ADELAIDE S BUSINESS COST COMPETITIVENESS

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1 ADELAIDE S BUSINESS COST COMPETITIVENESS A COMPARISON OF BUSINESS COSTS FOR ADELAIDE AND THREE OTHER AUSTRALIAN CITIES AGAINST THE 2006 EDITION OF KPMG S COMPETITIVE ALTERNATIVES Submitted to: Government of South Australia Department of Trade and Economic Development Economic Analysis and Policy Mr. Murray Arthur-Worsop Mr. Tim Melrose Prepared by: MMK Consulting Inc. Stuart MacKay Glenn Mair Angela Rey Treena Cook KPMG Mark MacDonald July 10, 2006

2 Contents 1. Introduction Study Objectives Study Conduct Layout of Report Interpretation of Results The International Comparison Basis for the International Comparisons Results for Australia Cost Trends Results for Australian Cities Overall Results for Australian Cities Comparison by Size of City City Results, by Industry Detailed Results, by Cost Component...12 Page 1

3 1. Introduction KPMG s Competitive Alternatives is the KPMG guide to comparing business costs in North America, Europe and Asia Pacific. The biannual report, published by KPMG and authored by MMK Consulting, measures the individual and combined impact of 27 major cost components, as they apply to 17 different industry sectors. The 2006 edition of KPMG s Competitive Alternatives compares costs in 95 featured cities (with populations of more than 100,000) in nine developed countries. The study results are based on an eight-month research and analysis program, examining more than 2,000 individual business scenarios and incorporating more than 30,000 items of data. 1.1 Study Objectives While a number of Australian cities (including Adelaide, South Australia) were sponsored in the 2004 edition of KPMG s Competitive Alternatives, no Australian cities were included in the 2006 edition. In implementing its South Australia Strategic Plan (SASP), the Government of South Australia desires to benchmark its business cost competitiveness relative to other jurisdictions in Australia and elsewhere. Accordingly, the South Australia Department of Trade and Economic Development (DTED) has commissioned MMK Consulting to benchmark Adelaide s cost competitiveness, not only in comparison to the 95 cities featured in the 2006 edition of KPMG s Competitive Alternatives, but also in comparison to three other Australian cities Brisbane, Melbourne, and Sydney. KPMG has verified the results of this analysis for inclusion in the 2006 web-edition of results, at Study Conduct This study has been performed by MMK Consulting in association with our associates KPMG, Mercers, and Colliers. Using the same methodology applied in KPMG s Competitive Alternatives study, we have: Performed detailed research into each of the 27 location-specific cost components, using the same approach as for the 2006 edition of KPMG s Competitive Alternatives. In addition to research performed directly by MMK Consulting, we have incorporated research undertaken by leading professional firms in specific cost areas Mercers for labour and benefits costs, Colliers for land purchase and building construction/lease costs, and KPMG in Australia for taxation and other location-specific costs. Analyzed the results, applying the same methodology used in the 2006 edition of KPMG s Competitive Alternatives, and utilizing the proprietary CCM-2006 costing model developed for the published 2006 study. Developed detailed cost reports, comparing costs for each Australian city, both overall and for each of the 17 industry operations profiled in Competitive Alternatives. Page 2

4 Developed this report summarizing our study findings. Further detailed information regarding the study methodology is available at Layout of Report The balance of this report is laid out as follows: Chapter 2 presents the overall international results for Australia in Chapter 3 presents a comparison of the four Australian cities, both overall and for each of the seventeen industry operations profiled in KPMG s Competitive Alternatives. Chapter 4 presents detailed results for the four Australian cities by individual cost components (labour, real estate, etc.). 1.4 Interpretation of Results This analysis was conducted using cost data related to the period between July 2005 and January Major sources of data include Colliers International (real estate), Mercer Human Resource Consulting (labour and benefits), and KPMG in Australia (taxes, utilities and transportation). The analysis reflects tax rates in effect on January 1, 2006, plus announced changes taking place in future years, where relevant. The analysis is presented in US dollars, using an exchange rate of AU $ = US $1. Exchange rates and other cost factors will, of course, change over time. Tax rates and other tax-related information are also subject to change as a result of new legislation, judicial decision, and administrative pronouncement. This report represents the results of analysis conducted by MMK Consulting Inc., and verified by KPMG. While great care has been taken in performing this analysis and developing the findings, all information provided is of a general nature and the results of this analysis should not be interpreted as a definitive or final opinion on the merits of locating any specific facility in one jurisdiction over another. Further analysis is required to determine the best site for any specific facility, and no one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. Page 3

