INTHEBLACK chose five regional hubs and checked out the cost of doing business there. What did we find?
By Clifford Coonan
The global workforce is now more mobile than at any time in history. Businesses are crossing borders to establish satellite operations in booming territories. Opportunities may abound, but it is the cost of doing business that's vital when it comes to making key decis-ions on where to set up shop.
Shanghai, Hong Kong, Singapore, Kuala Lumpur and Perth were chosen as key cities, not only because they are either major commercial centres or boom towns, but because they are key cities where many CPAs work and live.
We investigated property rentals, both commercial and residential, staffing issues and the tax situation. Infrastructure, including transport and educational opportunities, was also considered, as quality of life is becoming as big a draw as salary or the prestige of a company to attract key staff, especially if the key worker has a family to consider.
Shanghai
Shanghai has always had a strongly capitalist approach to things, which led to it being treated as a bit of a backwater during the days of Mao Zedong and the doctrinaire communists.
These days, socialism with Chinese characteristics means there is no shortage of big names in Shanghai - Volkswagen, General Electric, General Motors - they're all here, keen to ensure they are not left behind in taking a stake in the burgeoning market. Their employees can be found in the gleaming precincts of the Pudong district.
As it prepares for the Olympics in 2008, Beijing has tended to dominate recent headlines, but Shanghai is still far ahead of the northern capital when it comes to facilities and infrastructure. It grows in sophistication every day.
In a research document, the property company Jones Lang LaSalle talks about Shanghai's rapid process of maturing to the point where there is now a core central business district. 'Fifteen years ago, being in Shanghai meant being in Hongqiao or the Shanghai Centre,' runs the report, co-authored by Jones Lang LaSalle's Anthony Couse and Remy Chan. 'Demand was so hot, tenants were doing business out of hotel rooms.'
During the late 1990s pockets of new office developments started to appear. 'Since then, the positioning of thousands of businesses in Shanghai has reshaped the relationship between these distinct geographical clusters, redefining the city in the process,' explains the report.
There are precious few vacancies in downtown Puxi these days - less than 3 per cent compared to over 15 per cent in Beijing. Commercial rentals have been going up for some time in Shanghai and are currently at US$40 (A$48) per square metre per month, which is a rise of 20 per cent since last year.
'Rentals are rising because there's very little supply at the moment. That will change towards the end of 2008 as more supply comes on-stream, which should stabilise prices,' says Andrew Slevin, general manager of Knight Frank in Shanghai.
'In the rental market, occupancy is quite high and a lot of expats are coming in. At the level of over 15,000 RMB (A$2400) per month we're seeing quite high occupancy. Below that level there is a lot of supply, but above US$2000 (A$2400) per month there is quite a limited supply, prices are stable and we expect that to continue,' Slevin says.
For a 150 sq m three-bedroom apartment the average cost is around US$3500 (A$4200) per month.
Staff turnover in Shanghai has always been high and this continues to be the case. A survey showed that people below the age of 35 are in a job for an average of 17 months, while some industries such as insurance are seeing 70 per cent turnover. On most foreign investments you can expect 25 per cent or 30 per cent turnover in one year.
Taxation is a complicated issue. There are many different factors at work depending on where the candidate for tax comes from, and there are also deductibles to be taken into account. It is generally best to negotiate with authorities. Occasionally you will see districts competing with each other in terms of tax.
Infrastructure in Shanghai is booming, subway line number seven is going in and two or three more are planned in the next few years, with heavy investment in the system to alleviate traffic.
On the schools front, prices are high. Shanghai has lots of international schools, with fees running at US$20,000 (A$24,000) to US$25,000 (A$30,000) per year.
The health system is expensive for foreigners, as supply is limited and clinics are hiking their prices as they see that insurance companies are paying out for people to go to the expensive hospitals geared solely at expatriates. Logistics are still cheap in China.
Food prices are escalating, but from a low base. And the food is an important consideration when deciding whether or not to make the step of moving to China. 'Restaurants are as cheap as you want some of my staff eat for two or three yuan (3050 cents) in a local restaurant,' Slevin says.
'But you can also eat at Jean-Georges on the Bund for 100 times that'.
Hong Kong
A low-risk environment, with great access to China, a fantastic lifestyle and a pricey property market is how most people in the business community view Hong Kong.
Where Hong Kong wins is that it has managed to shrug off the problems that traditionally dog Southeast Asian cities - limited resources, high turnover of staff who lack experience, problems with business integrity and too much pressure to produce - and has started performing at a very high level indeed.
