A Guide to Cost Advantage

The 2006 Competitive Alternatives study is the most thorough comparison of international business costs ever undertaken by KPMG.  This study contains valuable information for any company seeking a cost advantage in locating international business operations.

Updating and expanding upon previous Competitive Alternatives publications, this study measures the combined impact of 27 significant cost components that are most likely to vary by location.  The eight-month research program covered 17 industry operations in nine industrial countries: Canada, France, Germany, Italy, Japan, the Netherlands, Singapore, the United Kingdom and the United States.  More than 2,000 individual business scenarios were examined, combining more than 30,000 items of data.  The basis for comparison is after-tax cost of startup and operation, over a 10-year planning horizon.

The Bottom Line

Among the countries studied, Singapore has the greatest cost advantage over the United States, at 22.3 percent.  With the GDP per capita now on par with some western European nations, Singapore is the first newly industrialized country to be included in Competitive Alternatives.

Canada leads the G7 countries for low business costs, with a cost advantage of 5.5 percent over the United States.

France and the Netherlands have the best results among the European countries.  Costs are virtually equivalent in both countries, with a cost advantage of approximately 4.4 percent over the US.

Italy and the United Kingdom also have very similar business costs, both holding a cost advantage of approximately two percent over the United States.

The United States is the study baseline against which other countries are compared, and ranks seventh among the nine countries.

Japan and Germany are the most expensive among the countries studied.  These countries are at a cost disadvantage relative to the US, by 6.9 and 7.4 percent, respectively.

Cost Trends:  Cost Differentials Narrow

Cost differentials among the returning countries (G7 plus Netherlands) have narrowed since the previous (2004) edition of Competitive Alternatives, with most countries moving closer to the US benchmark.

• Japan has experienced the greatest gain in cost competitiveness, assisted by the weakening of the yen relative to the US dollar, and improvements in local business costs.
• German, the Netherlands, France and Italy have all experienced improvement in their cost competitiveness, relative to the US benchmark,
• The United Kingdom has retained a cost advantage over the United States, Japan and Germany.
• Canada has retained its top ranking among G7 countries, although the size of its advantage has been reduced by the strong appreciation of the Canadian dollar relative to the US dollar over the last two years.

The results of this study are sensitive to exchange rates.  Exchange rates used in this study, along with comparative rates from the time of the previous (2004) study are as follows:

Exchange Rates

Source - Competitive Alternatives: KMPG's guide to International Business Costs 2006 Edition