5 2. The International Comparison 2.1 Basis for the International Comparisons The international business cost comparisons contained in KPMG s Competitive Alternatives are based on the combined impact of 27 key cost components applied to establishing and operating 12 representative business operations (in different industries 1 ) over a ten-year period. The international comparisons are based on the average results for comparable cities within each country. Further details of the study methodology are available at the study website. In comparing Australia to other countries, we have incorporated the results for three of the four cities analyzed Adelaide, Brisbane and Sydney 2. To enhance comparability with the 2006 KPMG s Competitive Alternatives results, Australia has been added to the comparison based on business costs as of late 2005/early Tax rates are those in effect on January 1, 2006, and currency exchange rates represent the average for October through December Results for Australia Total business costs in each country are expressed as an index, with the baseline index of being assigned to the United States. Countries with business costs lower than the US have a cost index less than 100.0, while countries with business costs higher than the US have a cost index greater than As illustrated in Exhibits 2.1 and 2.2, the 2006 results for Australia are very strong. Australia s cost index of 92.3 translates to an average 7.7% after-tax cost advantage over the US benchmark. While 2006 business costs in Australia are higher than in Singapore, they are lower than in each of the other eight countries surveyed Germany, Japan, the United States, the United Kingdom, Italy, the Netherlands, France, and Canada. 1 The 12 industries included in the international comparison include seven manufacturing operations (electronics assembly, food processing, specialty chemicals, metal machining, pharmaceutical products, plastic products, precision components), two R&D operations (biomedical R&D and electronic systems development and testing), two software operations (advanced software and content development), and one corporate services operation (shared services centre). Five additional industries are also analyzed individually (see exhibit 3.2). 2 Melbourne is not included, since the inclusion of both Melbourne and Sydney would over-weight the impact of large mature cities in the national results for Australia. Page 4

6 Exhibit 2.1. Overall results Index ASIA PACIFIC Australia Japan Singapore EUROPE France Germany Italy Netherlands United Kingdom NORTH AMERICA Canada United States COST INDEX Exhibit 2.2 Percentage cost advantage relative to the US Overall results 22.3% 7.7% 5.5% 4.4% 4.3% 2.2% 1.9% 0.0% -6.9% -7.4% baseline SG AU CA FR NL IT UK US JP DE Singapore Australia Canada France Netherlands Italy United Kingdom United States Japan Germany Page 5

7 2.3 Cost Trends Cost trends between 2004 and 2006 represent the combined impact of: Changes in currency exchange rates. Cost trends within the country, as expressed in national currency terms. Cost trends for Australia and other countries between 2004 and 2006 are illustrated in Exhibit 2.3. In determining Australia s results for the 2006 study, we have used the exchange rate of US $ per Australian dollar (the average rate for October-December 2005), representing an appreciation of 7.6% against the US dollar since 2004 (US $ per Australian dollar). Despite the strength of Australia s currency, the Australian cost index has increased by only 0.8% in relation to the United States. This finding indicates that, in terms of national currencies, Australia s business cost competitiveness relative to the United States has improved significantly between the 2004 and 2006 studies. Exhibit 2.3 Cost trends Change in Currency Relative to US $ Cost Index Change vs. US 2 ASIA PACIFIC Australia +7.6% Japan -5.2% EUROPE France +2.8% Germany +2.8% Italy +2.8% Netherlands +2.8% United Kingdom +5.2% NORTH AMERICA Canada +13.6% United States Results reflect both exchange rate shifts and local cost trends. 2 Difference in percentage points between 2006 and 2004 index. Page 6

8 3. Results for Australian Cities 3.1 Overall Results for Australian Cities Exhibit 3.1 summarizes the overall results (12-industry average) for each of the four Australian cities. The order of these four cities is unchanged from Adelaide is again the cost leader, with a cost index of 91.1 (8.9% below the US benchmark), followed by Brisbane (91.4), Melbourne (92.3), and Sydney (94.6). Adelaide s cost advantage over other Australian jurisdictions on an after-tax basis ranges from 0.3% to 3.7%. Exhibit 3.1 Results for Australian cities 12-industry average Cities Cost Index Adelaide s Cost Advantage 1 Relative to: Adelaide Brisbane % Melbourne % Sydney % 1. Percentage by which Adelaide s cost structure is lower. 3.2 Comparison by Size of City Exhibit 3.2 presents the results for the four Australian cities, in relation to the 95 other cities featured in the 2006 edition of KPMG s Competitive Alternatives. Adelaide s cost-competitiveness ranks first overall among 31 cities of similar size (population of 500,000 to 1.5 million). Among all 99 cities, Adelaide s business cost structure is tied for third lowest. Page 7

