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Selector's Strategies > Article May 2004
 Comparing Global Business Costs
Need to compare business costs around
the world? KPMG's 2004 Competitive Alternatives study
provides a comprehensive guide for the site selection
process.
By Larry Cusack and Stuart
MacKay
Business costs are one of the
most important, if not the most important, factors to
take into consideration when selecting a location for
your company's relocation or expansion project. Luckily
for you, KPMG LLP recently released the results of its
2004 Competitive Alternatives study-an independent analysis
of major cost factors impacting site selection decisions.
The biannual study, conducted in association with MMK
Consulting, is a comprehensive report of
business costs for companies, in various global locations,
seeking comparisons to consider in their decisions on
locating international business operations.
Specifically, the study enables
business executives to compare business costs in cities
located in leading industrialized countries; assists
economic developers in their work with potential investors-using
independently-developed cost data that they can tailor
to the operation of a specific enterprise; and helps
policy makers in determining the impact of a proposed
tax and/or incentive policy change on the cost-competitiveness
of their jurisdiction in relation to others.
The 10-month long study analyzed
the relative cost of doing business in 11 developed
countries in North America, Europe, and Asia Pacific,
looking at 11 manufacturing-based industries across
27 cost components likely to vary by location. Cost
structures were examined for France, Germany, Iceland,
Italy, Luxemburg, the Netherlands, the United Kingdom,
Canada, the United States, Australia, and Japan; research
included an analysis of costs in 98 cities worldwide.
The basis for comparison was the after-tax cost of start-up
operation for 12 types of business over 10 years. More
than 30,000 individual data cost elements were developed
in performing the study. Major cost factors that a company
would consider when setting up a business were studied
(costs for facility, labor, utilities, and transportation
and distribution), as well as income-based and non income-based
taxes. The study's benchmark cost index (U.S.=100) was
defined as the average of nine representative U.S. cities.
This article highlights key results
from the study and looks at ways corporate site selectors
can best use the results to their advantage.
CANADA RANKS AS LEAST-COSTLY
COUNTRY FOR BUSINESS
Among the 11 nations examined,
Canada ranked as the least costly place to do business
with a cost index of 91, edging out Australia, with
a cost index of 91.5. At the other end of the spectrum,
Japan and Germany, with cost indexes of 113.9 and 123.8
respectively, earned the dubious distinction as the
most expensive countries in which to do business.
The U.S., seventh in the ranking
with its benchmark cost index of 100, had the greatest
improvement in cost competitiveness since 2002. In Europe,
the UK ranked first in cost-competitiveness and third
overall in the study. Italy, France and Luxemburg had
the lowest costs among continental European countries,
with business costs marginally lower than in the U.S.
Since 2002, the last time KPMG
conducted the study, the most important factor affecting
international business competitiveness has been the
decline of the U.S. dollar relative to all major currencies.
Exchange rates for the countries analyzed in the KPMG
study have appreciated between 9% and 35% relative to
the U.S. dollar over this period.
LABOR, UTILITIES, AND INCOME
TAXES: KEY TO COSTS
Labor, utilities, and income taxes
were the most significant factors affecting business
costs; their impact varies considerably depending on
the type of business being studied. For example, while
salaries and wages declined in France and Italy since
2002, most other countries had increases; electricity
costs have increased in both the Netherlands and Germany,
while Italy was the only country to have notable decreases.
The study also found significant
cost differentials between countries for establishing
manufacturing and corporate services operations. For
example, Canada has an 18.2% cost advantage over Germany
for manufacturing and a 55.7% cost advantage for corporate
services operations. The U.S. is at a 2.5% cost disadvantage
to the UK for manufacturing, but holds a 16.9% cost
advantage for corporate services.
According to the study, labor
costs typically represent 56% to 72% of location-sensitive
costs for manufacturing operations and 75% to 85% for
non-manufacturing operations. Facility costs represent
the second largest location-sensitive cost factor, accounting
for 4% to 14% of costs for manufacturing and 12% to
24% for non-manufacturing. Taxes are another key factor,
representing 5% to 11% of total location-sensitive costs
for manufacturing and 3% to 8% for non-manufacturing.
For manufacturing operations,
transportation is another major factor, representing
up to 17% of total location-sensitive costs. Utility
costs represent 2% to 10% of location-sensitive costs.
Electricity and natural gas are the most significant
utility costs for manufacturers, while telecommunications
costs are more significant for non-manufacturers.
In comparing international cities
with populations over two million, Montreal ranked as
the most cost-competitive with a cost index of 91.3
followed by Melbourne, Australia, and Toronto, with
cost indexes of 92.1 and 93.2, respectively. Cities
with the highest costs were Yokohama, Japan with a cost
index of 128, followed by Frankfurt, Germany and London,
with 118.5 and 115.1, respectively.
