The impact of electricity cost on domestic, nearshore and offshore location decisions
by King White, on Oct 15, 2014 8:55:00 AM
Most companies assume the impact of relocating or expanding into a nearshore or offshore location will yield massive savings primarily due to labor arbitrage. However, most people don’t realize the labor savings can be quickly eroded due to hidden business expenses related to items such as utilities, government taxes, labor laws, travel expenses, start-up capital and other related costs. To address these overlooked cost factors, Site Selection Group has targeted electricity costs to illustrate the cost implications on call centers, manufacturing plants, distribution centers and data centers.
Assumptions utilized for the analysis
For purposes of the comparison, Site Selection Group analyzed four different types of operations that companies may have within their real estate portfolio. Industry standard operating times and peak demand needs were estimated to calculate the electrical usage required during each year. The following table summarizes the assumptions:
Project Type |
Peak Demand (KW) |
Days per Week |
Hours per Day |
|---|---|---|---|
| Call Center | 250 | 7 | 24 |
| Distribution Center | 1,250 | 7 | 16 |
| Manufacturing | 3,000 | 7 | 16 |
| Data Center | 8,000 | 7 | 24 |
Up to 400% cost differential identified
To illustrate the geographic financial implications, electrical rates across 20 metro areas worldwide were utilized to calculate the impact on annual electrical costs. There was almost a 15% differential of costs within metro areas in the United States while locations like Mexico yielded a 78% premium for electricity over the lowest cost location. The biggest cost differential was in Central and South America where electrical rates were the highest — a staggering 394% more than the lowest cost location in Dallas.
Annual Electricity Costs
City |
State/Country |
Electricity Rate |
Call Center |
Distribution Center |
Manufacturing Plant |
Data Center |
| Dallas | TX | $0.07 | $148,512 | $495,040 | $1,188,096 | $4,752,384 |
| Birmingham | AL | $0.08 | $163,800 | $546,000 | $1,310,400 | $5,241,600 |
| Albany | NY | $0.06 | $131,040 | $436,800 | $1,048,320 | $4,193,280 |
| Detroit | MI | $0.08 | $179,088 | $596,960 | $1,432,704 | $5,730,816 |
| Phoenix | AZ | $0.08 | $170,352 | $567,840 | $1,362,816 | $5,451,264 |
| Windsor | Canada | $0.10 | $222,593 | $741,976 | $1,780,742 | $7,122,969 |
| Hanoi | Vietnam | $0.10 | $222,593 | $741,976 | $1,780,742 | $7,122,969 |
| Monterrey | Mexico | $0.12 | $264,809 | $882,696 | $2,118,469 | $8,473,877 |
| Bangkok | Thailand | $0.12 | $264,809 | $882,696 | $2,118,469 | $8,473,877 |
| Pune | India | $0.13 | $272,484 | $908,281 | $2,179,874 | $8,719,497 |
| San Jose | Costa Rica | $0.13 | $283,998 | $946,659 | $2,271,982 | $9,087,926 |
| Changzhou | China | $0.13 | $291,673 | $972,244 | $2,333,386 | $9,333,546 |
| Manila | Philippines | $0.15 | $330,051 | $1,100,171 | $2,640,411 | $10,561,644 |
| Krakow | Poland | $0.16 | $356,148 | $1,187,162 | $2,849,188 | $11,396,751 |
| Manchester | United Kingdom | $0.18 | $383,781 | $1,279,269 | $3,070,245 | $12,280,981 |
| Sao Paulo | Brazil | $0.19 | $410,645 | $1,368,818 | $3,285,163 | $13,140,650 |
| Guatemala City | Guatemala | $0.19 | $410,645 | $1,368,818 | $3,285,163 | $13,140,650 |
| Managua | Nicaragua | $0.20 | $425,997 | $1,419,988 | $3,407,972 | $13,631,889 |
| Leipzig | Germany | $0.25 | $536,142 | $1,787,139 | $4,289,133 | $17,156,531 |
| Santo Domingo | Dominican Republic | $0.34 | $733,021 | $2,443,404 | $5,864,169 | $23,456,675 |
Conclusions
The United States is clearly positioned as one of the lowest cost countries to operate, which provides the country a competitive advantage over nearshore and offshore destinations. It is also recommended that you try to competitively bid and negotiate these electricity rates as there will be additional savings opportunities found. However, international locations may leave little to no room for negotiations due to government-controlled utility providers. There may be no negotiation leverage to achieve better rates. Bottom line: It is critical that companies conduct the proper due diligence to identify these hidden costs when considering where to relocate or expand their next operation.
