Competitive Alternatives 2014

Competitive Alternatives 2014

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A Guide to Business Location Costs

Competitive Alternatives 2014 compares business costs and other competitiveness factors in more than 100 cities, in 10 countries: Australia, Canada, France, Germany, Italy, Japan, Mexico, the Netherlands, the United Kingdom, and the United States. For 2014, Competitive Alternatives further expands its coverage in the US, and for the first time includes every US metro area with a population of two million or more.

The primary focus of Competitive Alternatives is international business costs. The study measures the combined impact of 26 key cost components that vary by location, over a 10-year analysis horizon starting in 2014. The study compares 7 different business-to-business (B2B) service sector operations and 12 different manufacturing sector operations. The overall cost comparisons for each country and city are based on the average results for these two sectors.

Competitive Alternatives also provides important information on non-cost factors that influence the business attractiveness of different locations. Aspects addressed by the study include labor availability and skills, economic conditions, innovation, infrastructure, regulatory environment, cost of living, and personal quality of life factors.

Competitive Alternatives is a biennial KPMG study that focuses on business locations in the NAFTA marketplace, as well as leading mature market countries in Europe and Asia Pacific. This study contains valuable information for any company considering international business location options.

2014 Findings

The four largest US metro areas—New York City, Los Angeles, Chicago, and Dallas-Fort Worth—form the US baseline against which costs for major cities in other countries are compared to determine the national results.

% cost advantage/disadvantage relative to US.

SOURCE: Competitive Alternatives, KPMG LLP (Canada), 2014

Mexico, the lowest-cost country examined, is the only high growth (emerging) country included in the study. As a NAFTA member, Mexico's 18.7 percent cost advantage over the United States in 2014 is similar to 2010. With little change in the value of the Mexican peso over that four year period, Mexico's cost advantage relative to its northern neighbor has been holding steady.

Canada ranks second among the 10 countries, with business costs 7.2 percent lower than in the United States. Moving ahead of both the Netherlands and the United Kingdom, Canada re-establishes a competitive advantage over these countries seen in 2010 and earlier editions of Competitive Alternatives.

Costs in the Netherlands (third) and the United Kingdom (fourth) are similar, at 5.5 and 5.4 percent (respectively) below the US baseline—essentially unchanged from 2012 although their rankings swap in 2014.

France and Italy rank fifth and sixth in the standings, and continue to represent midcost countries among the mature market nations.

The final four countries are tightly grouped, with a significant convergence of business costs in recent years and all with business costs within one percent of the US baseline. Japan and Australia have moved ahead of the United States since 2012, leaving Germany as the only country with business costs higher than the US.

Big Gains for Japan

The most dramatic change in the international cost competitiveness rankings in 2014 is a big gain for Japan. Japan now ranks in seventh place among the 10 nations, and ahead of the United States for the first time since Japan joined Competitive Alternatives in 1999.

Years of low inflation allowed Japan to gradually improve its competitive position during the 2000s, even as the yen appreciated. Now, with a significant drop in the value of the yen over the last two years, we are witnessing a new paradigm in Japan's global cost competitiveness.

Key Cost Factors

Labor costs represent the single largest location-sensitive cost factor for all industries examined. For service operations, labor typically represents approximately 75 to 90 percent of total locationsensitive costs, while the typical range for manufacturing operations is 45 to 60 percent of location-sensitive costs.

Labor comparisons are based on a mix of 42 job positions, which vary by industry. Labor costs comprise wages and salaries, statutory costs (payroll taxes, government pension plans, medical plans, etc.), and other benefits typically provided by employers. Combining these elements, total labor costs are lowest in Mexico by a wide margin, followed by the United Kingdom, Canada, and Italy.

Facility costs vary both by location and type of business operation:

For services operations, office lease costs average approximately 9 percent of total location-sensitive costs. Office lease costs are lowest in the Netherlands, Mexico, and Germany.

For manufacturing, factory lease costs average approximately 4 percent of total location-sensitive costs for the operations examined. Industrial lease costs are lowest in the United States, the Netherlands, and Mexico.

Transportation costs vary widely by industry, typically representing 7 to 24 percent of location-sensitive costs for manufacturing operations. Transportation costs vary by product and markets served. The countries with the lowest transportation costs for the business operations examined are Japan, the United States, and Germany.

Utility costs represent up to 8 percent of total location-sensitive costs. Electricity costs are lowest in the United States, Canada, and the Netherlands, while natural gas costs are lowest in Mexico, the United States, and Canada.

Taxes, Taxes, Taxes

Taxes typically represent up to 14 percent of location-sensitive costs across the locations and operations examined. Effective corporate income tax rates, calculated net of generally applicable tax credits and incentives, vary by business sector:

For digital services operations, Canada, the United Kingdom, and France offer the lowest effective corporate income tax rates.

