Race to the Bottom | Business Facilities - Area Economic Development, Site Selection & Workforce Solutions

KPMG’s 2010 Competitive Alternatives study reveals that the push to be the location with the lowest cost of manufacturing is heating up around the world. In a recovering economy, every major business expansion, relocation or new facility is the focus of intense competition. With fewer projects to zero in on, every location is vying to […]

KPMG’s 2010 Competitive Alternatives study reveals that the push to be the location with the lowest cost of manufacturing is heating up around the world. In a recovering economy, every major business expansion, relocation or new facility is the focus of intense competition. With fewer projects to zero in on, every location is vying to […]

Race to the Bottom

Race to the Bottom | Business Facilities - Area Economic Development, Site Selection & Workforce Solutions

KPMG’s 2010 Competitive Alternatives study reveals that the push to be the location with the lowest cost of manufacturing is heating up around the world.

In a recovering economy, every major business expansion, relocation or new facility is the focus of intense competition. With fewer projects to zero in on, every location is vying to offer the lowest overall manufacturing costs.

One of the most coveted measures of cost competitiveness is found in KPMG’s Competitive Alternatives study, which is conducted every two years. The 2010 Competitive Alternatives survey examined 112 cities in Australia, Canada, France, Germany, Italy, Japan, Mexico, the Netherlands, the United Kingdom and the United States.

The KPMG study measured 26 significant cost components most likely to vary by location, including: labor, taxes, real estate and utilities, as they applied to 17 business sectors over a 10-year planning horizon. A range of non-cost competitiveness factors also were considered, as were currency exchange rates.

The 2010 study was revamped to include a new focus on the largest cities in each country, and it includes a number of major cities not included in the 2008 survey, such as Berlin, Los Angeles, Lyon, Miami, Osaka, Rome and Tokyo.

The results, released at the end of March, revealed some bad news for the U.S.—the United States dropped from third place in the 2008 KPMG study to seventh place in the 2010 survey. Mexico and Canada continued to hold onto the first- and second-place rankings, respectively, while the Netherlands surged from number seven to number three.

“The global recession has not been the only factor impacting international business over the last two years,” explains Simon Harding, associate partner in KPMG’s Advisory Service practice and head of its Canadian Strategic & Commercial Intelligence practice.

“Divergent trends in exchange rates, utility and transportation costs, taxes and incentives all helped to shape the international competitiveness environment in 2010,” Harding noted. “The degree of variation in business costs between major cities in some countries also is quite remarkable. All of these factors highlight the importance of having access to up-to-date intelligence on international business competitiveness issues for both businesses and governments.”



Harding told Business Facilities that this year’s emphasis on the largest cities in each country was a primary factor in the downward shift in the U.S. competitiveness ranking. The change in focus impacted on the U.S. ranking due to the greater variation in costs between the largest cities and regional cities in the U. S.

The cost differential between larger and smaller cities in the U.S. was 5.2 percent, which was exceeded only by the 7 percent differential in the U.K. The differentials in the Netherlands, Australia, Canada and France were 0.4, 1.9, 2.5 and 3.7 percent, respectively.

According to the KPMG survey, Tampa, FL and Atlanta, GA are the leading U.S. cities for cost competitiveness, ranking 7th and 8th among all of the large international cities covered by the 2010 study. However, three of the largest U.S. cities—Los Angeles, New York and San Francisco, ranked 34th, 37th, and 39th, respectively.

Oklahoma City came out on top of the cost-competitiveness ranking for North American cities with populations between 1 million and 2 million, followed by Edmonton, Canada, Raleigh, NC, Buffalo, NY, and Nashville, TN.

In its analysis of cost trends since 2008, the KPMG study found that the U.S. experienced the largest increase in salary costs. Employee benefit costs and electricity rates also increased in the U.S., while natural gas rates declined.

According to KPMG, labor costs (including benefits) are the most significant cost factor, representing between 46 to 60 percent of location-sensitive costs for manufacturing operations, and 74 to 85 percent for service operations. Facility costs are the second most significant factor for service operations, ranging from 5 to 18 percent of total location-sensitive costs; facilities account for only 2 to 7 percent of location-sensitive costs in manufacturing.

Costs related to capital (including depreciation and interest) are a major cost item for manufacturers, ranging from 11 to 24 percent of location-sensitive costs, while taxes account for 5 to 14 percent of costs.

For the 17 industrial sectors covered in the KPMG study (including 42 different job positions) Germany came in with the highest average labor costs at $101,000 per employee (salary plus benefits), while Mexico’s labor costs were the lowest at $35,696. The U.S. ranked eighth at $89,791 per employee.

The U.S. fared well in the competitive analysis of facility costs, with an average factory leasing cost of $5.06 per square foot, second best in the survey to Mexico’s $4.83 per square foot. The most expensive facility costs were in Japan ($15.84 per square foot) and the U.K. ($13.94 per square foot).

