 points more costly than the U.S. • The rest of the top 10 export economies are ~10 to 25 points disadvantaged to the U.S. and ~15 to 30 points disadvantaged to China • The past ten years have been marked by high volatility – Several countries have seen more than ten years of 10% to 20% sustained wage growth – Productivity has doubled in many countries—while declining in others – Energy costs—relative to the U.S.—have increased in many countries: 50% to 200% – Currencies have fluctuated greatly, ranging from –20% to +35% versus the dollar • Future uncertainty in all of these dimensions demands that manufacturers remain flexible to stay competitive • Manufacturers need to develop long-term views and build options into their supply chain as much as possible

2 Copyright©2014byTheBostonConsultingGroup,Inc.Allrightsreserved. BCG's Global Manufacturing
Cost-Competitiveness Index covers countries with ~90% of total exports of manufactured goods Australia China India Indonesia JapanSouth Korea Taiwan Thailand Brazil Canada Mexico United States Austria Belgium Czech Republic France Germany Italy NetherlandsPolandSpainSweden United Kingdom Switzerland Russia Source: OECD.

3 Copyright©2014byTheBostonConsultingGroup,Inc.Allrightsreserved. 0 15 30
45 Switzerland Indonesia The index covers four direct drivers of mfg competitiveness: wages, productivity growth, energy costs, and exchange rates 0.0 0.4 0.8 1.2 United States Brazil 0.05 0.10 0.15 0.20 0.25 0.00 Russia Italy Productivity index (scaled to U.S.) Electricity cost (cents per kW hour) 0 3 6 9 12 15 18 21 24 Switzerland Russia Natural-gas cost ($ per million BTUs) Dimension Definition Range of values globally in 2014 $35.83 $0.29 1.00 0.15 22.2 5.4 21.1 3.3 Median Sources: U.S. Economic Census; BLS; BEA; ILO; Euromonitor; EIU; BCG. Labor productivity Value-added economic output per manufacturing worker 0.59 • Highly variable • Gains in most countries, but some developed countries are decreasing Energy costs Electricity and natural-gas input costs 11.4 12.6 • North American energy revolution driving down cost • Costs in the rest of the world steadily increasing Local wages ($) Manufacturing wage rates Average hourly salary for a manufacturing worker 17.64 • Increasing across all countries Macro trend

4 Copyright©2014byTheBostonConsultingGroup,Inc.Allrightsreserved. Over the past
ten years, there have been dramatic shifts in the relative cost competitiveness of the top 25 export economies Source: BCG. Unchanged or improved Declined 1-4 points Declined 5-9 points Declined 10-14 points Declined 15 or more points Outside top 25 exporters

5 Copyright©2014byTheBostonConsultingGroup,Inc.Allrightsreserved. Four country categories
emerge from these dramatic shifts Category themes Under pressure Losing ground Holding steady Rising stars Characteristics • Traditionally low-cost countries whose deteriorating competitiveness is driven by a wide range of factors • Traditionally high-cost countries whose competitiveness continues to deteriorate owing to the lack of productivity gains and energy cost increases • Countries roughly maintaining their relative competitiveness versus global leaders • Increasing competitiveness versus all others • Moderate wage growth, sustained productivity gains, stable foreign-exchange rates, and energy advantages Countries China Czech Republic PolandRussiaBrazil BelgiumFrance Italy SwedenSwitzerland India IndonesiaNetherlands MexicoUnited States Source: BCG. United Kingdom

6 Copyright©2014byTheBostonConsultingGroup,Inc.Allrightsreserved. Size of exports
(highest to lowest) Dramatic shifts have led to a wide spread in cost competitiveness across the top 25 export economies 90 140 120 110 100 130 0 80 India 87 Taiwan 97 Manufacturing-cost index, 2014 (U.S. = 100) Mexico 91 Russia 99 Canada 115 UnitedKingdom 109 Belgium 123 Netherlands 111 Italy 91 Brazil 123 Spain 109 Australia 130 Switzerland 125 CzechRepublic 107 Austria 111 Sweden 116 Poland 101 Indonesia 83 Thailand 123 France 124SouthKorea 102 Japan 111 UnitedStates 100 Germany 121 China 96 OtherElectricity Natural gasLabor1 Sources: U.S. Economic Census; BLS; BEA; ILO; Euromonitor; EIU; BCG. Note: Index covers four direct costs only. No difference assumed in “other” costs (for example, raw-material inputs, machine and tool depreciation); cost structure calculated as a weighted average across all industries 1Productivity-adjusted.

