How cost-competitive are mature markets?
The increasing value of the US dollar in the past year has hampered the cost-competitiveness of the US, according to KPMG’s 2016 guide to international business location costs. Within the North American Free Trade Agreement region and compared with developed economies in Europe and Asia-Pacific, the US is now by far the most expensive market.
Among the ten countries in the KPMG guide, ninth-ranked Japan has a 7.3% cost advantage over the US. Second-ranked Canada’s cost advantage is 14.6%, and Mexico, the only developing economy in the study, has a cost advantage of 22.5%.
In the two decades KPMG has studied business location costs in the ten countries, “this .. represents the first time that the US has ever placed this low in the … cost rankings,” the 2016 guide reported.
The study uses a set of business operating specifications that are held constant for all locations. The model applies 26 location-sensitive cost factors, including labour and transportation costs, cost of capital, taxes, and incentives, for 19 industries and business operations. Rankings are then based on the business costs in 111 major cities in the ten countries.
Mexico, Canada, and the Netherlands retained the top three rankings as most cost-competitive markets in the past two years. Italy came in fourth, up two spots from 2014, followed by Australia, which moved up three places. France was in sixth place, down one spot from two years ago, and the UK, in seventh place, was down three spots. Germany moved up two places to eighth, ahead of Japan and the US.
NAFTA. Mexico had the lowest labour and facility costs of the ten countries in the study, a ranking that was greatly helped by the rise in value of the US dollar compared with the peso in 2015. Business costs in the Mexican corporate services sector were less than half compared to the US. Less-skilled clerical and administrative staff contribute to the cost savings.
Canada ranked among the three most competitive markets in labour, facility, and transportation costs, and in corporate income taxes. Significant federal and provincial support for research and development activities provides Canada a 27.7% cost advantage in research and development services compared with the US.
Europe. The rise in the value of the US dollar compared with the euro bolstered the cost-competitiveness of the Netherlands, Italy, France, and Germany. R&D tax credits and incentive support further aided the Netherlands, France, and Italy.
Italy’s labour costs were third lowest overall. Germany ranked second and third lowest in facility and transportation costs, respectively. The Netherlands ranked among the three countries with the lowest corporate income taxes.
The British pound held some ground against the US dollar, which hampered the cost-competitiveness of the UK as a whole, compared with countries in the euro zone. But results varied significantly within the UK. Manchester, for example, had the lowest business costs among the ten European cities included in the study, and London had the highest. Also, UK corporate income taxes ranked among the lowest in the study.
Asia-Pacific. The rise in the value of the US dollar helped improve the cost-competitiveness of Australia and Japan. Australia consistently ranks fifth among the ten countries in all sectors, except manufacturing, which is affected by relatively high costs to lease industrial facilities and transport freight. Japan had the lowest transportation costs among the ten countries.
—Sabine Vollmer (firstname.lastname@example.org) is a CGMA Magazine senior editor.
10 most cost-competitive cities
These cities had the lowest costs to do business in the NAFTA region and developed economies in Europe and Asia-Pacific:
1. Monterrey, Mexico
2. Mexico City