Hong Kong recently scored second lowest in a survey of risky places in Asia to do business, pipped only by its regional rival Singapore. The rivalry between the two cities is not going to go away, but Hong Kong retains its image as a London to Singapore's Zurich. This works to its benefit, even while its property market simmers.
One banker, who moved with a major European bank to Hong Kong from London, was amazed at how it is possible to get everything set up for living in Hong Kong in one day, including registration, getting a bank card, your Hong Kong identity card and your Octopus card for taking the MTR (Mass Transit Railway).
Gina McLellan, country manager of recruitment firm Hudson in Hong Kong, says the territory is expensive, but likes to point out the compensations to those thinking of moving there. 'Hong Kong is expensive. That's the one-word answer and there's no surprise there,' McLellan says. 'But there are two sides to this - accommodation is expensive but the cost of living is reasonable.'
As a place to do business, Hong Kong is an extremely sophisticated venue that scores highly on most of the usual gauges of a place to work. Its infrastructure is excellent. Taxis are cheap and widely available, ferries run between the islands, and the MTR subway system has to be one of the cleanest and most efficient in the world. Buses and minibuses complete the picture of a terrifically integrated transport system.
A big selling point is the tax system, which is effectively 16 per cent, falling to 15 per cent for some people once deductions are factored in. This compares favourably with the top rate of tax in other countries. The government adopts a generally laissez-faire approach to how people spend their money, and doesn't interfere. The return of power to the Chinese in 1997 did not bring about any major changes in how business is done in the territory. If anything the former colony has benefited from its closer links to the booming China market.
Real estate is among the most expensive in the world for commercial and renting. Although there is a variety of products on offer, don't expect too much space.
'You very quickly have conversations about square footage in Hong Kong, and square footage includes your share of the lift,' says McLellan, who came from Brisbane to Hong Kong one year ago. 'An expat can expect realistically to pay HK$50,000 (A$7760) upwards [per month]. In Australian terms it's a massive cost. And Australian people would expect a big apartment for that, which it often isn't.'
Expatriates tend to look at Hong Kong Island, or increasingly to Discovery Bay on Lantau Island, where rents are more reasonable. Occasionally foreigners look at Kowloon on the mainland, particularly the type of expat who is not necessarily looking for expat culture and who wants to experience more of Asia.
One major downside is air quality, and Hong Kong's air pollution is making it more difficult for companies to attract foreign staff to the territory, a survey recently released by the city's American Chamber of Commerce showed.
In the survey, which covered responses from 89 chamber members, 51 per cent of respondents said they had experienced difficulty recruiting professionals to come and work in Hong Kong, and 70 per cent said they knew of professionals who had declined to work in the territory because of the poor quality of the environment.
However, recent months have seen an improvement in Hong Kong's air quality and there are signs of a growing commitment to green issues.
Singapore
Singapore Inc is experiencing a personality change at the moment as it transforms itself from a low-cost outsourcing and production centre to a base for Singaporean and foreign multinationals higher up the value chain.
It's a great place to live, with terrific restaurants, high-quality schools and a deserved reputation as a solid legal and financial hub for a company. But the city-state's growing affluence, based on strong growth in home-grown non-manufacturing and knowledge-based enterprises, from financial services to tourism, has translated into higher prices, a booming real estate market and a surge in salaries for fresh graduates.
Mícheál Collins, who runs consulting firm Collins Kumarasinghe Associates, describes Singapore as a 'safe pair of hands in Asia', but says the days where the city-state was a low-cost production outpost and expat haven are gone. 'Expect the market to settle at a far higher price in five years' time,' Collins says.
'Lock in what advantages you can now. Plan for only the highest value-add work to be performed in Singapore and continuously seek to outsource low-cost manufacturing and services.
'At the end of the day your business plan here should reflect that,' says Collins. 'For Singapore, think educated workforce, think multicultural workforce, don't think low-cost workforce. You'll be wasting your time.'
Nominal office rental growth has been 120 per cent year-on-year in the first half of this year in Singapore, according to Jones Lang LaSalle data. In general, office per square foot rental prices are also on the upward swing from the average low of S$5 (A$4) p sq in 2004 to S$12 (A$9.50) this year, and are expected to continue upwards for at least the next two years.
The process of renting serviced offices is straightforward and there is still capacity, although you can expect to pay S$2500 (A$2,000) to S$7500 (A$6000) per month for a two-person office somewhere like Raffles Place, depending on quality.
The government's 'City Living' policy has seen a big move downtown, but the cost of condominium housing for expatriates is increasing rapidly.
