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.
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.
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 locationsensitive 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 locationsensitive 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 incometax 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.
Property-based taxes represent the other major category of taxes that are widely applied in all study countries. Property based taxes are lowest in Mexico, the Netherlands, and Australia.
Taxes are also the subject of a companion KPMG report, Competitive Alternatives Special Report: Focus on Tax, which analyzes international tax issues in greater depth. The updated Focus on Tax report is expected to be available from June 2014 at CompetitiveAlternatives.com.
All study results are sensitive to exchange rates. The exchange rates used in this edition of Competitive Alternatives are as follows:
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 inbusiness costs, consistent with the depreciation of their currencies shown in the table above.
Results by Sector and Subsector Services Sector
Results for specific business operations form the basis for comparing major sectors and subsectors.
Results for the digital services tsubsector are based on the analysis of two representative business operations—a software development firm and a video game production studio. Costs in this subsector primarily reflect salary levels and benefit costs associated with hiring creative and technical IT professionals.
Among the countries, Canada demonstrates its strongest relative results in this subsector, ranking second among the 10 countries with a cost advantage of 17.8 percent relative to the US baseline.
This significant advantage is due in part to substantial incentives that some Canadian provinces provide to digital media production firms.
Research & Development
Results for the R&D services subsector are based on three representative operations—a biomedical research firm, an electronic systems design/test facility, and a clinical trials management firm. Cost differentials for R&D are generally higher than for the digital subsector, reflecting differences in labor costs for scientific and technical employees, as well as differences in the tax and incentive treatment of R&D costs. The Netherlands, France and Australia all achieve their best relative results in this subsector, achieving both their highest rankings among the countries and their largest cost advantages relative to the US baseline. These three countries all offer government incentive support for R&D activities.
Results for the corporate services subsector are based on two representative operations—a shared services center and an international financial services firm. Labor costs for both entry-level admin and customer service employees, as well as finance professionals, are significant in this subsector. These costs vary considerably by country and region, resulting in high cost differentials in this subsector. Mexico ranks first among the 10 countries in all sectors but sees its greatest cost advantage relative to the US baseline in this subsector, with costs 46 percent lower than in the United States. The United Kingdom ranks second and Italy ranks fifth among the countries—representing the strongest relative results for these two countries among the sectors examined.
Results for the manufacturing sector are based on 12 representative industry-specific operations, as listed on the following page. For manufacturing firms, costs for globally sourced machinery, materials, parts, and subcomponents are similar by location, resulting in lower cost differences among countries in this sector. Japan and the United States both achieve their best rankings among the countries in this sector, ranking sixth and eighth respectively. This stronger showing for the United States in manufacturing is timely given the upswing in re-shoring of production from China to the US in 2013. Major US-based hardware manufacturing announcements from Apple and Google in 2013 affirm that re-shoring is now gaining momentum.
Major US Cities
In 2014, for the first time Competitive Alternatives includes coverage of every US metro area with a population of two million or more—a list that has grown to 31 cities.
Las Vegas is the latest addition to this group, having surpassed two million residents in 2012. The ranking table for these large US cities follows, with costs expressed as an index relative to the US baseline of 100.0.
Stable Business Costs In Slow Economic Times
One notable finding of Competitive Alternatives 2014 is the stability of underlying cost fundamentals in most countries over the last two years.
Consistent with the low growth, low inflation environment that most countries are experiencing, total costs for the sample business operations examined in Competitive Alternatives have barely moved since 2012.
Excluding Mexico, the nine mature market countries examined showed an average increase in costs of just 1.2 percent between 2012 and 2014.
Only in France did costs rise by more han 2 percent over the last two years.
Expressed in local currency, labor costs for the nine mature market countries (excluding Mexico) rose by an average of just a quarter percent between 2012 and 2014. The largest increase in labor costs was in the United States, where total labor costs increased by only 3.2 percent over two years. In contrast, labor costs decreased marginally in most European countries, mainly through reductions in employer-paid benefit costs.
Interest rates are at “rock bottom” in most countries, resulting in low financing costs and contributing to the stable total cost picture.
This stability in total costs comes despite some large cost increases in certain areas, including freight costs on certain routings, utility prices in many countries, and some increases in local tax rates.
All of these factors combine to result in a very low net increase in total business costs over the last two years.