Tactics for Deploying Manufacturing Facilities in the United States

Today’s business dialogue surrounding international ventures is full of progressive axioms such as “the world is flat,” “business knows no borders,” and “we live in the global marketplace.” While these ideas at a certain level are true, the persisting reality for expanding businesses today is often the old adage, “the devil is in the details.” The U.S. distributor trying to import French cheeses, the pharmaceutical manufacturer in China seeking EU distribution channels, or the farmer in Sweden who wants to import genetically modified crops knows all too well that market hurdles are still very much alive and well.

At Cushman & Wakefield we assist global companies as they deploy assets around the world. In our role, we hear clients consistently ask the following questions: “What are the barriers to market entry?” “What should we know before we invest in that market?” “Once there, what are the rules we must abide by?” All are common queries without simple answers. Our advice when confronted with these questions is often the same: “You have to do your homework.”

This article is intended for international business leaders contemplating a manufacturing investment in the United States. We address key issues and tactics to be considered for such an effort, in the hope that readers can draw parallels between their own initiatives and the projects we have worked on, including our recent efforts supporting German industrial conglomerate ThyssenKrupp AG in its due diligence and decision-making to locate a $3.7 billion, 2,700-employee steel and stainless steel processing facility near Mobile, Alabama.

The United States as a Manufacturing Investment Destination
ThyssenKrupp’s investment in Alabama is a commanding reminder that foreign manufacturing companies continue to invest in the United States. Companies consider investment in the United States in order to access lucrative customer markets; operate under predictable and transparent business norms; avoid import restrictions; reduce transportation costs and supply-chain risk; and access advanced manufacturing processes and standards.

From the perspective of information availability and transparency, evaluating location opportunities in the United States is easier than in emerging markets and many foreign destinations. Substantial data on structural cost indices and macroeconomic indicators (e.g., corporate tax rates, incentive programs, wages, and utility costs) are available from third-party data aggregators, the federal government, and myriad state and local economic development agencies. Upon high-level review of such information, it is tempting for investors to conclude that facility-location decisions can be made from the desktop, and that there are many suitable places to establish a new facility.

However, in order to maximize and sustain competitive advantage, manufacturing facilities must be located in a fully optimized fashion, wherein many variables affecting implementation timing and ultimate success are prioritized and quantified through a due-diligence and decision-making process. Furthermore, companies undertaking a location project in the United States are bound to discover that some locations cannot accommodate their needs related to utility infrastructure, transportation access, labor supply, and profitable operating-cost structures.

The Foundation for Success
Three essential elements are required to successfully launch a location project: (1) building an appropriate team; (2) identifying a realistic project timeline; and (3) defining the facility operating requirements. When these activities are not done properly, project progress can be derailed at critical stages.

1. Diverse internal and external team: Team composition will vary throughout the project, but at the project start the complete team should be identified and members’ involvement levels programmed. Corporate functions represented on the team should include operations, finance and tax, supply chain, legal, public relations, human resources, and marketing. These functional groups may ultimately participate in the final decision, so their early involvement builds consensus as the project evolves. In addition, a project management and executive leadership team should be designated to execute key decisions, allocate personnel/funds to address project needs, and provide upward reporting to senior management.

It is advisable to assemble a diverse team of external, U.S.-based resources that include engineering and environmental consultants to conduct site assessments and secure development permits; real estate service providers to secure land or building property; supply-chain consultants to simulate material and product flows; and legal counsel to support incentive negotiations and transactions. The size of the external team should be proportional to the size and complexity of the facility, and inversely proportional to the project timeline and availability of internal resources for the project.

2. Well-defined timeline: Our first contact with clients typically includes discussion of the necessary (that is, shortest possible) duration of the location-selection and incentive-negotiations process. While there can be compelling reasons to pursue an aggressive timeframe, allocating insufficient time for comprehensive analysis and negotiations will yield undesirable outcomes. Small, simpler projects require a minimum of six months from project initiation to incentive negotiations conclusion. Large, complex projects can take a year or more to complete, even on an aggressive schedule. Having experienced the ThyssenKrupp project firsthand, we expect that both internal and external team members would agree that each of the 16 months required to complete the project was quite necessary.

