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A Comparison Of 1996 Business Costs In Atlantic Canada and the United States
by KPMG
April 2, 1996
1. Introduction and Summary
On behalf of the Atlantic Canada Opportunities Agency, KPMG Management Consulting has carried
out an analysis of the relative costs of doing business in the United States and Atlantic
Canada in 1996. In conjunction with our associate, Business Development Information
Incorporated (BDI), we have also briefly examined a number of non-financial comparative
factors.
The study included the development of illustrative business scenarios, and is based on current
tax rates, cost factors and exchange rates. We used a computer-based financial model to
compare typical operating costs, from start-up to ten years of operation, for facilities in
twenty-eight cities-twelve in the U.S. and sixteen in Atlantic Canada. All figures in this
report are expressed in U.S. dollars (USD$), unless Canadian dollars (CDN$) are specified.
The study examined the impact of location on key location-sensitive capital and operating
costs for seven industries. Each facility was modeled based on existing industry information.
The analysis focused on costs of establishing facilities on 5-10 acre sites in suburban areas
zoned for light-to-medium industrial purposes.
The specific industries, jurisdictions, and location-sensitive cost factors examined
included:
| Industry |
Jurisdictons |
Location-Sensitive Cost Factors |
| Frozen Foods |
Atlantic Canada |
Eastern US |
Industrial Land Costs |
| Medical Devices |
Atlantic Canada |
Eastern US |
Industrial Land Costs |
| Software |
Grand Falls, NF |
Charleston, SC |
Labour Costs: |
| Telecommunications |
St. John's, NF |
Hampton, VA |
- Wage & Salary |
| (Ocean Technology application) |
Halifax NS |
Hartford, CT |
- Employer-sponsored benefits |
| Plastics |
Kentville, NS |
Manchester NH |
- Statutory benefits |
| Metal Fabrication |
Sydney, NS |
Newark, NJ |
Electricity Costs |
| Electronics and Instrumentation |
Truro, NS |
Raleigh, SC |
Transportation/distribution costs |
| (Avionics application) |
Yarmouth, NS |
|
Interest costs |
|
Charlottetown, PEI |
Other US |
Federal, Regional and local taxes |
|
Summerside, PEI |
Austin, TX |
- Income and Property Taxes |
|
Bathurst, NB |
Bellingham, WA |
- Research Tax Credits |
|
Edmundston, NB |
Columbus, OH |
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Fredericton, NB |
Minneapolis, MN |
|
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Miramichi City, |
Sacramento, CA |
|
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NB |
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Moncton, NB |
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Saint John, NB |
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The model has developed standard financial statements (balance sheet, income statement etc.) for ten
years, treating each facility as a stand-alone operation. The model also incorporates a number of
standard financial and operating assumptions.
A. Summary of findings
1. For every industry, overall costs are lower in Atlantic Canada
As illustrated in Exhibit I-1, the location-sensitive annual costs are significantly lower in Atlantic
Canada than in U.S. jurisdictions, for all industries. The net after-tax annual cost advantage averages
19.5% on location-sensitive costs. Since location-sensitive costs constitute 36% of total costs, the
overall annual after-tax cost advantage to Atlantic Canada averages 7.0%.
2. Most individual location-sensitive cost components are favourable to Atlantic Canada
Most of the cost components we analyzed are favourable to Atlantic Canada:
- Industrial land and construction costs are significantly lower in Atlantic Canada.
- Labour costs (including wages, salaries, employer-sponsored benefits. and employer-paid
statutory benefits and taxes) are also significantly lower in Atlantic Canada. This cost component has
a considerable impact of the overall cost comparison, since labour costs represent between 17% and 29%
of total operating costs in the industries we examined.
- Electricity costs, transportation costs, and interest costs also tend to favour Canada,
although their impact on the overall cost comparison is less significant than labour costs.
