PwC recently published a report where they look at the wage gaps between mature and new economies over the next 20 years.

Projected average monthly wage levels relative to US index = 100

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Source: PwC projections based on ILO data for 2011; real wages index relative in each year to US = 100

China 3 times more expensive than India or the Philippines

Looking at 2011, the first finding is that there are significant differences among the “new economies” or “low labor cost countries” in terms of labor costs. China wages are 3 times higher than in India or the Philippines. The ratio US/China is “only” 6.5 times where it’s 20 times or more for India or Philippines. Of course, there are many other factors for companies to consider before off shoring their manufacturing to a country. To name a few:

  • Logistics (transportation costs to the final market -shipping a country across the world is costly) ,
  • Infrastructures (power, water, road, and their costs),
  • Political and social environment (who wants to get his factory nationalized?)
  • Taxes & customs – what’s the point of having a low cost if you lose that benefit in taxes or custom duties?

Go back or go further

Looking at the 2020 and 2030 numbers, companies that have off-shored their operations in countries that have a shrinking cost differential will have 2 options:

  • Go back: re-shore their production back to the original market as the cost difference is smaller and eaten by the logistics costs.
  • Go further: move to a cheaper country to maintain the benefit of a large labor wage difference. Turkey, South Africa, Poland are definitely at risk when you look at the index in 2013. The good news for them though is that, as labor cost increases, so does the consumption making these countries more attractive as a market (rather than a cheap production location).

India & the Philippines keep a very low index in 2013 compared to the US or the UK making them interesting location for investment in the longer term (provided that infrastructure, taxes, and the political and administrative environment are competitive).

Will your T shirts still be Made in China?

China is a dilemma. With an index at 45 (that is 3x the index of 2011) that reflects the explosion of labor cost in China, some companies will probably reconsider their approach. A lot of them have already started “going West” in China where labor costs remain lower than on the East Coast. This may help limit the cost increase. Now, China is also a 1.5 billion consumer market with a huge potential and a government that’s trying to boost internal demand and limit dependency to export. So even at a high cost, it’s likely that a lot of companies will chose to continue producing in China for its huge domestic market.

You can find the article Shrinking wage gaps will re-shape global businesses