The timeline should account for both internal and external influences on its duration. Internal factors include corporate reporting and approval processes, accessibility of top executives for travel/meetings, and procurement requirements to conduct site testing or purchase/control properties. Numerous external factors come into play as well: site condition assessments, availability of political leaders, regulatory-agency consultations, and governmental/legislative approval processes.

3. Facility requirements — defined yet flexible: An efficient location-selection process requires that the facility’s specifications be defined well enough to identify measurable criteria against which candidate sites and communities can be evaluated. The key specifications include land and building dimensions, utility infrastructure, transportation infrastructure proximity, customer market concentrations, raw materials, labor requirements, and environmental impacts. Specifications that are ambiguous or undergo significant revision can lead to serious project delays, search-area revision, and confusion in the economic development and real estate marketplace. However, a certain level of flexibility in the team’s mindset and facility configuration must also be maintained in order to make adjustments as needed to fit high-potential locations.

In the process of locating its new steel-production facility, ThyssenKrupp excelled in all three areas described above under uniquely challenging circumstances. To rapidly complete the many analyses required for an investment of such magnitude and complexity, ThyssenKrupp deployed significant internal and external functional teams operating in parallel. Project monitoring and reporting schedules were synchronized with corporate approval processes to communicate developments on the highly visible initiative. The project specifications were clearly defined at the outset of the project, and their extreme magnitude and uniqueness were used to efficiently focus on the most viable regions of the country. When finalist sites were identified, ThyssenKrupp teams adjusted facility configurations to best accommodate non-ideal site conditions. Finally, the team demonstrated superb decision-making discipline by making decisions when required to maintain the project timeline, rather than delaying them to obtain further information or analysis.

The Drawing Board: Establishing the Search Area
Once facility requirements are defined and the company recognizes what it is looking for, the time comes to consider where to look for it — the project search area. The search area should encompass all geographies that could present suitable location opportunities for the project. Selecting too narrow a search area may cause a favorable location to be overlooked or a delay when the search area must be expanded.

Search areas vary dramatically from project to project, yet typically fall into one of several categories. When transportation costs comprise most of a facility’s geographically variable operating costs, network analysis to optimize inbound/outbound transportation distances will suggest a continuous search area radiating out some distance from a transportation-cost-optimal centroid. Facilities whose operations depend particularly upon one or two unique parameters other than freight costs often search multiple discontinuous areas where those critical parameters exhibit the desired values. For example, facilities whose primary operating expense is electric power will limit their search to regions with low electric-power costs, while facilities seeking highly specialized production skills will target cities with the highest concentration of those skills before considering operating costs and other parameters. In the case of ThyssenKrupp, a 19-state area was used to cast a wide search for the convergence of multiple challenging requirements: tremendous electric power and natural gas infrastructure, river-barge and railroad access, connectivity to one or more deepwater ports, a sizeable labor market, and a very large site.

Some companies underestimate the tremendous physical scale of the United States and the diversity of its economic geography, environmental settings, and infrastructure networks. This promotes the expectation that operating conditions and costs are homogeneous, and this is manifested in search areas that are too narrow and timelines too brief to allow sufficient investigation and analysis for a comprehensive study.

Due Diligence: Going Abroad To Do Your Homework
Once the universe of candidate locations is narrowed to a few preferred options, detailed evaluation is needed to confirm the feasibility of each site, and to compare the locations’ advantages, disadvantages, risks, and costs. The due diligence should focus on factors that materially influence the facility’s timely implementation, operational sustainability, and long-term profitability. Analyses are undertaken by external subject-matter experts to confirm labor market characteristics, permitting timelines, infrastructure capacities, and utility and construction-cost estimates. This usually takes about one month for small, straightforward projects, and up to six months if site testing or other technical analyses are needed. At least two locations, and preferably more, should be carried through this process and to the project’s conclusion, to manage the risk of discovering a “fatal flaw” with a given location or of unsuccessful negotiations.

