AFG Venture Group Dispatches

Corporate advisory and consultancy in Australia, South East Asia and India.

COMPARATIVE OPERATING COSTS IN ASIA 2016

January 16th, 2017

There have been many comments in relation to the operating costs in Asia and how much lower they are when compared to Australian costs. The commentary usually revolves around the cost of labour, and the “need” to reduce that cost. This analysis clearly shows that while labour costs are a factor, the major factor is what we have termed as Cost of Doing Business, CODB, all those regulatory impositions which add cost to any endeavour

 

 

 

 

 

 

 

 

 

 

Glen Robinson has spent the last 25+ years focussing on the establishment and development of cross border alliances, joint ventures, mergers and acquisitions, particularly in the manufacturing, processing and distribution areas, and particularly targeted to Asia. These corporate advisory activities are based on many years’ experience in management consultancy, and he has worked with a wide range of industries from agriculture, government through to manufacturing, distribution and service industries. He initially gained his Asian experience as chief executive officer for the Asian subsidiaries and joint ventures of a major international manufacturing and marketing organisation.

Glen sits on the board of many Asian related business organisations and has for many years advised a number of Foreign Investment Boards in the Asian region.

1.INTRODUCTION

There is often the debate about the cost of goods produced or processed in the countries of Asia compared to some of the more developed economies in the western world. Most of the commentary seems to revolve around the differences in the cost of labour, however, the hypothesis tested in this analysis is that is only half the story as the “Red Tape” effect is quite significant.

Labour costs are a component of the significant cost differential, but it is not the most significant. The concept of Cost of Doing Business [CODB] is explored and while no attempt has been made to actually define CODB, it may be very loosely described as all those other factors and costs, including profit, which are not directly related to labour costs.

This analysis demonstrates that the CODB factor is extremely high and can be a main reason for high costs in most operations particularly in both manufacturing and distribution. In a western country the CODB may be 4 times of that in a developing Asian country.

2.METHODOLOGY

It is extremely difficult to evaluate the effect of labour costs on the economy, and the usual approach is to list out the average or other measure of direct labour costs, and of course, using that method, Australia is one of the leaders in average wages.

In this analysis the adopted method was to identify a relatively small business which would, or perhaps more correctly, should, be essentially the same in a number of cities and that would allow cross border comparisons. While the ideal may be to have access to the financial structures of a cross border company, that is most unlikely to be readily available.

There are very few businesses in which many of the cost inputs should be common, so cross border comparisons are difficult to make. For this analysis we have identified one business which theoretically should have the same cost structure across most economies excluding the labour component, particularly in relation to capital costs of equipment, and the most significant consumable, and if there are differences they can be attributed solely to the local factors of direct labour costs and CODB.   That business is the operation of a taxi service.

The following cities selected for comparative analysis were:-

  • Sydney, Australia
  • New York, USA
  • Frankfurt, Germany
  • Paris, France
  • Auckland, New Zealand
  • Jakarta, Indonesia
  • Kuala Lumpur, Malaysia
  • Bangkok, Thailand
  • Makati, Philippines
  • Ho Chi Min City, Vietnam
  • Beijing, China
  • Mumbai, India

3.WHY A TAXI SERVICE

In attempts to identify a business which can be legitimately used for cross border comparative purposes, without compromising the confidentiality of the business itself the number is quite small. The owners or managers of a privately owned business or even a publically owned business are unlikely to allow a public examination of the cost structure of at least several of its businesses, and the taxi service has been deemed the most likely information source for several reasons: –

  • The service is basically common across the various countries
  • The capital inputs are similar, ie a 5 seater motor vehicle, which are a common cost
  • The major consumables, ie fuel, spares and replacement parts, should be a common cost.
  • The taxi service generally is free standing business and is not part of an international ownership in which the operation and fare structure may be imposed from “head office”.

Any variations in those costs are almost certainly attributable to local requirements.

The other major cost, the labour associated with the driver, can be identified and treated separately, and when the labour is taken away from the total fare income, the remainder has been termed CODB. By definition CODB is all those costs except the direct labour cost. For completeness, the Labour cost is shown in Appendix 2.

