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September 11, 2008 |
Canada is open for international business, says KPMG, but other centres are also reaching for investment dollars
By Jason Rodham
Canada’s competitive position on the world stage remains strong, but threats to our long-term competitiveness and prosperity are rising, according to Competitive Alternatives 2008, a new report from KPMG.
The KPMG report quantifies what it would cost a foreign investor to open a new operation in more than 100 cities in 10 countries: Australia, Canada, France, Italy, Japan, Germany, Mexico, the Netherlands, the United Kingdom and the United States. This includes a range of expenses including securing Class A office space and industrial machinery all the way to the price of sales and administrative support. The report then tracks these costs against 17 strategic industries.
“From the perspective of cost competitiveness,” said report author Glenn Mair, the director of Vancouver-based MMK Consulting, “the big story at the moment is the value of the Canadian dollar.” Five to seven years ago, when Canada’s dollar was weak, a foreign company could save up to 30 per cent by investing in this country. With our dollar more or less at par with the U.S., it is “harder to convince the international investor that Canada is a good place for serving the North American market.”
As an example, Mair cited Dell’s recent closures of its Ottawa and Edmonton call centres and the accompanying loss of almost 2,000 jobs as evidence of this trend. On pulling up stakes, Dell pointed to the high value of the Canadian dollar as a primary motivation.
Dell, Mair said, simply never imagined the dollar could get to where it is today. “Maybe they decided they would move (those call centre operations) to India after all.”
However, Canada should not expect a landslide of closures and job layoffs like Dell’s simply because of the higher dollar. “One of the positives that we’ve been taking away is that, even with the dollar at par, Canada can still be cost competitive with the U.S.”
When you compare the costs of maintaining an investment in Vancouver with a small city in Alabama, he said, there will always be a significant savings for that U.S. community. But when you’re looking at the costs of doing business in comparable cities like Vancouver, Seattle or San Diego “it tends to be a break-even position.
“It’s not as if operating in Canada has become so outrageously expensive that you have to move back to the U.S.”
Other side of the fence
However, for Virginia-based Primus Tele-communications, Canada’s buoyant dollar actually presented a distinct opportunity to deepen its commitment in this country.
“A dollar of revenue billed in Canada is now worth 20 per cent more than it used to be” for a U.S.-based business, said AJ Byers, senior vice-president of business services at Primus Canada. Given that his company had already built a strong base in this country, “it made 20 per cent more sense” to increase that investment.
After 11 years of steadily building up its Canadian operation, he added, Primus recently opened two new Internet data centres in Edmonton and London to better serve its core Canadian market of small to medium-sized business customers.
Although Byers agreed that the cost to set up and run a shop in Canada would always be higher when compared to India or the Philippines, he said investors need to consider more than cost when plotting a foreign investment.
The direct expense associated with moving an operation like a call centre, for example, to another country is high, he said, and there are additional costs and skills sets required to both manage and maintain a global workforce. He also cited language barriers as a major impediment to serving clients effectively.
“It’s just not as easy as most companies think.”
Microsoft: look beyond cost
Parminder Singh, managing director of the Microsoft Canada Development Centre in Vancouver, said KPMG’s tight focus on probing business costs alone “should be taken with a grain of salt.”
“There are 68,000 things that go into when and where and how you develop a new centre. Cost is a factor, but it is not the only one.”
If a company like Microsoft “is going to create that spark that’s going to make that new idea or new feature really come alive,” he said access to a talented and well-educated workforce is the only factor that really matters. Vancouver is an example of this, he said. In addition to high quality of life, there is significant diversity and strong population clusters of Chinese, Indians and Koreans, nations which, Singh maintained, are known for producing large numbers of graduates in math and science.
Vancouver provides these foreign nationals with an immediate peer group, a vital factor in both attracting and retaining this demographic. “When people come from overseas, their worry is: where do I get food, where do I go to church, where do I go to meet my own?” Vancouver, he said, “provides comfort there.”
Singh suggested the greatest threat to Canada’s leadership in high tech was not its high tax base or skyrocketing housing prices in cities like Vancouver, but the small pool of locals who want to study math or science. Most of his 250 employees, for example, are foreign-born workers, “and that’s even the case for the ones we’ve hired who are Canadian.”
The equation, he said, is simple: “In order to get the best workers, you have to tap the global market. It’s a necessity.”
East vs. West, North vs. South
When comparing different Canadian provinces and cities, the Atlantic coast and cities like Moncton, St. John, Charlottetown and Fredericton were among KPMG’s most competitive in electronics/telecom manufacturing and call centres.
In addition to being the lowest-cost locations, the east coast has encouraged investment in high tech by offering inducements such as tax breaks and R&D incentives. “We have to give a lot of credit to the Atlantic provinces, particularly Nova Scotia and New Brunswick, for their approach to attacking the new economy and developing it in their provinces,” Mair said.
However, as evidenced by Microsoft’s investment in Vancouver, the larger centres—including Toronto, Montreal and Ottawa—will likely maintain their edge in the big knowledge-intensive industries like advanced software and Web/multimedia application development. The big cities, after all, “are where the action is for those businesses.”
Though he’s reluctant to be drawn into an argument of whether the East is a better location for investment than the West for a new high-tech business, Mair said there is “still a statement to be made” when comparing these two competing regions of Canada. All you need to do is study the significant rise in the cost of living in the West over the last several years. High costs for real estate in cities like Calgary and Vancouver, for example, make it harder for businesses and their employees to find an affordable place to put down roots. This makes the fact that it is “less expensive back east a lot more noticeable.”
In terms of Canada’s overall position on the world stage, Mair was fairly buoyant about Canada’s long-term investment potential. Of the four main emerging competitive blocks throughout the world, Canada is in a good position.
1) Mexico. The country maintains a significant cost advantage of around 20 per cent, but one should not rule out the trade-offs (such as concerns over corruption) that come with investing in some emerging markets.
2) Canada, the U.S. and Australia. “They are in a dead heat,” Mair said, with each maintaining very similar costs.
3) France, the U.K., Netherlands and Italy. Although costs are greater when compared to Mexico or North America, these countries, with their solid workforces and good universities, remain fairly competitive.
4) Germany and Japan. Things are not looking good for these two, given their extremely high cost of living and, particularly in Japan, rapidly aging workforce.
View the full report
SIDEBAR
Canada’s competitiveness quotient
| Sector |
Competitive ranking |
| Advanced software development |
#2
|
| Web/multimedia content development |
#3 |
| Back office/call centres |
#3 |
| Telecom equipment manufacturing |
#2
|
| Electronics assembly |
#3 |
Source: KPMG
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