9 Exhibit 3.2 Results for 99 Cities, by size of city, including ranking within city population classification Population 100,000 to 500,000 to Exceeds 500,000 Rank million Rank million Rank 1 ASIA-PACIFIC Fukuoka, JP Yokohama, JP No representative city Hamamatsu, JP Sydney, AU Adelaide, AU Melbourne, AU Brisbane, AU Singapore, SG EUROPE Chemnitz, DE Nottingham Frankfurt, DE Florence, IT Northampton London Vicenza, IT Nantes, FR Manchester Livorno, IT Lincoln Paris, FR Fruili V. G. Region, IT Leicester Turin, IT Mulhouse, FR East Netherlands, NL Naples, IT Poitiers, FR Derby Amsterdam Area, NL Montpellier, FR Darmstadt, DE Lyon, FR Brabant Stad, NL Barnsley NORTH AMERICA Burlington, VT Hartford, CT New York City, NY Spokane, WA Buffalo, NY San Jose, CA Lewiston, ME Colorado Springs, CO Boston, MA Saginaw, MI Harrisburg, PA Newark, NJ Cedar Rapids, IA Salt Lake City, UT Seattle, WA Billings, MT Albuquerque, NM Minneapolis, MN Sioux Falls, SD Boise, ID Las Vegas, NV Lincoln, NE Wichita, KS Riverside-San Bernardino, CA Cheyenne, WY Oklahoma City, OK San Diego, CA Charleston, WV Raleigh, NC Houston, TX St. John s, NF Nashville, TN Philadelphia, PA Waterloo Region, ON Ottawa, ON Detroit, MI Lima, OH Jackson, MS Providence, RI Lexington, KY Calgary, AB St. Louis, MO Chilliwack, BC Winnipeg, MB Dallas-Ft. Worth, TX Dothan, AL Greenville-Spartanburg, SC Phoenix, AZ Saskatoon, SK Edmonton, AB Chicago, IL Halifax, NS Quebec City, QC Portland, OR Charlottetown, PE Northern VA (Metro DC), VA Moncton, NB Milwaukee, WI Sherbrooke, QC Vancouver, BC Indianapolis, IN Tampa, FL Toronto, ON Atlanta, GA Montreal, QC Ranking within population grouping. Page 8

10 3.3 City Results, by Industry Adelaide s rankings for the seventeen industry operations profiled in the 2006 edition of KPMG s Competitive Alternatives, are presented in Exhibit 3.3. Exhibit 3.3 shows Adelaide s ranking within Australia, within the Asia-Pacific region, and relative to 99 international cities. Relative to other Australian cities, Adelaide is cost-competitive in all 17 industries, and is the cost leader (or tied) in more than two-thirds of the 17 industries. Exhibit 3.3 Adelaide's business cost-competitiveness ranking, by industry Business Operations Within Australia Adelaide's Ranking Within Asia-Pacific Overall (4 cities) (8 cities) (99 cities) Manufacturing R&D Software Aerospace Agri-food (tie) Automotive 2 (tie) 3 (tie) 3 (tie) Chemicals Electronics Medical Devices Metal Components Pharmaceutical Plastics Precision Manufacturing Telecommunications Biotechnology Clinical Trials 1 (tie) 2 (tie) 9 (tie) Product Testing Software Design Web/Multimedia 1 (tie) 2 (tie) 2 (tie) Corporate Services Back Office/Call Center Overall (tie) Detailed results for all 99 cities, for each of the seventeen industry operations profiled in the 2006 edition of KPMG s Competitive Alternatives, are presented in Exhibit 3.4. Page 9

11 Exhibit 3.4 Results by city - Asia Pacific and Europe Industry Operation Aircraft Parts Food Proc. Aerospace Agrifood Automotivcalnics Chemi- Electro- Medic. Dev. Auto Parts Spec. Chem. Electr. Assbly Manufacturing Med. Dev. Plast. Prod. Metal Pharmaceutic. Comp. Plastics Precision Mfg Prec. Comp. Metal Pharmaceutic. Mach. Telecom Equip. Biomedic. R&D R&D Telecom Biotech Clinical Trials Clin. Trials Mgt Product Testing Elec. Syst. Dvlt/Test Software Software Design Adv. Softw. Web/ Multimedia Content Dvlt Corp. Serv. Back Office/ Call Center Shared Serv. Overall Result 12 Operations ASIA PACIFIC Australia Adelaide Brisbane Melbourne Sydney Japan Fukuoka Hamamatsu Yokohama Singapore Singapore CONTINENTAL EUROPE France Lyon Montpellier Mulhouse Nantes Paris Poitiers Germany Chemnitz Darmstadt Frankfurt Italy Florence Friuli V. G. Region Livorno Naples Turin Vicenza Netherlands Amsterdam Brabant Stad East Netherlands UNITED KINGDOM Barnsley Derby Leicester Lincoln London Manchester Northampton Nottingham continued overleaf Page 10

