Setting up Shop Abroad.

How do Canada's business-related costs compare to the rest of the world?

Virtually all senior executives in Canada must contemplate, at one time or another, expanding or even relocating their business outside the country. Competitive pressures in an increasingly interdependent global economy necessitate an extranational perspective; products and markets can dictate location as well.

How much would it cost, though, to set up and operate a business in the U.S. or elsewhere? How do Canada's business-related costs really compare, say, to those of European countries or (shudder) Japan?

A detailed 1999 KPMG study of business costs in 64 medium-sized cities in eight countries -- Austria, Canada, France, Germany, Italy, Japan, the U.K. and U.S. -- found that, contrary to what may be expected, Canada is the least expensive on average of any country surveyed, when it comes to building a business.

As can be seen, the scores are relatively consistent across every industry. For example, Canada scores lowest in business costs in all sectors except food processing (where it placed second lowest), while the U.K. scores second in all except in food processing, where it ranked lowest. The U.S. scores third lowest in costs in all but food processing (fifth). Japan, perhaps more predictably, is way up there for everything. Costs in France, Italy and Austria are closely grouped around 104 and Germany is second most expensive across the board, albeit still significantly less expensive than Japan.

These 1999 results are similar to the findings of a 1997 KPMG competitive alternatives study commissioned by the Royal Bank of Canada and Ontario Hydro examining costs in 42 cities and seven countries (Japan was not included). That survey also found Canada to be least expensive of all, but Atlantic Canada was found to have a significant advantage over the rest of Canada.

The '97 survey summary noted that while transportation costs were slightly higher than elsewhere, land prices on the East Coast were lower than elsewhere in Canada or the United States and labour costs (which account for more than half of location-sensitive annual costs) were also well below the Canadian average. The combination of interest rates and investment costs was particularly low in Atlantic Canada because low initial outlays reduced borrowing requirements.

"That situation changed a bit in the 1999 survey," says Stuart MacKay, a managing director with KPMG in Vancouver, BC, and the person in charge of the competitive alternatives study. "There were some shifts in corporate tax structures, particularly in Quebec, bringing that province's overall costs into line with those of Atlantic Canada. In fact, the lowest-cost city in the 1999 survey was Sherbrooke, Quebec."

Among the 1999 survey's other findings were:

* Overall, Canada has the lowest labour costs of all the countries surveyed -- our technical and professional employees cost only 65% of what they would in the U.S. The U.K.'s labour advantage is greatest in the manufacturing sectors, where its labour costs are 67% of those in the U.S.

"The biggest driver of U.S. labour costs is the cost of medical coverage," MacKay notes. "Health care premiums are not covered through Medicare as they are here in Canada, so they must be funded by employers. And these plans are expensive. They can amount to a 10% premium on labour costs in relation to Canada. In fact, the U.S. is the only country studied that does not have a national health care plan."

* Cost differentials are greater in the labour-intensive software industries than in more capital-intensive manufacturing industries. The average U.S. advantage over France in seven manufacturing categories is just 2.5%, for example, but in the two software categories the advantage averages 13.4%. Canada's advantage over the U.S. in manufacturing averages 6.7% but that margin more than doubles to 14.3% in the software industries.

* In the advanced manufacturing sector (electronics and telecommunications), Canada and the U.K. have virtually identical labour costs, but lower transportation and electricity costs provide Canada with an overall advantage.

* Modest U.S. wage inflation as a result of a tight labour market is one reason the overall labour costs for Canada and the United Kingdom are lower than U.S. costs, even in the U.S. sunbelt. High base wages and salaries in Japan, and statutory benefit costs in Austria, France and Italy, drive labour costs in these countries well above the U.S. average.

* Employer-paid benefits range from 18% of payroll in Canada to 32% in the U.S. (largely because of health care premiums). Statutory benefit costs range from 8% of payroll in Canada and the U.K. to 45% in France and 61% in Italy.

* Canada and the U.S. are "runaway leaders" when it comes to industrial land prices. Average construction costs are lowest in Canada at $29 US per square foot and highest in Japan at $213 US per square foot!

* The U.K. and Austria offer the lowest road freight costs, Italy and the U.K. benefit from low-cost sea freight, and airfreight is cheapest in North America and Japan. Electricity costs are significantly lower in Canada, the U.S. and U.K. than in the other countries.

Methodology

KPMG's 1999 Competitive Alternative study is based on a proprietary model of typical start-up and ten-year operating costs for medium-sized firms in nine industries: electronics, food processing, medical devices, metal fabrication, pharmaceuticals, plastic products, telecom equipment, packaged software and advanced software. Each firm is assumed to have annual sales of $13 million-plus and a minimum of 90 employees. Using standard financial assumptions, the model generates ten-year pro forma reports with income and cash flow statements.

Manufacturing operations are based on establishing a plant on a purchased site in a suburban area zoned for industrial use. Service operations are based on establishing a facility in a leased, Class A suburban office building.

The model companies were sited in 64 cities in nine countries (576 scenarios), with the U.S. average representing 100 on the cost index scale. Location-sensitive cost items included land acquisition (or lease), construction, interest/depreciation, income and other taxes, electricity, transportation, telecommunications and labour, including the cost of wages, salaries, statutory and other benefits. The survey took into account prevailing currency exchange rates; some have moved a bit since 1999 but the key ratio of 1 1/2 loonies to the greenback remains close.

"The amount of advantage for a particular country is obviously dependent on exchange rates," says Stuart MacKay of KPMG. "For example, the break-even point for Canada in terms of parity with the U.S. is around 83 cents. At 68 or 69 cents now, I don't think we're going to see that for a while."