February 28, 2002 12:40 PM PST
When a city's cost is bad for business
San Francisco is the most expensive North American city for a high-tech company do to business, with an estimated average cost of $43 million a year, according to The Boyd Company, a consulting firm that advises major companies on location planning. For example, a company relocating to Baltimore from San Francisco would see a savings of about 21 percent, according to the study's figures.
And as if that's not incentive enough for companies to relocate, an increase in government spending on defense, centered in the metro Washington, D.C., area, and the lure of cheaper operating costs north of the U.S. border, are about to siphon more business out of Northern California.
"I have never seen a decline so rapid," said John H. Boyd, talking about the conditions that precipitated the study.
The numbers for the study were based on the average cost of operating a 500-employee facility.
Boyd, who has done location planning for 27 years as president of The Boyd Company, said he has watched with amazement as the unemployment rate in San Francisco has risen from 1.7 percent in January 2001 to 7.5 percent in January 2002. That figure doesn't compare favorably with the national average of 5.6 percent in January, Boyd said.
Things may get worse, he said, as companies head east and north, following the two biggest money trails of the post-Sept. 11 economy.
Venture capitalists "are saying, 'Show me the money,' and companies are concluding they have to be competitive on a global scale," Boyd said. In an economy where it is close to impossible to cut costs, cost reductions have a new importance, and site selection has become more critical.
"Canada is emerging as an alternative location for U.S. high-tech investments in the recessionary economy," Boyd said, citing a lower exchange rate, the elimination of tariffs under NAFTA (North American Free Trade Agreement) and the absence of corporate health care costs in a country with a national health care system. Several companies have already caught on to the trend: Mountain View, Calif.-based Intuit and Houston-based Compaq have both listed their Calgary, Alberta, facilities as among their most profitable, Boyd said.
"Many companies in the (San Francisco) Bay Area are also looking to Washington because of the vast government spending for the war on terrorism," Boyd said. John Hopkins University, which has locations throughout the Baltimore-Washington area, "is the center for bio-terrorism research, and the NSA (National Security Agency) is becoming the catalyst for billions and billions of dollars in electronic surveillance and Internet security spending by the federal government," he added.
"It's like Silicon Valley is returning to its roots; it was founded in the defense industry in the 60s," Boyd said.
Of the individual cities being considered, Baltimore; Vancouver, British Columbia; and Calgary are considered some of the most attractive. Baltimore was the cheapest U.S. location included in the study, at $34.4 million a year. Vancouver was the highest-priced Canadian city, at $35 million, and Calgary was the lowest, at $27.7 million.
Gartner analyst Michael Bell says the flight of high-tech companies from San Francisco to less expensive cities shows that the 2001 "tech wreck" is not yet finished wreaking havoc on the industry.
Santa Clara County, Calif., which includes San Jose, Calif., and most of Silicon Valley, came in second to San Francisco with costs of $41.7 million. New York was next, at $40.9 million and then Boston, at $39 million.
Of course, not every city in North America was considered. The study takes factors such as pre-existing technology centers, ease of travel, and other nuances into consideration. The Boyd Company has spent the last nine months doing everything from number crunching to interviewing mayors to come up with the survey cities, which are likely to become targets for expansion or relocation by the consulting firm's clients.
Though Boyd would not disclose which companies are considering relocation, he listed Compaq Computer, Chase Manhattan Bank, Pitney Bowes and Time Inc. as clients.
"These cities included in the study were not chosen at random; you will see them on the short lists of corporate-site seekers over the next 12 months," he said.