The KPMG study found that Canada, France and the U.S. had the lowest electricity costs, respectively. The average U.S. electricity rate of 9 cents per kWh came in lower than the rate in Mexico, which averaged 11.2 cents per kWh. However, Mexico registered the lowest natural gas costs, at $0.48 per CCF.


Mexico maintained its top international ranking in the Competitive Alternatives study with business costs that measured 18.2 percent lower than those recorded in the U.S. According to Harding, this showing reflects Mexico’s status as the only emerging industrial country included in the 2010 Competitive Alternatives analysis.

In late 2009, the Mexican government increased income and sales taxes in order to counter growing fiscal deficits, a move that has taken some of the edge off Mexico’s cost competitive position relative to other countries; but the two large Mexican cities examined in this year’s survey—Monterrey and Mexico City—ranked first and second in cost-competitiveness, respectively, with almost identical business costs. Monterrey, in particular, fared well in comparisons with U.S. cities directly across the border in Texas. Business costs in Monterrey were found to be 16.2 percent lower than in Dallas-Ft. Worth, TX and 13.3 percent lower than in McAllen, TX.

Canada was the cost leader among the nine established industrial countries examined, coming in 5 percent lower than the U.S. The easing in the U.S.-Canada exchange rate supported this position, as well as a variety of tax cuts and tax reforms initiated by the Canadian federal and provincial governments. In 2008, Canada and the U.S. were virtually tied in the KPMG cost-competitiveness ranking.

Canada’s major cities fared well in the KPMG report, with Montreal (third among 41 large international cities surveyed) and Toronto (6th) ranking ahead of all major U.S. cities studied in terms of affordable business costs. Manchester, in the U.K., was the only other G7 city to match the rankings of the Canadian cities.

KPMG undertook a comparison of four pairs of U.S. and Canadian cities that straddle the U.S.-Canada border. In each comparison of the border locations, the Canadian cities held on overall cost advantage over their U.S. counterparts. For example, Vancouver costs are 5.2 percent lower than Seattle’s; and Sherbrooke, Quebec holds a 6.5 percent cost advantage over Burlington, VT, even though the two cities are similarly sized and only separated by 127 miles.

“What stands out in the 2010 survey is how strong Canada’s position is globally as economic recovery starts to set in,” says Glenn Mair, director, MMK Consulting, and one of the study authors in association with KPMG.

“Canada has pulled its weight in terms of contributing to the global stimulus response to the economic crisis, ranking fifth among nine countries in terms of relative stimulus spending. However, this has been achieved while maintaining a reasonable long-term debt outlook, with Canada expected to rank first among the G7 in 2014 in terms of low government debt,” Mair noted. “This helps Canadian businesses now with direct stimulus spending and, in the future, with lower risk of tax hikes than in countries where the government debt is much higher.”

The KPMG results were determined using recent exchange rates, with the Canadian dollar valued at U.S. $0.943, the euro valued at U.S. $ 1.47, and the British pound valued at U.S. $1.64.

“Ten years ago, we estimated that the break-even exchange rate for the two countries was about U.S. $ 0.80, yet a number of structural changes through the 2000s have allowed Canada to maintain a cost advantage over the U.S., even in this high-dollar environment,” Harding said.

He added that Canada “must continue to present a clear value proposition to businesses in other areas in order to maintain its attractiveness for international firms.”

Harding told Business Facilities that KPMG’s cost model assumes that there will be fluctuations in exchange rates during the course of the survey, but registers the impact of large variations. An example is the Japanese yen, which appreciated by 24% in the past two years, dropping Japan from 9th to 10th in the KPMG cost-competitiveness ranking. Japan registered the highest cost structure of those nations surveyed, 7.4 percent higher than the U.S.

Cities in the provinces of Quebec and New Brunswick continued to outshine outposts in the other provinces in the KPMG survey, with Sherbrooke, Quebec, Moncton, NB, and Fredericton, NB again snaring the top three rankings for Canadian cities in the survey, respectively.

Business costs for Sherbrooke and Moncton were more than 8.5 percent lower than the U.S. study baseline, KPMG said. Despite the slowdown in the oil industry during the period covered by the survey, the resource-led boom in western Canada in recent years has “reshaped the map in terms of business costs across Canada,” the study reported. Since 2008, Winnipeg has moved ahead of Saskatoon in terms of offering lower business costs, while business costs in Edmonton are now higher than Vancouver and almost on a par with Toronto.

The Netherlands posted the lowest business costs in Europe, finishing third overall in the KPMG study behind Mexico and Canada. Business costs in the Netherlands registered 3.5% lower than in the U.S. According to KPMG, the Netherlands benefited due to its relatively homogeneous nationwide cost structures.