4.FARE STRUCTURE

The fees associated with hiring a taxi in the various cities is shown in the accompanying table, and the detailed costs taxi-hiringand exchanges rates are shown in Appendix 1

There are at least 3 components to the hiring charges of a taxi

  • The Start-up cost [or flag fall] which is independent of the distance to be travelled
  • The cost per kilometre of travel [one way], and
  • The waiting time [per hour] if the vehicle has to wait at the passengers request

It should be noted that “add-ons” are NOT included, and these may be surcharges for out-of-normal hours; long or short distances; number of passengers; specific locations, airports etc; use of credit cards for payment; tolls and entrance fees; VAT or GST or other government charges.

5.TYPICAL DAY typical-day

The Taxi total income are exclusively hiring fees which are a function of the day’s activities, and those have beenestimated based on advice from the NSW Taxi Council office in Sydney which provided the following statistics in relation to the daily hours for the taxi and the driver. The 4 scenarios ranging from a very lightly loaded day through to an extremely busy day, are outlined in the accompanying table.

 

6.COST OF DOING BUSINESS

The Taxi hiring fees or service fees and how it is derived is certainly a function of the day’s activities, and the various costs associated with it. Those have been calculated and are included as Appendix 3, and the summary is shown in the accompanying table. cob

It is clearly demonstrated that the CODB is a significant part of the total income in both developing and developed countries, but the CODB in the developing countries is much lower than it is in the developed countries.   The average daily CODB of those developed countries shown is $A401 and for the developing countries it is $A97, which implies that the developed countries are at least 4 times the cost of the developing countries in relation to CODB

The cost of labour is a significant cost in the developed economies, but it is less than the CODB.

 

 

7. BIG MAC INDEX

The Big Max Index [BMI] was a light hearted invention by the Economist just over 30 years ago and it has big-macendured the passage of time. It was developed to demonstrate the difference in currency values but it ignored the CODB, which as shown by the analysis in this presentation, can be quite significant. The current BMI is shown in the accompanying table, and it clearly shows that the BMI in those Asian countries lower than that of the Western countries.

 

 

 

 

8.UBER EFFECT

We have seen the Uber service enter the market in Australia, much to the chagrin of the established taxi industry and the regulators. The Uber business structure is such that it attacks that portion of CODB which is not directly attributable to owning and driving a vehicle which has passengers, therefore all the additional costs, such as high level insurance, the capital cost of the taxi “plates”, the additional vehicle inspections etc are all avoided. At least for the short term.

These “disruptive” business structures will almost certainly increase in number as more experience is gained with the application of technology, and it is expected that measures will be developed and adopted to partially return to the status quo, however, it is anticipated that significant changes will still occur.

9.SUMMARY

While this analysis may be seen as “approximate” the differences are so significant that minor variations would not change the hypothesis; that the Cost of Doing Business in Asia is significantly less than doing business in a developed country. There are several interesting points of information

  • The labour costs in Australia, and other developed countries while they may be significant, they are generally smaller than the CODB
  • Presuming that the principles of this analysis can be translated to other operating or processing business, the CODB would probably be higher as there is usually real estate and buildings with the attendant costs to be considered, which is not a factor in the taxi business
  • Perhaps, it is the CODB which should be considered as a target for cost reduction exercises.
  • It is difficult to see that the CODB in Asia could be an impediment or a significant hindrance to an investment in the region.

 

The actual ratio of CODB to total cost is dependent on the industry, and it can be presumed that the labour intensive industries are going to have a lower CODB ratio than most other industries, and in very few industries would the labour costs be a higher than those of the CODB

 

Glen Robinson

AFG Venture Group

Mob: +61 412 229 664

Email: glen.robinson@afgventuregroup.com

APPENDIX 1: DAILY COST OF TAXI HIRE

appendix1

 

APPENDIX 2: LABOUR COSTS

labour-costs

 

 

 

 

 

 

 

 

 

APPENDIX 3: THE DAILY CODB

dailycodb

 

 

 

APPENDIX 4: THE BIG MAC INDEX

big-mac-index