Last year, ECA International’s cost of living survey placed Hong Kong as the 33rd most expensive place in the world in terms of day-to-day living expenses for expatriates. The cost of living in Singapore was far cheaper – it was ranked way down at No. 68.
No longer. Last week, ECA ranked Hong Kong at No. 45 – and Singapore at No. 36. “Inflation in Hong is about 5.5% in the last 12 months, whereas Singapore’s is just under 4%,” explains Lee Quane, Regional Director, Asia, at ECA. “But the Singapore dollar has appreciated against the Hong Kong dollar by 10% in the last 12 months alone. So you take that 4% increase in prices, you factor in the 10% increase in currency, then obviously that puts Singapore above Hong Kong in terms of cost of living.”
Quane spoke to CFO Innovation’s Cesar Bacani about the latest survey, other ECA studies on accommodation and international assignee destinations, as well as how companies can deal with the rising cost of sending expatriates to other markets. Excerpts:
So it seems like it’s actually cheaper now to assign expatriate staff to Hong Kong rather than Singapore.
The total package in Hong Kong is still slightly higher than it is in Singapore, but the Hong Kong premium that companies used to pay to employ expatriates in Hong Kong rather than Singapore is much lower now than it was five years ago. The one thing that goes against Hong Kong is the higher cost of accommodation. While housing is increasing in Singapore a lot, it hasn’t gone up to the same sort of levels as in Hong Kong.
But Singapore has now overtaken Hong Kong in terms of cost of living – it’s now ranked higher. This means the relative cost of living has jumped much more in Singapore over the course of the last 12 months than it has done in Hong Kong.
Because of inflation?
And currency. Obviously in Hong Kong, everything is denominated in Hong Kong dollars, which is a relatively weak currency. So while you’ve got high price inflation, that’s being offset or counterbalanced by the weak currency.
Inflation in Hong is about 5.5% in the last 12 months, whereas Singapore’s is just under 4%, so prices have not gone up in Singapore dollar terms by anywhere near as much as in Hong Kong dollar terms. But the Singapore dollar has appreciated against the Hong Kong dollar by 10% in the last 12 months alone. So you take that 4% increase in prices, you factor in the 10% increase in currency, then obviously that puts Singapore above Hong Kong in terms of cost of living.
Does this mean that more companies will be choosing Hong Kong as regional base rather than Singapore?
Not necessarily. If you’re looking at total cost, the cheapest place is Karachi. It’s got the cheapest accommodation, it’s got the lowest cost of living, it is pretty much the cheapest place in Asia to move an international workforce.
However, no one will really move there because you don’t really have the market. One of the reasons why companies are in China is to produce for the world and for 1.3 billion people in China. You don’t have that in Pakistan. Likewise you don’t really have logistics to elsewhere in the world. You’ve also got the security issues, the corruption issues and so on and so forth.
At the end of the day, the company’s decision is [influenced by] cost but it’s also about market. One of the other surveys we also do is where companies send the most international assignees to. The results: the USA is No. 1, UK is No. 2, China is No. 3.
Why are companies still sending international assignees to the US and UK? Those markets have high unemployment rates.
The US remains the biggest consumer market in the world. It has 9% unemployment, but in some states, the unemployment is really among blue-collar workers. There’s still a shortage of skilled workers. That’s why you still have a lot of US companies bringing in people from India to do IT functions.
Why do companies still send staff to the UK? It’s the world’s financial services capital. Yes, we can find people locally in the UK workforce, but again can we find people with the right skills, can we find people with the right expertise, can we find people who understand our corporate culture? We can’t, so we still have to send international assignees.
Likewise, what is the most expensive place to deploy international assignees in Asia? Probably Japan, where accommodation costs are among the highest in the world. The cost of living in Tokyo is the highest anywhere in the world, as shown by our latest survey. Tax rates are much higher. The total cost of employing an expatriate in Japan is much higher than if I were to send that person in Hong Kong. Why am I still sending that person to Japan? Because of the Japanese market. You need to service Japan.
How do other Asian countries rank in this assignees survey?
Off the top of my head, after China, it’s Singapore and Hong Kong, then you’ve got places like India and Vietnam. Outside of the US and UK, everyone is sending staff to Asia. This has been going on for some time. People have been sending staff to China now for ten to 20 years, uninterrupted.
Hiring locally in Hong Kong and Singapore is probably difficult, given the tight labour markets in these two cities.
In many cases it’s difficult. In Singapore, the current unemployment rate is 1.9%. Likewise in Hong Kong, the current unemployment rate is now about 3.4-3.5%. Most of those people who are unemployed are long-term structurally unemployed. So if you’re a multinational organization, for example, looking to expand, you’re not really looking at that 3.5% unemployed, because they won’t possess the skills that you need. You’ll have to bring in people from other markets.
Are there cases where you can pay your expatriates local rates?
Yes, if you’re bringing in staff from somewhere like Vietnam, China, Myanmar, etc. where the base salary in the home location are so low. So the person is attracted to go to Singapore or Hong Kong for the offer of a higher salary and a better standard of living.
So why don’t companies just set up in those markets? If you’re importing from Malaysia or Manila, why not just set up there?