Many expats are reporting that their rents have doubled upon renegotiation, causing thousands of foreign workers to seek accommodation in government housing blocks outside the city centre at prices that two years ago would have netted them a luxury condo within walking distance of work.
The situation is not helped by foreign companies paying high prices for accommodation, forcing the price upwards for anyone not working for a big company, and making administration and education expensive.
Phone calls are still competitive, and international dialling codes are available for low-cost trunk calls, and generally the online infrastructure is excellent cheap and fast. You can expect to be wired up instantly, although Singapore lags in areas like online banking.
English is widely spoken, but cannot be taken for granted. Malay is the national language, Chinese is the dominant language and English is the official language.
Personal taxes are low, ranging from 3.5 per cent for the range from S$20,000 (A$16,000) to S$30,000 (A$24,000) per annum to a fairly mild 20 per cent for S$320,000 (A$250,000) per annum and above. The first S$20,000 is tax-free. Corporate taxes are 20 per cent. Companies with turnover of less than S$5 million (A$4 million) do not have to audit their books, and the first S$100,000 (A$80,000) is tax-free for three years for new companies.
Companies may register for GST (recently hiked to 7 per cent), and must do so if their turnover exceeds S$1m (A$800,000) per annum. Singapore has double taxation treaties with over 50 countries, meaning it is an efficient place to do business if you book revenues from several jurisdictions.
Education is good in the private schools, but extremely expensive, with exorbitant rates for schools such as the American School. Public train transport is excellent and cheap in the city centre, but not so good outside the centre. Taxis are relatively cheap though not as widespread as in other Southeast Asian centres.
Kuala Lumpur
Arguably the cheapest place in Southeast Asia to do business, Kuala Lumpur has a lot going for it. The Malaysian capital can happily play to its competitive strengths in the region it's a significantly cheaper place to do business than regional counterparts Singapore or Hong Kong but it retains that Southeast Asian energy.
Office rents are currently running at US$146 (A$177) per sq m per annum, which is considerably lower than its neighbours - Singapore is US$965 (A$1172) per sq m per annum and Bangkok at US$201 (A$244), according to data from Jones Lang LaSalle.
And over the next couple of years, Malaysia's economy is expected to grow strongly. The underlying economic outlook is healthy - gross domestic product (GDP) is expected to grow 5.9 per cent this year, 5.8 per cent next year, and inflation is stable.
'One of the reasons that I have stayed here for so long is that I work for myself,' says Nicholas Ashby of Celadon Capital (Malaysia), a boutique investment bank that advises on raising capital and M&As and joint ventures. 'Arguably, Kuala Lumpur is the cheapest place to do business in Southeast Asia, when you take into account factors like there are a lot of necessities available - groceries, decent restaurants and housing.'
Ashby, who has dual citizenship with Britain and Australia, has been in Kuala Lumpur for 15 years.
'There are countries with a lower GDP per capita where housing is more expensive,' Ashby says. 'You can have a middle-class existence here at relatively low cost. In other countries such as China or Indonesia, you either live among the expat elite or among the ordinary people, which many people don't like. You don't have that here.'
The logistics are good and the cost of moving goods around is favourable. Ultimately, for anyone planning to do business in Malaysia, and Kuala Lumpur specifically, the fact is that you can survive on thinner profit margins there because of the lower costs.
In terms of renting office space, Jones Lang LaSalle sees an increasing trend where large corporations are moving to decentralised areas such as Bangsar/Pantai and Petaling Jaya. Rents are expected to keep rising in the city centre, but they are still lower than elsewhere in the region.
On the downside, the tax regime in Malaysia is not as favourable as in Singapore. There is a top rate of 28 per cent, with a corporate tax rate of around 26 or 27 per cent.
But there is flexibility in how the tax laws are applied.
Entrepreneurs also complain that the environment for hiring staff is not ideal, because there is a lot of moving around, with very few people staying in the same job for very long. Wages are relatively low for local staff, but there is a premium for quality.
Perth
Powered by the resources sector, Perth is in the midst of a heady boom. Shelley Glass is typical of many Perth businesses at the moment. It's phenomenally busy and turnover is increasing, but profitability is not rising at the same rate.
'Turnover has probably risen about 60 per cent in the past two years but the profits aren't anywhere as high as that,' says Shelley Glass general manager John Bosio. 'My family have been in this business for more than 30 years and we haven't seen growth like this. But four years ago the profits were higher.'
Shelley Glass specialises in glass products for the home and office, including windows, roofs and doors. The company is confronted with both supply and labour problems.