Germany was cited as the most expensive among the European countries studied, with costs 2.5 percent higher than the U.S. and 6.1 percent higher than the Netherlands. However, Germany did move up to 9th place from its 10th place finish in the 2008 report, an improvement attributed to lower sea freight rates and energy costs.



KPMG found that cost differentials are generally highest for research and development activities, due to differences in labor costs for scientific and technical employees, as well as different tax treatment of R&D costs. Australia, the Netherlands and France registered their strongest results in this sector due in part to their R&D tax incentive programs.

“The importance of R&D to the continued success of businesses and the growth of national economies is undeniable,” Mair says. “Governments are responding accordingly with ever more focus on a variety of incentives for R&D activities. Staying abreast of current R&D incentive offerings in various countries is a key consideration for managing international business activities.”

Research and development costs for biotechnology, clinical trials and product testing were analyzed by KPMG. Once again, Mexico was the cost competitiveness leader, with R&D costs averaging about 40 percent lower than the U.S. However, Harding noted that the KPMG study assumed similar skill levels for R&D workforces in the nation’s surveyed.

The Competitive Alternatives analysis focused on 11 manufacturing sectors, including: aerospace, agri/food, automotive, chemicals, electronics, medical devices, metal components, pharmaceuticals, plastics, precision manufacturing, and telecommunications.

The KPMG study found that, for manufacturing, costs for globally sourced materials and equipment do not vary significantly by location.

In its comparison of aircraft parts manufacturing costs, all of the nations in the survey were found to be lower-cost producers than the U.S., with the exception of Germany, which was 1.4 percent higher and Japan, which came in 5.3 percent higher than the U.S.

The lowest-cost locations for plastics manufacturing, among the North American cities surveyed, were Youngstown, OH, Charleston, WV, Shreveport, LA, Atlanta, GA, and Lexington, KY. Overall, Youngstown ranked third in plastic product manufacturing costs, behind only Monterrey and Mexico City.

Mexico’s cost advantage stood out most dramatically in the section of the report that compared costs in corporate and IT services. In the cost comparison for back office/call centers, Mexico’s costs were more than 50 percent lower than costs in the U.S.

[Editor’s Note: Simon Harding of KPMG will make a presentation on the 2010 Competitive Alternatives study as the closing speaker at Business Facilities LiveXchange in New Orleans, Nov. 7-9]

OKC: A Thriving Economy Driven by Much More than Oil

Although in its early days oil dominated the economy, Oklahoma City today hosts a wide range of businesses and employers. Agriculture, energy, aviation, government, healthcare, manufacturing, and industry all play major roles in the city’s economic well-being.

Oklahoma City is the seat of government for the state of Oklahoma as well as Oklahoma County. There are also many regional federal agency offices located in the city. The government sector accounts for about 20 percent of the Oklahoma City metropolitan area non-agricultural employment.

The healthcare industry is a major economic driver in OKC. Mike Monroney Aeronautical Center, which is the largest trainer of Air Traffic Controllers in the world, and Tinker Air Force Base are economic engines as well. As the largest industrial operation in Oklahoma, Tinker serves the U.S. Air Force as a repair depot and provides logistic services. Tinker employs 26,000 military and civilian personnel with a combined annual payroll of more than $775 million. There also is a growing high technology sector in OKC, with more than 400 companies employing 30,000 in high-tech sectors including information technology and software development.

As one of the nation’s largest processing centers for a variety of farm products, Oklahoma City is home to the world’s largest stocker and feeder cattle market. Horses are also big business in OKC. The city is known as the Horse Show Capital of the World for the nine major national and international horse shows held annually.

Many large oil and energy-related companies have headquarters or major branches in the city. Other present and projected future growth industries include fabricated metal, computers, clothing, oil-field equipment, crude oil, back office, distribution and food processing.


The Civic Center Music Hall was recently renovated into a modern performance center for the Downtown Arts District; nearby stands the Oklahoma City Museum of Art, featuring Dale Chihuly’s 55-foot glass sculpture, as well as the Ronald J. Norick Downtown Library. The Bricktown riverwalk area features shops and restaurants in turn-of-the-century industrial buildings; a Bass Pro Shop and 16-screen theater add to the district’s entertainment scene. Towering over Bricktown is the SBC Bricktown Ballpark, home of the Oklahoma RedHawks.

The Greater Oklahoma City Chamber of Commerce Economic Development Division provides full-service expansion and/or new business services. The Oklahoma City Development Center offers one-stop shopping for permits, inspections, and building guidelines. Many zones and neighborhoods of Oklahoma City have been designated as Federal Empowerment Zones that offer incentives to businesses looking to start up or relocate. Incentives include tax credits of up to $3,000 for each employee newly hired or already on the payroll who lives and works in the zone; tax-exempt facility bonds to finance property, equipment and site development; and increased expense deductions of up to $35,000 for depreciable assets acquired during the first year.

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