Marketing Canadas Cost Advantage

1
Marketing Canadas Cost Advantage

• Presentation to the Economic Development
  Association of Canada
• Stuart MacKayMMK ConsultingSeptember 26, 2002

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Contents

• 2002 Cost study results key messages
• Delivering the message
• Update on 2003/04 edition

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About the 2002 Cost study

• KPMGs comprehensive guide to comparing business
  costs in G-7 jurisdictions (plus Austria, the
  Netherlands)
• Last published in 1999
• The 2002 edition represents the results of a
  major ten-month KPMG research program (30,000
  data inputs)
• Made possible by more than 60 sponsors in
• Austria ? Netherlands
• Canada ? United Kingdom
• Italy ? United States

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Study Components

• Component 1 comparison of business costs among
  the G-7 countries, Austria, Netherlands
• Overall and by industry/operation (12 standard
  operations)
• By city and region (115 cities, nine countries)
• By cost factor (27 factors)
• 30,000 data points, 10 year time horizon
• Component 2 - web-based interactive costing model
• Customized (user-defined) operations
• Assessing the sensitivity of results to changing
  conditions (taxes/incentives, exchange rates,
  etc.)

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Site selection considerations

• Study focus is on business costs
• Other location issues also need to be considered
  in the site decision

6
Overall results
Overall results (12 operations)

• Key messages for Canadian EDAs
• Canada still 1 in G7, as in 1999 and 1997
• Cost advantage over US has further increased
  since 1999
• Dollar has weakened (slightly) to 64.7
• Improving cost fundamentals

Percent cost advantage/(disadvantage) relative
to the United States
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Comparison Across Provinces

• US Average 100.0

8
Atlantic/New England
Canada
US
9
Northeast North America
Canada
US
10
Midwest North America
Canada
US
11
Pacific
Canada
US
12
Applicability to other communities

• If your city is not in the report
• Refer to data for similar-sized communities in
  your province
• Some cost factors may distinguish your city from
  others in your province
• Relative property values
• Relative property tax rates
• Separate utility providers
• In general, cost differences among smaller cities
  in each province tend to be minor
• Selection based on non-cost factors

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Manufacturing
Results for manufacturing(7 operations)

• Key messages for Canadian EDAs
• Costs differentials are lowest in manufacturing
• Higher proportion of globally-sourced materials
  and equipment, which do not vary by location
• Results are least sensitive to exchange rates
• Canadas cost results are strongest in high- tech
  manufacturing industries (e.g. 1 in electronics
  assembly)
• Higher proportion of highly skilled labour

Percent cost advantage/(disadvantage) relative
to the United States
14
Software
Results for software (2 operations)

• Key messages for Canadian EDAs
• Cost differentials are higher in software
• Labor costs more significant
• Vary greatly by country
• Canada is the overall cost leader
• Lower labour costs for high-skilled software
  industry workers

Percent cost advantage/(disadvantage) relative
to the United States
15
RD
Results for RD (2 operations)

• Key messages for Canadian EDAs
• Cost differentials are even higher in RD
• Salary costs for scientists and technicians more
  significant
• Vary greatly by country
• Canadas strongest positiondue to combination
  of
• Labour cost advantages
• RD tax credits

Percent cost advantage/(disadvantage) relative
to the United States
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Corporate Services
Results for corporate services(1 operations)

• Key messages for Canadian EDAs
• Corporate services include
• account processing
• call center and
• IT support operations
• Costs differentials are very high
• Costs almost completely labor-driven
• The United States has its strongest G7 result
  here
• Competitive clerical and administrative salaries
• But Canadas after-tax cost advantage is still
  19.7 over the US

Percent cost advantage/(disadvantage) relative
to the United States
17
Exchange rate sensitivity
Impact of Exchange Rates Canada versus US

• Key messages for Canadian EDAs
• Canadas cost advantage over the US
• 14.5 at the exchange rate of 1.546 per US (C
  1.00 US 64.7)
• 5.1 with a 20 decrease in value of US, to Cdn
  1.237 (C 1.00 US 80.8)
• Canadian advantage is significant for any
  exchange rate in the foreseeable future

    
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Labour Costs
Total labor costs Average for 12 operations, US
000

• Key messages for Canadian EDAs
• Dont look only at salary wage levels!
• Canada 1 in loaded labour costs

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Wages and Salaries
Average for 12 operations Percentage of wages
and salaries

• Key messages for Canadian EDAs
• Canadas employee benefits costs are the lowest
  in G7
• Advantages over US arises from the cost to US
  employers of providing private health care plans

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Effective corporate income tax- Manufacturing
Effective combined corporate income taxAverage
of six manufacturing operations1Percentage of
net profit before tax

• Key messages for Canadian EDAs
• Canadas effective corporate tax rate for
  manufacturers is lower than in the US
• Recent tax cuts in key provinces
• Federal tax changes cementing effect of old MP
  tax credits
• RD tax credits more generous than in the US
• Effective rates are lowest in Canada for
  RD-intensive operations

1 The specialty chemicals operation is not
included because of marginal profitability/loss
situations in some countries
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Effective corporate income tax- Non-manufacturing
Effective combined corporate income taxAverage
for five non-manufacturing operationsPercentage
of net profit before tax

• Key messages for Canadian EDAs
• Canadas corporate tax rate for non-manufacturing
  is lowest among the G7
• Influenced by the inclusion of several
  RD-intensive operations
• Recent federal and provincial tax cuts have had
  greatest benefit for non-manufacturers

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2. Delivering the Message

• International Presentations of KPMG Study Results
  (Spring 2002)

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2. Delivering the Message (contd)
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2. Delivering the Message (contd)
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2. Delivering the Message (contd)
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3. KPMG Cost Study Outlook for 2003/04

• More than 20,000 copies of the 2002 published
  report have been printed and distributed
• More than 80,000 summary brochures are in print
• KPMG distribution to all September 2002 IEDC
  Conference attendees
• Competitivealternatives.com website received more
  than 900,000 page hits in the first 6 months
• Study results have been reviewed by
  representatives of most major US/European
  manufacturers
• Several regional EDAs have provided testimonials/
  success stories
• Promotional tour in 2002 received media/press
  coverage reaching more than 50 million people

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3. KPMG Cost Study Outlook for 2003/04 (contd)

• Planning for the next edition of Competitive
  Alternatives is under way
• One-year project with report targeted for Fall
  2003 release
• Website to be updated/enhanced and extended until
  at least February 2005 (2-year extension)
• Funding from a combination of public and
  corporate sponsors
• Object is to exceed the 60 sponsors of the 2002
  edition
• Expected coverage of several new countries
• Possibly Scandinavian countries, Ireland, and/or
  Australia
• Expected coverage of at least 120 cities

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For Further Information

• Stuart MacKayFounder and Co-AuthorCompetitive
  AlternativesTel 604 484 4621Fax 604 738
  2801Email smackay_at_mmkconsulting.com

• Glenn MairProject DirectorCompetitive
  AlternativesTel 604 484 4622Fax 604 738
  2801Email gmair_at_mmkconsulting.com