When cheap is not so cheap
There are a number of factors to look at while deciding where
the location of a new factory will. These factor include cost, raw materials,
energy, transport, etc. Labor cost is an important factor in this decision. Not
only costs, exchange rates fluctuate too. So yesterday’s low-cost location may
turn out to be tomorrow’s money-pit.
In China, the wage rates of labors have increased significantly over the years which gained a lot of attention from the outside world. Firms have now been trying to find out what the next cheap Asian country will be to take a chunk of China's manufacturing job-growth. Average factory wages have more than quintupled, in nominal, renminbi-denominated terms since 2004. Productivity levels have also grown. However, China's currency has appreciated as well. There a couple of other countries that have been moving up and down the cost rankings. For example, America and Mexico are becoming increasingly affordable, Brazil less so.
In the United States, the wage restraint
and the
newly cheap energy have attracted a lot of manufacturers. In addition, Mexican
wages have grown less than 50% in dollar terms over a decade, leaving them 13%
cheaper than China’s. Decrease in Mexico’s energy prices, added strength to the
country's competitiveness.
There
are a few other countries in Europe, Asia and South American that are now under
pressure because they were previously considered ‘low-cost’ countries. They are
mainly Brazil, Russia, Poland, and the Czech Republic. In addition to Poland’s strengthening
currency, their productivity grew quickly over the years as well but wage rates
have risen even faster.
Production
costs matter a lot to the firms. If the costs in a ‘low-cost’ country is just a
few points lower than some other emerging or already developing countries, firms
might tend to go for the latter. This is true for China’s and Russia’s case
where national situation, such as corruption is a major problem. As a result,
countries like Poland and Czech Republic might gain an upper hand in the labor
market. All the same, in all these
cases, what may have seemed cheap at first is now starting to look rather more
expensive.
The search for firms to lower their initial costs will always be an important aspect in terms of investing in a certain sector or country. This search to reduce costs tends to lead firms into basing their production in countries where labor is cheaper. Due to this important factor of firms needing to reduce costs leads them to make the decision as to relocate to a country where it is cheaper to produce.
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