Innovative Ways Manufacturers are Optimizing Location Decisions
by Josh Bays, on Aug 20, 2019 1:45:29 PM
It feels like the last several weeks have been a microcosm of the political and economic themes that have dominated headlines thus far in 2019. The Dow Jones Industrial Average has been volatile (swinging as much as 800 points in one day!), the Federal Reserve has cut interest rates, and there is stronger rhetoric around global tariffs. Apolitically, it is tough to ignore the increasing level of uncertainty that has entered the marketplace. As a firm that successfully weathered (rather well, I might add) the Great Recession, Site Selection Group can unequivocally say that nothing can affect manufacturing investment in the United States quite like uncertainty in the marketplace.
Although economists are largely divided on when we will experience the next recession, you can’t help but feel a potential economic storm brewing. While we hope whatever storm that might be headed our way is mild, there are several challenges on which our manufacturing clients seem to be increasingly fixated. Site Selection Group, a full-service location advisory, economic incentive and real estate services firm, helps clients develop effective location strategies to optimize their geographic footprint.
These three questions have been top of mind lately for our manufacturing clients:
1. Given current instability, how do I implement a U.S./Mexico cross-border diversification strategy?
It is not uncommon for North American manufacturers to have production assets in both the United States and Mexico. However, there are many companies that are heavily invested in one country more than the other. For these operations that have their proverbial production eggs in one basket, strong rhetoric around tariffs, currency volatility, workforce scarcity and regulatory issues can be a strong motivation for manufacturers to seek diversification strategies that will allow them to shift production capacities as political and economic winds change direction.
For example, Site Selection Group has a client heavily invested in Mexico that is considering locating incremental capacity in the United States. Under current conditions, the operating cost structure of the United States is 50% more expensive than Mexico. However, modest fluctuations in product mix, currency and tariffs could quickly close that gap. Philosophically, would you as a manufacturer pay an extra 10% in operating costs to diversify geopolitical risk?
2. What effect will accelerating the replacement of human capital with automation have on location decisions?
It has been well documented over the last decade that automation is decreasing the need for “touch labor” in the production process, albeit slower than many anticipated. Simultaneously, the overwhelming majority of domestic manufacturers are finding it extremely difficult to hire and retain a qualified workforce. The combination of these factors joined by rising operating costs and strong domestic consumer demand has companies accelerating their long-term strategy of substituting labor with increased capital.
Increasing capital with the intent of decreasing labor can have a dramatic effect on site selection drivers. For example, if wages and salaries, training costs, and employee benefits make up a smaller portion of your operating cost composition, companies can have more latitude in location options which can lead to better optimizing logistics networks. But at the same time, it places more emphasis on the tax treatment of that increased machinery and equipment investment, whether through nominal ad valorem tax rates, appraisal and depreciation schedules, and potential abatements and other offsets. Good companies and their consultants ask not only about the balance of labor and capital today, but what it might look like in the future.
3. How will a focused emphasis on quality of workforce and place influence my site selection decisions?
As domestic labor costs continue to rise and the labor cost delta from one market to the next shrinks, many manufacturers have a renewed focus on quality of workforce and quality of place to draw distinctions between candidate locations in their site selection process. As capital substitutes labor, quality of workforce is critical as the required skill sets of the workforce are elevated. Additionally, as the need to attract and relocate talent to a market intensifies if that skill set cannot be found locally, quality of place can be critical so that companies can recruit everyone from a highly-specialized tool & die worker, to executives.
It is factors like these that have influenced so many production projects toward the periphery of large markets or alternatively to mid-size markets that can offer many of the amenities of larger metro areas, but at a lower cost point with more accessibility (e.g. less traffic congestion). In Site Selection Group’s recent experience, corporate decision-makers tend to gravitate toward one or the other. But regardless, a quality site selection search should include quality options from both types of markets, and conducting on-site due diligence in both helps clients understand which solution aligns with their needs. Regardless of the ultimate market decision, location strategies like this often offer the optimal balance of site selection drivers and lower operating costs while retaining access to talent.
With change comes opportunity
This particular manufacturing site selection blog is not as data driven as most of the content published by Site Selection Group. Candidly, there is an uneasy feeling in the marketplace that is difficult to capture in a lagging data matrix. Therefore, we thought it beneficial to anecdotally discuss these important questions to which we find ourselves dedicating so many resources.
Because, one thing is clear: The political and economic landscape is changing. And as the saying goes, with change comes opportunity. Manufacturing site selection is no different. Now is the time for companies mulling over potential location strategies to fully understand their opportunities to grow, consolidate or relocate. For manufacturing firms with clear goals and priorities (and enough foresight to execute on that strategy), economic headwinds may provide an opportunity to optimize their footprint and come out of the other side of this potential downturn ahead of their competitors.