When all large, medium and small
cities are included, the least-costly place to do business
is Sherbrooke, Canada (86.5 cost index). In Europe,
the least costly city was Caserta, Italy (95.1 cost
index).
SAN JUAN TOPS U.S. AND AFFILIATED
CITIES
Among 24 large U.S. and affiliated
cities studied (populations over 1.5 million), San Juan,
Puerto Rico is the least costly place to do business,
benefiting from low labor and tax costs. The city, with
a cost index of 93-7% below the U.S. national average
(100 cost index)-is also the least costly among the
44 U.S. locations examined in the study.
In the large U.S. cities category,
Atlanta, GA and Tampa, FL, emerged as the most cost-competitive
locations behind San Juan, ranking second and third,
respectively. Atlanta, with a cost index of 99.2, and
Tampa, with a cost index of 99.3, both benefit from
very competitive labor costs found in the southeast.
Phoenix, with a cost index of
99.4, ranks fourth among U.S. large cities and has significantly
lower costs than comparable southwestern cities. Indianapolis
and Columbus, OH, are closely ranked fifth and sixth,
respectively, with cost indexes of 99.6 and 99.8, respectively.
Both cities benefit from very competitive land and construction
costs, as well as favorable transportation costs associated
with central locations.
In San Juan, labor costs-which
are approximately 25% below the U.S. average-are a major
advantage. In addition, businesses locating in Puerto
Rico-especially those serving customers outside the
U.S. commonwealth-can receive favorable federal income
tax as well as favorable rates and abatements on local
taxes. These savings are partly offset by transportation
costs approximately 70% above the U.S. average.
On the other end of the spectrum,
San Jose, CA, and New York City are the most expensive
places to do business among large U.S. cities. Reflecting
the high labor costs of its technology-based economy,
San Jose is the most expensive location to do business
in the U.S., posting a cost index of 110.9 or 10.9%
above the U.S. national average. New York, with a cost
index of 109.8, ranked as the next most expensive place
to do business.
USING RESULTS IN THE SITE SELECTION
PROCESS
Site selection evaluations can
easily stall due to the sheer number, variety, and weighting
of all relevant factors. Evaluations that succeed often
begin with the benchmarking and "short-listing" of locations
based upon an analysis of costs associated with doing
business. That quantifiable approach, as evidenced in
Competitive Alternatives, provides a platform from which
to identify attractive jurisdictions in which a business
can operate profitably.
How can corporate site selectors
work best with the results provided by Competitive Alternatives?
In general, here are four key ways:
- Review the overall results
of the report to develop an initial understanding
of how costs differ among countries and regions and
identify which regions (and cities within each region)
are most attractive from a cost perspective. The intent
at this stage is to perform a "quick scan," to identify
a "long list" of which locations are worthy of further
investigation.
- For the locations of greatest
interest, select the most relevant industry sector
(from the 17 standard industry operations analyzed
in the report) and review the detailed results by
cost component. This step will provide an understanding
of how each of the individual costs factors (labor,
facilities, utilities, taxes, etc.) varies by location,
as well as the relative influence of each cost factor
in the overall cost comparison. Further, this step
can be performed using the tools available on the
Competitive Alternatives Web site. Where exchange
rates are relevant to the comparison, the potential
impact of future exchange rate shifts can also be
assessed, using the public cost model posted on the
site.
- Customize the cost comparison
to the specific operation under consideration. This
third step can be a complex one and requires a wide
range of "what if" questions such as worker productivity,
availability of discretionary (non-statutory) incentives,
and many other factors, which could impact on relative
costs by location. A variety of resources are available
to help provide information at this stage, ranging
from local economic development councils, government
data, and the guidance of an experienced professional.
Regarding incentive programs, site selectors usually
use them as a tool to fine-tune the site selection
process (i.e., to choose between the finalists after
weighing other considerations). Keep in mind that
certain programs, such as tax-free zones or programs
legislated particularly for a given company/project,
can rate higher in terms of relative importance than
widely available incentives such as job creation credits.
- Combine the cost comparison
results with other key factors (such as worker quality
and availability and access to markets), which need
to be considered in comparing sites and determining
which locations provide the best mix of cost and other
advantages.
In summary, selecting the best
site for a business operation requires careful consideration
of a multitude of factors ranging from taxes, utilities,
wage rates, and property costs to more subjective considerations
such as proximity of competitors, quality of the local
workforce, and community aesthetics.
The relative importance of these
factors will vary significantly-not only for different
industries, but also for individual companies within
a particular industry. Site selectors should be sure
to keep all of them in mind when searching for new jurisdictions
in which to conduct business.
The full text of KPMG's 2004 Competitive
Alternatives study is available online at http://www.competitivealternatives.com/.
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