The Focus on Automation over Labor Shifts Industrial Site Selection Strategy

Any Econ 101 student knows about the historical shift from labor-intensive manufacturing to more capital-intensive operations, and we’re currently in the midst of another industrial revolution as advances in automation increase the role that capital-intensive machinery plays in manufacturing compared to labor. COVID certainly didn’t cause this latest shift, but it did accelerate it.  

This continued shift from labor to automation continues to change what really drives site selection decisions. Not only does it impact highly advanced operations like those in semiconductors, clean energy, and batteries, but it also affects the processes of almost every manufacturer.  

Site Selection Group, a location advisory and incentives firm, sees the trend every single day as our clients’ projects have more machinery and equipment and declining levels of employment. Other times, we work with clients who are upstream in the process and are considering whether to invest in new, automated machinery and equipment in an existing facility, as part of a growth strategy, or as part of a relocation and consolidation project.  

Three key site selection drivers can play a key role as companies decide whether it makes sense to invest in automation, and if so, then they need to identify the most cost-effective place to execute that strategy:  

1. Property Tax

As capital investment in machinery and equipment, automation, and advanced facilities increases, the impact of different real and personal property tax rates across states, counties, and municipalities begins to play an outsized role in site selection decisions. Property taxes aren’t the largest share of a company’s budget, but they’re one that can swing wildly from site to site and state to state. For example, some states and municipalities have effective property tax rates below 1 percent, while others have rates more than 3 percent. And some states don’t tax it at all. For a $10 million investment in taxable machinery and equipment, that difference exists, but it’s unlikely to drive a decision. For a $1 billion investment, that property tax treatment can almost single-handedly drive the decision. As a result, it’s critical in the site selection process to consider an estimated capital expenditure to ensure that property taxes are accurately estimated. While Site Selection Group advises that incentives shouldn’t drive a site selection decision too early in the process, it is important to understand potential property tax abatements available in otherwise favorable locations that could offset those expenses.  

2. Workforce Skill Level vs. Availability

As automation increases, so do the skill requirements needed to operate that advanced machinery. At the same time, headcount requirements can fall in more automated facilities.  As a result, Site Selection Group sees more companies taking a closer look at the availability of highly skilled labor, not just sheer labor force statistics. There are examples of mid-sized and even smaller markets with a large presence of highly skilled production workers who have experience with automation. Furthermore, we see more companies focusing less on minor differences in target wages. If you’re going to invest that much capital into a new facility, it makes sense to pay a premium wage to get the right talent.    

3. Utilities

This one can be a bit trickier. Some highly automated machinery can be very utility-intensive, while others can be much more efficient.  That utility profile can play a significant role in drawing fine distinctions across states with higher and lower electric costs, and across communities where water and wastewater costs can vary widely even within the same region. Regardless, it’s critical that companies, whether in preliminary stages of strategy planning or finalizing a site selection decision, make the right assumptions on utility needs for a more automated plant.    

In summary,  increased automation doesn’t fundamentally change the drivers in site selection; however, it can reorder which ones have the largest impact.

Each company’s machinery and equipment, workforce, and utility requirements are different, and that profile can lead to different decisions.  

As an example, California isn’t often at the top of the list of cost-competitive locations. However, a capital-intensive operation that requires limited but highly skilled labor and has engineered its equipment to minimize electricity use might carefully consider markets in that state compared to other Western alternatives.  

Site Selection Group is happy to work with companies at various stages of their decision-making process, from those just starting to test different automation scenarios to those who have clearly defined their needs and are ready to select a site.