Home » Latest News » Where To Manufacture? Global Analysis of the Cost of Doing Business

Where To Manufacture? Global Analysis of the Cost of Doing Business

Hands holding tablet on blurred automation machine as background

Across the globe, manufacturers are taking a critical look at their networks. Confidence in supply chains has been shaken; policy disputes and tariffs have undermined global trade; customer demands and expectations have shifted. Many manufacturers are asking whether their current production footprint is still optimal in the context of the new reality.

As they rethink their network, cost is coming under the microscope. What manufacturers increasingly recognize is that labor costs are only part of the overall cost of doing business that can vary from market to market. In fact, ‘secondary costs’ (those typically related to the business environment or ease of doing business) are often a better predictor of a market’s overall cost of doing business than ‘primary costs’ like labor. Yet quantifying those costs and their impact on a manufacturer’s overall operations can be challenging.

To help support manufacturing executives as they assess different markets, KPMG partnered with the Manufacturing Institute (MI) to see if we could develop a quantitative index of the cost of doing business (CoDB) across 17 key manufacturing markets in the developed and emerging markets. This report provides a high-level review of our findings along with valuable insights from some of KPMG’s manufacturing leaders around the world. To discuss the factors that influence your cost of doing business or to drill down into a specific market or strategy, we encourage you to contact your local KPMG member firm or one of the contacts listed at the end of this report.

Cost and resilience factors together are informing choices in procurement and supply chain, along with tax considerations such as rules of origin, working practices and skills. At the same time, we are seeing manufacturers dispose of non-core activities in order to free up funds for investment, which are then targeted closely around opportunities for profitable growth.

From
Rebecca Shalom
Partner, Head of Defense and Manufacturing
KPMG in the UK

There are multiple factors that can influence the cost of doing business, including local market demand, local supply chain and parts availability, tax incentive policies and others.

From
Frank Li
Partner, Advisory
KPMG in China

With a high priority on primary costs, German manufacturers have traditionally focused on near-shore countries in Eastern Europe and offshore countries in ASPAC or in Central and South America. But the disruption and supply chain volatility created by the COVID-19 pandemic has forced them to think very seriously about diversifying their supply base.

From
Kaveh Taghizadeh
Partner, Consulting, Value Chain Transformation
KPMG in Germany

The need for rapid change in response to issues like Brexit and COVID-19 showed manufacturers the connection between a strong data strategy and their ability to manage costs. Those with a robust data management system and a connected enterprise data strategy were able to pivot much faster than their peers. Not surprisingly, we are seeing a significant uptick in activity from manufacturers seeking to enhance their data strategy and create a more connected enterprise.

From
Simon Jonsson
Partner, UK Head of Industrial Products
KPMG in the U.K.

Conclusion

Our results indicate that countries that placed better on the Secondary Cost Index generally performed better on the overall rankings. Of the top five most competitive economies on the overall rankings, only two — Malaysia and Taiwan — have a better primary than secondary cost score.

In keeping with this trend of lower secondary cost countries scoring better on the CoDB Index, the US placed fifth on the CoDB Index despite being tied with Switzerland for 14th on the Primary Cost Index. This high Primary Cost Index ranking was primarily due to high labor costs. The US was able to compensate somewhat for these unfavorable scores on the Primary Cost Index by placing first in the Secondary Cost Index.

A closer look at the countries that outperformed the US on the CoDB Index ranking indicates some interesting factors. For example, the US outperformed all of the countries on the Secondary Cost Index due to better labor productivity and business conditions. This implies that the outperformance on the CoDB Index by Canada, Taiwan, South Korea, and Malaysia are all driven by primary cost factors. Specifically, Canada’s rank is driven primarily by its ability to offer lower compensation costs and slightly lower electricity rates while still maintaining Secondary Cost Index rankings that were not far behind the US. South Korea ranked third by offsetting weaker ranking on the Secondary Cost Index with even lower compensation costs. A sharper version of the tradeoff between primary and secondary cost explains the rankings of Taiwan and Malaysia, with Taiwan offering higher primary costs but lower secondary costs.

Even within the factors we have considered, the relative importance of these factors to a specific firm may be different than the weights we have considered. Furthermore, it may well be the case that the factors we classify for the purpose of convenience as secondary are in fact primary factors for consideration in a location decision for an individual firm or manufacturing sector.

Finally, a number of local factors that go into firm location decisions may or may not be captured in the country level analysis. For example, labor and rent costs are higher in urban areas relative to more distant suburban or rural areas. Recognizing this, we have developed a Tableau analytic and visualization tool in conjunction with this study that allows the interested reader to alter the weights and to reassess the score based on the relative importance of these factors to them. Click here for the Cost of Manufacturing Operations Tool.

Source from KPMG

Disclaimer:The information set forth above is provided by KPMG independently of Alibaba.com. Alibaba.com makes no representation and warranties as to the quality and reliability of the seller and products.

Was this article helpful?

About The Author

Leave a Comment

Your email address will not be published. Required fields are marked *