You can look at a place like Manila. Good workforce, ready supply of people who are skilled, able to work globally . . . on the other hand, high tax rates, bad infrastructure, issues with corruption. Also, if you’re a regional MNC, you’re looking for a location which is linked to the region. In Hong Kong, you’re linked to every major city in Asia, pretty much. Singapore you’re linked to every major city, in terms air links, etc. Whereas if you’re based in, say, the Philippines, you’re not, unfortunately.
And at the senior levels, I imagine companies would be sourcing from their home locations anyway, which will be the US or Europe.
Yes. Typically when you move foreigners into Asia, there are two ways in which you can determine their salaries. One, you can benchmark against the local market. That local market might be the local market for local nationals. On the other hand it might be the local market for expatriates in the host location.
If you look at Hong Kong and Singapore, for example, when companies say that they pay their expatriate staff based on the local market, many actually never do. It’s not in line with what a local national would be paid. It’s basically in line with what the average expat salary will be in this location.
The other approach is to reference the person’s salary that they would have earned in their home location. For example, if we bring someone out of the US into Singapore or Hong Kong, rather than referring to the local market, what we do is refer to the salary that this person earned in the US and you adjust it for differences such as taxation and cost of living.
The main aim of this salary approach is what’s known as ‘no gain, no loss.’ You keep the person’s compensation whole. They receive a salary in Hong Kong or Singapore that ensures they enjoy the same standard of living as the corresponding salary would have given them in their home location. So their taxes are looked after, their standard of living is protected.
These international assignees are typically compensated in two currencies because they are only there for a defined period of time, one year, two years, three years. During that time, the company acknowledges that you have commitments in multiple locations. If I’m being seconded from the US to Singapore, I may have my mortgage in US dollars. So when you’re paying me, you’d have to split my salary. So you give me a certain percentage in US dollars, and you have to give me a certain percentage in my host currency, where I allocate money on a day-to-day basis.
So your latest cost of living survey implies that companies with assignees in Singapore and Hong Kong will need to increase allowances to make good on ‘no gain, no loss’?
With these types of packages where you bring in somebody and you make reference to what they would have earned, that basically means that the salary structure of these people have to increase, because you’re having to pay higher allowances in order to protect their purchasing power.
So it seems like companies will just have to grin and bear it. They need to send international assignees out, regardless of the cost. So all they can do is manage the process at the edges.
You’re right. There are reasons why companies still employ international assignees. One is leadership. To be the local CEO, MNCs usually require people who have got a lot of experience and who have been with the company for years and years. You don’t necessarily find that in the host location. This is true even when you’re sending people to skills-based projects, where there’s a short-term need for those skills in the host location.
The main changes are the peripheral changes. Look at your assignee numbers. Do all of them have to be assignees? Can we find these people locally or can we source these people locally?
If you’ve got people in the host location for a relatively long term, you sent them out or you recruited them about ten years ago and they’re still there, then companies should think: Are we overpaying these people? Do we actually need to review their compensation structure? Localize them? Move them onto a more host-based compensation package?
If we’re employing this person in a host location for ten years, are we really going to move them back to their home location? Probably not. So therefore do we need to pay them a salary which assumes that they’ve expenditures in multiple locations? Do we still need to ensure that the salary paid these persons allows them to pay their mortgage back in the US? No. Why? Because our relationship with this employee is purely here in Hong Kong, is purely here in Singapore.
But the person will feel bad to have his compensation reduced.
That’s what companies have to manage when they’re trying to cut costs. There are ways in which you can reduce these overtly, and there are ways in which you can reduce these costs covertly. Reducing benefits, for example, housing allowances and so on, rather than a person’s cash compensation, is generally easier to do.
Another strategy is to hire locals, where possible. So we increase the skills levels of our employees, we train them better. We continue to provide ongoing training.
We can also increase productivity. We don’t necessarily need to increase our workforce in order to increase our output. If you give people better tools like technology, they can work more productively.
Can we reduce costs elsewhere, for example by assigning those roles which assignees are doing now to cheaper locations, or even shifting some of those roles which we think we’re going to have problems staffing in Hong Kong or Singapore in the next few years. Can we ship them offshore as well?
How about sending out people with no families on international assignments?
That would be cheaper. I don’t have to provide you with a three-bedroom or four-bedroom accommodation. I don’t need to pay for your children’s schooling. That could reduce costs considerably.
But when you get into the senior levels, and they’re the type of people who will be international assignees, that’s not going to happen. You’re not going to find too many single people because your senior-level people, they’ll be the ones in their 40s, 50s, 60s, they are the ones you need for those roles and so you’ll have to bring them and their families overseas.
So not all expats are compensated the same? It also depends on whether they’re single or have families and other circumstances?
Exactly. We see more and more companies move into more varied policy, defining the type of compensation structure based on the business reasons for the assignment. Is this assignment business-critical? If so, we’ll have to pay a full expatriate package.
Is it career development for them? Are they actually benefiting from the assignment? If so, maybe we can encourage them to go on local salary or we pay them a scaled-down version of our international package.
Companies can also look at their travel and expenses policies.
Yes, that’s something’s that changed. Do we need to put somebody in a five-star hotel? Is a four-star hotel good enough? A lot of companies have reduced business travel as much as possible. They’ve shunted people down into economy from business class; first class into business. Western companies generally are a lot more cost-conscious about business travel than are Asian companies, so there’s scope for Asian companies to review their business travel policies.