7 Copyright©2014byTheBostonConsultingGroup,Inc.Allrightsreserved. Summary of competitiveness
index rankings for the top 10 export economies Country 2014 index rank 2014 mfg-cost index Delta in mfg-cost index ('04–'14) Trend in index ('04-'14) China 1 96 +9 United States 2 100 N/A South Korea 3 102 +4 United Kingdom 4 109 +1 Japan 5 111 +4 Netherlands 6 111 –1 Germany 7 121 +4 Italy 8 123 +10 Belgium 9 123 +7 France 10 124 +10 Source: BCG.

8 Copyright©2014byTheBostonConsultingGroup,Inc.Allrightsreserved. Several of the
remaining top 25 exporters have very attractive direct-cost profiles but are challenged by secondary factors Mfg cost relative to the U.S. Overall business environment2 Ease of doing business3 Logistics performance4 Corruption perception5 Rank 47 35 31 29 47 Country1 Indonesia India Thailand Mexico Russia Rank 120 134 18 53 92 Rank 59 46 38 47 95 Rank 114 94 102 106 127 Sources: U.S. Economic Census; BLS; BEA; ILO; Euromonitor; EIU; BCG. 1Includes a selection of economies ranked from 11 to 25 on total export size. 2EIU ranking based on ten separate criteria or categories covering the political environment, the macroeconomic environment, market opportunities, policy toward free enterprise and competition, policy toward foreign investment, foreign trade and exchange controls, taxes, financing, the labor market, and infrastructure. 3World Bank Ease of Doing Business Index. 4World Bank Logistics Performance Index. 5Transparency International 2013 Corruption Perception Index. Delta –17% –13% –9% –9% –1%

9 Copyright©2014byTheBostonConsultingGroup,Inc.Allrightsreserved. This research is
part of BCG’s series on the shifting dynamics of global manufacturing Authors of This Analysis Harold L. Sirkin Senior partner and coauthor of The U.S. Manufacturing Renaissance: How Shifting Global Economics Are Creating an American Comeback (Knowledge@Wharton, November 2012) BCG Chicago Michael Zinser Partner, coleader of the Manufacturing practice, and coauthor of The U.S. Manufacturing Renaissance: How Shifting Global Economics Are Creating an American Comeback BCG Chicago Justin Rose Partner, leader of green energy in the Americas, and coauthor of The U.S. Manufacturing Renaissance: How Shifting Global Economics Are Creating an American Comeback BCG Chicago Selected Publications and Research in the Series How Cheap Natural Gas Benefits the Budgets of U.S. Households An article by The Boston Consulting Group December 2013 Majority of Large Manufacturers Are Now Planning or Considering “Reshoring” from China to the U.S. (press release) Survey findings by The Boston Consulting Group September 2013 The U.S. Skills Gap: Could It Threaten a Manufacturing Renaissance? A report by The Boston Consulting Group August 2013 Behind the American Export Surge: The U.S. as One of the Developed World's Lowest-Cost Manufacturers A report by The Boston Consulting Group August 2013 U.S. Manufacturing Nears the Tipping Point: Which Industries, Why, and How Much? A report by The Boston Consulting Group March 2012 Made in America, Again: Why Manufacturing Will Return to the U.S. A report by The Boston Consulting Group August 2011 Note: Publications are available on BCG's thought leadership portal, www.bcgperspectives.com, or at www.bcg.com. To request a more detailed overview of the findings, please contact BCG-Info@bcg.com. To request a media interview, please contact Eric Gregoire at gregoire.eric@bcg.com. To discuss the findings with a BCG expert, please contact Payal Sheth at sheth.payal@bcg.com.