For research and development operations, many of the countries studied offer significant R&D tax incentives. France, the Netherlands, and Canada offer the lowest effective tax rates in this subsector.

For corporate services, the United Kingdom, Canada, and the Netherlands offer the lowest effective rates of corporate income tax.

For manufacturing operations, the United Kingdom, Canada, and the Netherlands also offer the lowest effective corporate tax rates.

Exchange Rates

All study results are sensitive to exchange rates. The exchange rates used in this edition of Competitive Alternatives are as follows:

 

 

% cost advantage/disadvantage relative to US.

SOURCE: Competitive Alternatives, KPMG LLP (Canada), 2014

Mexico, the lowest-cost country examined, is the only high growth (emerging) country included in the study. As a NAFTA member, Mexico's 18.7 percent cost advantage over the United States in 2014 is similar to 2010. With little change in the value of the Mexican peso over that four year period, Mexico's cost advantage relative to its northern neighbor has been holding steady.

Canada ranks second among the 10 countries, with business costs 7.2 percent lower than in the United States. Moving ahead of both the Netherlands and the United Kingdom, Canada re-establishes a competitive advantage over these countries seen in 2010 and earlier editions of Competitive Alternatives.

Costs in the Netherlands (third) and the United Kingdom (fourth) are similar, at 5.5 and 5.4 percent (respectively) below the US baseline—essentially unchanged from 2012 although their rankings swap in 2014.

France and Italy rank fifth and sixth in the standings, and continue to represent midcost countries among the mature market nations.

The final four countries are tightly grouped, with a significant convergence of business costs in recent years and all with business costs within one percent of the US baseline. Japan and Australia have moved ahead of the United States since 2012, leaving Germany as the only country with business costs higher than the US.

Big Gains for Japan

The most dramatic change in the international cost competitiveness rankings in 2014 is a big gain for Japan. Japan now ranks in seventh place among the 10 nations, and ahead of the United States for the first time since Japan joined Competitive Alternatives in 1999.

Years of low inflation allowed Japan to gradually improve its competitive position during the 2000s, even as the yen appreciated. Now, with a significant drop in the value of the yen over the last two years, we are witnessing a new paradigm in Japan's global cost competitiveness.

Key Cost Factors

Labor costs represent the single largest location-sensitive cost factor for all industries examined. For service operations, labor typically represents approximately 75 to 90 percent of total locationsensitive costs, while the typical range for manufacturing operations is 45 to 60 percent of location-sensitive costs.

Labor comparisons are based on a mix of 42 job positions, which vary by industry. Labor costs comprise wages and salaries, statutory costs (payroll taxes, government pension plans, medical plans, etc.), and other benefits typically provided by employers. Combining these elements, total labor costs are lowest in Mexico by a wide margin, followed by the United Kingdom, Canada, and Italy.

Facility costs vary both by location and type of business operation:

For services operations, office lease costs average approximately 9 percent of total location-sensitive costs. Office lease costs are lowest in the Netherlands, Mexico, and Germany.

For manufacturing, factory lease costs average approximately 4 percent of total location-sensitive costs for the operations examined. Industrial lease costs are lowest in the United States, the Netherlands, and Mexico.

Transportation costs vary widely by industry, typically representing 7 to 24 percent of location-sensitive costs for manufacturing operations. Transportation costs vary by product and markets served. The countries with the lowest transportation costs for the business operations examined are Japan, the United States, and Germany.

Utility costs represent up to 8 percent of total location-sensitive costs. Electricity costs are lowest in the United States, Canada, and the Netherlands, while natural gas costs are lowest in Mexico, the United States, and Canada.

Taxes, Taxes, Taxes

Taxes typically represent up to 14 percent of location-sensitive costs across the locations and operations examined. Effective corporate income tax rates, calculated net of generally applicable tax credits and incentives, vary by business sector:

For digital services operations, Canada, the United Kingdom, and France offer the lowest effective corporate income tax rates.

For research and development operations, many of the countries studied offer significant R&D tax incentives. France, the Netherlands, and Canada offer the lowest effective tax rates in this subsector.

For corporate services, the United Kingdom, Canada, and the Netherlands offer the lowest effective rates of corporate income tax.

For manufacturing operations, the United Kingdom, Canada, and the Netherlands also offer the lowest effective corporate tax rates.

Exchange Rates

All study results are sensitive to exchange rates. The exchange rates used in this edition of Competitive Alternatives are as follows:

Fig 02

1. Per US$.

2. Average exchange rates for October-December 2013.

3. Two-year appreciation/depreciation relative to US$.

Business Cost Trends

The following table tracks the change in business costs over the last two years for all 10 countries. Japan and Australia have seen the greatest changes in business costs, consistent with the depreciation of their currencies shown in the table above.

Fig 03

1. Increase in cost index represents an increase in relative business costs since 2012.

For more information, download the full report below.