12 Exhibit 3.4 (cont d) Results by city - North America Industry Operation NORTH AMERICA Aircraft Parts Food Proc. Aerospace Agrifood Automotivcalnics Chemi- Electro- Medic. Dev. Auto Parts Spec. Chem. Electr. Assbly Manufacturing Med. Dev. Metal Pharmaceutic. Plast. Mach. Prod. Metal Pharmaceutic. Plastics Comp. Precision Mfg Prec. Comp. Telecom Equip. Biomedic. R&D R&D Telecom Biotech Clinical Trials Clin. Trials Mgt Product Testing Elec. Syst. Dvlt/Test Software Software Design Adv. Softw. Web/ Multimedia Content Dvlt Corp. Serv. Office/ Call Center Shared Serv. Overall Result 12 Operations New England/Atlantic Canada Boston, MA Burlington, VT Charlottetown, PE Halifax, NS Hartford, CT Lewiston, ME Moncton, NB Providence, RI St. John s, NF Northeast US/Canada Buffalo, NY Charleston, WV Detroit, MI Harrisburg, PA Indianapolis, IN Lexington, KY Lima, OH Montreal, QC New York City, NY Newark, NJ Northern Virginia (Metro DC) VA Ottawa, ON Philadelphia, PA Quebec City, QC Saginaw, MI Sherbrooke, QC Toronto, ON Waterloo Region, ON Southeast US Atlanta, GA Dothan, AL Greenville-Spartanburg, SC Jackson, MS Nashville, TN Raleigh, NC Tampa, FL Midwest US/Western Canada Albuquerque, NM Billings, MT Calgary, AB Cedar Rapids, IA Cheyenne, WY Chicago, IL Colorado Springs, CO Dallas-Fort Worth, TX Edmonton, AB Houston, TX Lincoln, NE Milwaukee, WI Minneapolis, MN Oklahoma City, OK Phoenix, AZ Salt Lake City, UT Saskatoon, SK Sioux Falls, SD St. Louis, MO Wichita, KS Winnipeg, MB Pacific US/Canada Boise, ID Chilliwack, BC Las Vegas, NV Portland, OR Riverside-San Bernardino, CA San Diego, CA San Jose, CA Seattle, WA Spokane, WA Vancouver, BC Page 11

13 4. Detailed Results, by Cost Component The cost model (CCM-2006) that underlies KPMG s Competitive Alternatives may also be used to compare overall costs, and also to compare component costs. Exhibit 4.1 presents an overview of component costs for the four Australian cities, based on the overall twelve-industry results: Initial investment costs Adelaide s initial investment costs are similar to those in Melbourne, and are lower than those in Sydney and Brisbane. Property acquisition (real estate) costs are the source of much of the differential. Labour costs Adelaide has the most cost-competitive salaries and wages among the four cities. Its total labour costs are comparable to Brisbane, and are lower than Melbourne and Sydney. Lease costs Adelaide s lease costs are lowest among the four cities. Transportation and utilities Adelaide s costs are highest among the four cities, reflecting Adelaide s geographic location and costs of accessing markets. Taxes Adelaide s income and other taxes are competitive with other Australian cities. Overall Adelaide s business cost advantage over Sydney and Melbourne is driven primarily by its competitive labour cost environment. Adelaide s cost advantage over Brisbane results primarily from its lower real estate costs. Detailed comparisons by cost component are also available for each of the seventeen industries. Page 12

14 Exhibit 4.1 Selected comparisons by major cost component Overall results (US $ 000s, 12-industry average) Australia Adelaide (Rank) Brisbane Melbourne Sydney Initial investment 9,116 (2) 11,046 9,056 11,412 Annual Revenues 1 15,792 15,801 15,904 15,956 Annual Costs - Salaries & Wages 4,309 (1) 4,343 4,604 4,695 - Statutory Benefits 605 (2) Other Benefits 802 (1) Total Labor & Benefits 5,715 (2) 5,714 6,063 6,207 - Facility Lease 272 (1) Transportation 325 (4) Utilities 472 (4) Interest & Depreciation 619 (2) Non-income Taxes 39 (2) Location-insensitive Costs 5,557 5,557 5,557 5,557 - Income Taxes Effective Rate 30.0% (3) 30.0% 29.9% 29.9% Total Annual Costs 13,837 (1) 13,874 14,020 14,358 Index (US=100.0) 91.1 (1) Revenues are not identical among cities because a few of the 12-industry operations are modelled as cost-plus subsidiaries of larger firms (visit for fuller explanation). Page 13

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