Weak U.S. economy creates new rivals for B.C.

November 8, 2011

Tax-free US states could scoop up new business ventures

A weaker U.S. dollar is making it tougher for British Columbia to attract new jobs in one of North America’s hottest sectors.

It’s still cheaper to set up a medical technology company in Metro Vancouver than in markets such as Silicon Valley, Los Angeles, Boston or Toronto, according to new research from The Boyd Company.

But John Boyd Jr., a consultant based in Princeton, New Jersey, notes that jurisdictions including Florida, Texas and South Dakota are aggressive new competitors in the pursuit of med tech companies – and they’re making offers that companies with a strict bottom-line focus are finding hard to ignore.

“For the first time there’s as compelling case to be made for the U.S. versus Canada because of the weakened dollar,” Boyd said in a recent interview.

South Dakota for example has no state corporate or personal income tax – plus right-to-work labour legislation – and it’s already home to two medical research institutes.
Boyd says demand for medical equipment will spike thanks to aging baby boomers, and as U.S. President Barack Obama’s health care program expands services to 40 million people without coverage at present.

Boyd expects the program to endure: “ A lot of the chamber of commerce groups are very vocal in the U.S. about repealing Obamacare but the big employers, the multinationals, actually like it because it lowers the corporate burden.”

Boyd spoke with The Vancouver Sun during a recent visit to Vancouver, where he presented clients with research that reviews the cost of operating a medical devices manufacturing facility in 55 locations in the U.S., Canada, Mexico and Latin America.

“The U.S. economy is very soft right now but there are a number of macro-drivers that are fuelling this medical device industry,” Boyd said. “Biotech companies and medical devices companies are growing and doing very well in the U.S.”

Boyd compared the most significant operating costs in each jurisdiction — things like taxes and infrastructure — for a hypothetical 175,000 production plant employing 325 workers.

In Canada, those annual operating costs, amortized over 25 years ranged from $27.8 million US in Toronto down to $25.8 million Montreal.

Vancouver, at $27.5 million, fell in between. The most expensive jurisdiction was San Jose/Palo Alto at $30.7 million.

Vancouver was 11th.

“California is a lucrative med tech recruiting target for Vancouver’s industry-attraction efforts given the costliness and onerous tax and business climate associated with California,” Boyd wrote in a briefing paper obtained by The Sun.

Moreover, Vancouver is Western Canada’s med tech research hub and it’s well served by academic links to University of B.C. and Simon Fraser University, as well as access to “intellectual and venture capital” from Asia.

Boyd told The Sun that “generous” R&D tax credits are also beneficial for B.C. -- as is our national health care system.

“In the U.S., an employer will pay 40 per cent of their labour costs in pension and health care. In Vancouver the same company will pay 16 per cent.”

But he said B.C. needs to be monitoring what’s happening elsewhere if it wants to stay competitive.

While some costs – such as regulatory approvals – are fixed in North America, others such as labour, taxes, energy, real estate and shipping vary widely by geography.
“For many medical devices companies, strategic site selection is a way to address the cost equation,” he wrote in the report. “Improving the bottom line on the cost side of the ledger is often easier than on the revenue side.”

Labour costs are seen as “especially pivotal” – although Boyd sees advantages for companies based in Canad and the United States compared to jurisdictions that offer cheap labour: “Boyd is forecasting that a significant number of final assembly and quality control jobs within the medical devices and supplies industry will be washing back on the U.S. and Canadian shores over the next decade from places like China, India and the Caribbean Basin due to security issues, greater regulatory scrutiny, heightened patent, counterfeiting and piracy concerns.”

Don Enns, president of LifeSciences BC, which represents the med tech and biotech sectors, said one of Canada’s biggest competitive advantages is information about the health of its citizens.

“Wherever you have a single payer system that effectively tracks everything health-linked, from prescriptions to hospital visits, even to workplace safety, I think we tremendously underestimate the value of that data,” Enns said in an interview.

“With a single payer system we get everyone from the unemployed individual to a geriatric patient, to a baby that was born yesterday. If I go down the States, because of the way the health care system works, you tend not to get representative populations. The plans tend to be socio-economically stratified. You tend to get the upper classes.”

ssimpson@vancouversun.com
Twitter:@ScottSimpsun
© Copyright (c) The Vancouver Sun