% cost advantage/disadvantage relative to US.

SOURCE: Competitive Alternatives, KPMG LLP (Canada), 2014

Mexico, the lowest-cost country examined, is the only high growth (emerging) country included in the study. As a NAFTA member, Mexico's 18.7 percent cost advantage over the United States in 2014 is similar to 2010. With little change in the value of the Mexican peso over that four year period, Mexico's cost advantage relative to its northern neighbor has been holding steady.

Canada ranks second among the 10 countries, with business costs 7.2 percent lower than in the United States. Moving ahead of both the Netherlands and the United Kingdom, Canada re-establishes a competitive advantage over these countries seen in 2010 and earlier editions of Competitive Alternatives.

Costs in the Netherlands (third) and the United Kingdom (fourth) are similar, at 5.5 and 5.4 percent (respectively) below the US baseline—essentially unchanged from 2012 although their rankings swap in 2014.

France and Italy rank fifth and sixth in the standings, and continue to represent midcost countries among the mature market nations.

The final four countries are tightly grouped, with a significant convergence of business costs in recent years and all with business costs within one percent of the US baseline. Japan and Australia have moved ahead of the United States since 2012, leaving Germany as the only country with business costs higher than the US.

Big Gains for Japan

The most dramatic change in the international cost competitiveness rankings in 2014 is a big gain for Japan. Japan now ranks in seventh place among the 10 nations, and ahead of the United States for the first time since Japan joined Competitive Alternatives in 1999.

Years of low inflation allowed Japan to gradually improve its competitive position during the 2000s, even as the yen appreciated. Now, with a significant drop in the value of the yen over the last two years, we are witnessing a new paradigm in Japan's global cost competitiveness.

Key Cost Factors

Labor costs represent the single largest location-sensitive cost factor for all industries examined. For service operations, labor typically represents approximately 75 to 90 percent of total locationsensitive costs, while the typical range for manufacturing operations is 45 to 60 percent of location-sensitive costs.

Labor comparisons are based on a mix of 42 job positions, which vary by industry. Labor costs comprise wages and salaries, statutory costs (payroll taxes, government pension plans, medical plans, etc.), and other benefits typically provided by employers. Combining these elements, total labor costs are lowest in Mexico by a wide margin, followed by the United Kingdom, Canada, and Italy.

Facility costs vary both by location and type of business operation:

For services operations, office lease costs average approximately 9 percent of total location-sensitive costs. Office lease costs are lowest in the Netherlands, Mexico, and Germany.

For manufacturing, factory lease costs average approximately 4 percent of total location-sensitive costs for the operations examined. Industrial lease costs are lowest in the United States, the Netherlands, and Mexico.

Transportation costs vary widely by industry, typically representing 7 to 24 percent of location-sensitive costs for manufacturing operations. Transportation costs vary by product and markets served. The countries with the lowest transportation costs for the business operations examined are Japan, the United States, and Germany.

Utility costs represent up to 8 percent of total location-sensitive costs. Electricity costs are lowest in the United States, Canada, and the Netherlands, while natural gas costs are lowest in Mexico, the United States, and Canada.

Taxes, Taxes, Taxes

Taxes typically represent up to 14 percent of location-sensitive costs across the locations and operations examined. Effective corporate income tax rates, calculated net of generally applicable tax credits and incentives, vary by business sector:

For digital services operations, Canada, the United Kingdom, and France offer the lowest effective corporate income tax rates.

For research and development operations, many of the countries studied offer significant R&D tax incentives. France, the Netherlands, and Canada offer the lowest effective tax rates in this subsector.

For corporate services, the United Kingdom, Canada, and the Netherlands offer the lowest effective rates of corporate income tax.

For manufacturing operations, the United Kingdom, Canada, and the Netherlands also offer the lowest effective corporate tax rates.

Exchange Rates

All study results are sensitive to exchange rates. The exchange rates used in this edition of Competitive Alternatives are as follows:

Fig 02

1. Per US$.

2. Average exchange rates for October-December 2013.

3. Two-year appreciation/depreciation relative to US$.

Business Cost Trends

The following table tracks the change in business costs over the last two years for all 10 countries. Japan and Australia have seen the greatest changes in business costs, consistent with the depreciation of their currencies shown in the table above.

Fig 03

1. Increase in cost index represents an increase in relative business costs since 2012.

For more information, download the full report below.

1. Per US$.

2. Average exchange rates for October-December 2013.

3. Two-year appreciation/depreciation relative to US$.

Business Cost Trends

The following table tracks the change in business costs over the last two years for all 10 countries. Japan and Australia have seen the greatest changes in business costs, consistent with the depreciation of their currencies shown in the table above.

1. Increase in cost index represents an increase in relative business costs since 2012.

For more information, download the full report below.

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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