- Corporate federal, regional and local taxation rates vary significantly among jurisdictions,
and our analysis does not show consistent advantages for one region over another. In Canada, research
and development expenditures receive particularly favourable tax treatment.
Exhibit 1-1
Location-sensitive costs, by industry
(USD$'000)
1Based on annual average U.S. dollar costs as follows:
|
U.S. |
Canada |
|
(USD$'000) |
(USD$'000) |
| |
|
|
| Electronics & Instrumentation |
5,338 |
4,252 |
| Frozen Food |
4,954 |
4,304 |
| Medical Devices |
2,933 |
2,325 |
| Metal Fabrication |
2,803 |
2,337 |
| Plastics |
2,719 |
2,299 |
| Software |
5,505 |
3,958 |
| Telecommunications |
3,546 |
2,910 |
| |
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| Average |
3,971 |
3,198 |
3. Atlantic Canada's cost advantage holds over a wide range of exchange rates
Atlantic Canada's cost advantage holds over a wide range of exchange rates. As illustrated in Exhibit
I-2, based on the average of costs for all industries studied, even if the value of the U.S. dollar was
to fall as low as $1.09 CDN from its current level of about $1.35 CDN, Atlantic Canada would still
maintain a comparative cost advantage.
The range over which Atlantic Canada maintains its cost advantage varies somewhat among the industries
studied, depending on the relative costs in Atlantic Canada and the U.S. for each industry. For each
industry, the exchange rate at which the U.S. would be cost-competitive:
| |
US$1=CDN$ |
| Electronics & Instrumentation |
$1.08 |
| Frozen Food |
1.17 |
| Medical Devices |
1.07 |
| Metal Fabrication |
1.13 |
| Plasitcs |
1.14 |
| Software |
0.97 |
| Telecommunications |
1.11 |
|
|
| Weighted Average |
1.09 |
Exhibit I-3 illustrates recent trends in the value of the U.S. dollar in Canadian funds. Based on this
history, it would appear likely that Atlantic Canada will maintain a comparative cost advantage in all
industries into the foreseeable future.
Exhibit 1-3
Trends in the value of the U.S. dollar in Canadian funds
4. Non-financial factors also require consideration
Non-financial factors which need to be addressed in choosing a site locatin include:
- Workforce characteristics. Atlantic Canada jurisdictions tend to have somewhat lower
education levels and higher percentages of unionized workforces than their U.S. counterparts.
- Personal income. While wages are lower in Atlantic Canada jurisdictions, the cost-of-living
index and average house prices are also significantly lower. Personal income tax regimes also differ
among jurisdictions.
- Safety and security. Crime rates are lower in Atlantic Canada particularly for violent
crimes. Homicide rates in Atlantic Canada jurisdictions are an order of magnitude less than their Eastern
U.S. counterparts.
B. Further Information
This study is based on current tax rates and cost factors, all of which are subject to change. Major
investment decisions require investigation of situation-specific cost factors. Business location
decisions also require a detailed investigation of non-cost-related factors, including: work force
availability, quality of life, transportation infrastructure, education, medical care and other factors.
For assistance in addressing specific opportunities, please contact:
Information on this study and its results
KPMG Management Consulting
Suite 1505
Purdy's Wharf, Tower One
1959 Upper Water Street
Halifax, Nova Scotia, Canada
V7Y 1K3
Robin McAdam (902) 492-6060
Stuart MacKay (604) 691-3410
Cathy Nobes (604) 691-3086
Fax: (902) 492-6000
Information on Atlantic Canada as a place to do business
Atlantic Canada Opportunities Agency
Head Office
P.O. Box 6051
Blue Cross Centre
644 Main Street
Moncton, New Brunswick
E1C 9J8
Martin Abrams
Tel: (613) 954-0428
Fax: (613) 954-0429
David Slade
Tel: (506) 851-6141
Fax: (506) 851-7403
Gilles Belzile
Tel: (613) 954-8062
Fax: (613) 954-0429
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