Should we still consider the cost of labor as one of the main decision points in outsourcing or moving manufacturing to a low-cost region? The answer is, of course, yes. However, with a shift in the global landscape, we should look closely at where that decision may take us. Historically, most roads have led to Asia, and more specifically China. Assuming that our decisions to either move or outsource operations to countries other than our home base are for all the right reasons, let's focus on the trends of just the labor rates.
Somewhere around the end of 2008 and the beginning of 2009, there was an inflection in a grouping of low-cost country labor rates that we track: India, China, Thailand, and Mexico. Labor rates at all of these countries dropped, except for China, which continued to climb. There has been a bit of jostling over the past few years, but the forecasted outcome is that China will continue to increase at an average rate of about 13 percent per year over the next five years. This leaves them at the highest labor rate in this group of countries. Mexico and Thailand have very similar hourly rates, which are lower than China, and a very similar average annual growth rate of about 5 percent per year over the next five years.
When we look towards Europe, we track Ukraine, Romania, the Czech Republic, Hungary, and Poland. While all of these countries have higher rates than our Asia grouping, Ukraine and Romania are very competitive with more modest growth rates over the next five years in the range of 10 percent per year.
Pulling back to a higher level, we see that in real terms, labor rates for Ukraine, China, Mexico, Thailand, India, and Romania are projected to be between $3 and $6 per hour at the end of 2016. The fundamental question is how much does this affect us? Of course, this impacts each company differently, as the percentage of labor content and technology varies by product.
When making decisions to move operations, there are other indicators and metrics we suggest besides the capabilities of outsource partners, transportation costs, infrastructure, and the like. Looking at foreign direct investment, GDP for industry per worker, and regional risk assessment will help build a more comprehensive picture.