'We used to be able to place an order and have it in two to three days, now it is two to three weeks,' Bosio says. 'Lead time for jobs was four weeks but now it is 12 weeks. Because we work in the high end of the market we are always busy. But the resources boom has increased our work [and] that has caused some problems in attracting the right kind of employee. Most people wanting work have headed up to the mines, so there is a quality issue here.'
Recruitment companies, however, are relishing the job growth. 'Potential employees don't have to call us as we are calling them,' says Maryann McKenna, recruitment consultant for the Gel Group. 'Obviously the resource sector is prominent but the accounting and finance sector is also busy. There is one company that specialises in resources and currently has 2500 employees. The managing director told me he expects to double the amount of employees in the next five years.
'This growth is affecting wages, which are climbing steadily because it is so competitive. Some companies are trying to rely on internal databases to recruit but we are seeing recruitment companies pop up everywhere. Everyday I am getting calls from new clients.' In my 15 years in the industry I have never seen anything like it.'
Welcome to Western Australia, which with its diverse internationally competitive economy, leads the nation in economic growth, productivity, investments and exports.
Expanding at a rate of 14 per cent, the Western Australian economy is Australia's strongest and fastest-growing state economy, with unemployment at a record low of 3.3 per cent.
According to Stephen Moir, managing director of the Small Business Development Corporation in Western Australia, this looks set to continue. There is $23.3bn worth of projects currently under construction, and public and private investment in infrastructure in WA is estimated to reach $650bn over the next 20 years.
'In addition to this, the current mining and resources boom has created enormous opportunities for business of all sizes, across most industries,' Moir says. 'The only downside to all this is that Western Australia is seriously short of skilled workers to build and operate these world-class projects.'
Small businesses represent around 96 per cent of all businesses in the state, and account for over half of all employment. Western Australia also has a solid track record for developing world-scale, technically advanced mineral and petroleum projects. While a record amount is being spent by the state government on training, the booming economy still needs thousands more skilled workers from interstate and overseas to make the most of opportunities.
It is mineral exports that are leading the way in creating employment and boosting the economy.
Western Australian exports to China, mostly of resources, have increased 340 per cent since 2003 to $13.8bn for the year to July, according to local government statistics.
Western Australia now accounts for 60 per cent of all Australian exports to China.Underscoring the state's importance to China, Chinese president Hu Jintao made Perth his first stop on his visit to Australia for the APEC Leaders meeting in September.
For the second quarter of 2006, the economy of Western Australia was 14 per cent greater than the corresponding quarter in 2005. Growth has since moderated to about 9 per cent for the year through June, according to the Australian Bureau of Statistics.
On top of continued demand from traditional markets like Japan and South Korea, annual sales for Western Australia's resource sector increased 25 per cent to $53.4bn for the year through June, the WA government reported in August.
The government has also estimated that another 180,000 skilled workers will be needed over the next 10 years.
As a result, housing prices have naturally increased. The Perth median price for June 2007 was $446,500, up 11.6 per cent from the June 2006 price ($395,000) that was up 33.8 per cent on the June 2005 price. In fact, since the beginning of 2004 the median house price in Perth has doubled.
'There has been extraordinary pressure on Western Australia housing prices and they have caught up to every state bar Sydney,' Brian Greig, from REIWA says. 'Another impact has been the jump in rent rates and vacancies, which got as low as 0.8 per cent but are now up to 2.1 per cent. Perth rents have been traditionally low but they have skyrocketed in the past year. The demand for housing has made it hard for first-time home buyers, as wealthy individuals look to purchase property as investments.'
The demand for office space is also not expected to slow down. 'The Perth office market is well and truly into its growth cycle,' says research analyst Alyson Martinovich Savills.
'We expect office demand to remain strong over the next three years. While white-collar employment growth has a strong correlation to net absorption, it does not account for the pent-up demand within the Perth market. This demand has been created by tenants being forced to re-engineer their existing premises to accommodate staff growth due to the lack of growth space available in the market.
'Supply should start to come on line late 2008. Those developments (currently under construction) yet to secure 100 per cent pre-commitment are expected to be fully leased upon completion. As a result, vacancy levels are expected to continue to fall until the market experiences some relief in the form of new supply, and this may see tenants leaving the CBD due to a lack of suitable accommodation. Rents are expected to continue to climb.'
A recent ABS survey shows that 89 per cent of Western Australian residents are easily able to get around through the use of both public and private transport. Education costs remain stable. Western Australia is looking like the state that will sustain Australia's record period of growth.
John Bosio and his team had better find some new suppliers.
