UK offshore arrangements unlikely to survive shrinking wage gap

Gurjit Degun
6 October 2013

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Low-cost production could move to the Philippines, with Turkey, Poland, China and Mexico becoming more valuable as consumer markets.

That’s according to new analysis by PwC, which put it down to the wage gap shrinking between the UK and emerging economies.

India’s current average monthly wage is around 25 times smaller than that of the UK. By 2030, the difference is likely to be only 7.5 times smaller. PwC said this represents a “huge relative economic shift”.

Average wages in US are currently 7.5 times greater than in Mexico, but the gap could close to a factor of less than four times by 2030. Over the same time period, the average monthly Chinese wage could rise to around half that of Spain.

The PwC analysis said: “Many UK companies’ offshore arrangements will not survive the changes in relative wages, but an existing base in a fast-rising market is not always something to be given up lightly. After all, these are often the locations that will see the biggest growth in consumer spending power for the coming decades.”

PwC predicted the following potential implications for business strategy:

●  Companies re-shore their manufacturing or service operations, or move them to cheaper locations.

●  As current large cost advantages decline, companies move to locations that are initially more expensive but closer to home, gaining more control over supply chains to respond to customers’ changing needs and demands.

●  Middle-income economies Turkey, Poland and China begin offshoring to relatively cheaper economies like Vietnam, India and the Philippines. 

●  Current ‘Western’ offshorers (to China and India, for example) reorient their operations to sell their goods and services to increasingly affluent local populations.

John Hawksworth, chief economist at PwC, added: “While any such projections are subject to significant uncertainties, the direction of change is clear. The large wage advantages enjoyed today by many emerging economies will shrink as their productivity levels catch up with those in advanced economies and their real exchange rates rise as a consequence.

"Places like Turkey, Poland, China and Mexico will therefore become more valuable as consumer markets, while low cost production could shift to other locations such as the Philippines.

India could also gain from this shift, but only if it improves its infrastructure and female education levels and cuts red tape.”  

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