The involvement of external and in-country advisors typically arises during this phase of the project. The advisors’ participation is needed to supply subject-matter expertise, increase the speed of data collection and analysis, filter and manage confidential communications with economic development officials, and draft legal agreements.

On every manufacturing-facility location project, companies face the inevitable realization that there are no perfect locations. Sites with river access present challenges with poor soils, undevelopable wetlands, and shallow water tables. Favorable deepwater-port proximity brings increased natural-disaster risk. Larger, higher-skilled labor markets are typically associated with higher costs and greater environmental restrictions. How do you choose between the location with the superior labor market and inferior infrastructure versus the lowest-cost location with the prolonged development timeline and higher natural-disaster risk? For starters, a multiyear financial summary of each location’s estimated capital and operating expenditures — including a valuation of anticipated financial incentives — is the preferred method to rank the financial performance of the locations.

The importance of many qualitative factors must also be weighed, especially when finalist locations have similar cost profiles. Balanced decision-making among disparate qualitative variables is one of the greatest challenges of location-selection projects, but is solved through consultation among the diverse groups on a well-conceived project team. Site selection consultants have various approaches to weight and rank the many location factors, and can facilitate a successful decision-making outcome.

ThyssenKrupp performed extensive due diligence on its finalist sites over several months. In addition to extensive labor, supply chain, and financial analyses, significant effort was focused on quantifying timelines and costs of site preparation and infrastructure expansion given the extremely large scale of the installation. To maintain forward progress toward the facility’s ultimate go-live date, ThyssenKrupp pursued permitting evaluations/applications in two locations, as well as other parallel investigations.

Timing of Incentive Negotiations
Among location projects’ many facets, government assistance and financial incentives awarded to companies receive the most attention from the media and public. An incentives-value “price tag” is often the sole reported metric of a project’s significance, and the press typically implies the winning location won based solely on its incentives offer. In truth, incentives are not primary drivers of location decisions, particularly when substantial incentives must be used toward infrastructure and site needs. The ThyssenKrupp project outcome is one very significant supporting example: The company selected a location in Alabama whose incentives offer was considerably lower than the competition’s.

Incentives should be considered in the decision-making process only after a location is shown to present a favorable long-term operating environment for the facility. When incentive-program benefits taper after several years, the facility must stand on its own with an operating cost structure that gives it competitive advantage.

Incentives offerings are not automatic nor are their values readily predictable. For substantial projects, the negotiation process requires months of stakeholder dialogue focused on incentives that meaningfully reduce one-time and recurring facility costs. The availability and magnitude of the myriad incentives offerings differ for each state and local community, and they are proportional to the project’s capital investment, payroll, and degree of stakeholder interest. During the lifespan of a very large project, incentives packages and value thresholds can be expanded through extraordinary governmental efforts, but only if the project timeline and momentum can support such efforts. In the case of ThyssenKrupp, both Alabama and Louisiana held special legislative sessions and funding approvals while competing for the project.

In Sum
Foreign companies face various challenges and potential pitfalls as they evaluate locations to deploy manufacturing assets in the United States; missteps or confusion in the process cause delayed facility start-ups or facility deployment that does not maximize competitiveness and sustainability. Successful outcomes are more likely when projects launch with a realistic timeline, appropriate resources, and well-defined requirements. Leveraging external, in-country expertise is advised — particularly for larger projects with ambitious schedules — to navigate due-diligence activities, systematically compare location alternatives, and mitigate risks. Once high-potential locations are vetted, incentives negotiations should be tailored to the company’s needs and allowed sufficient time to run their course. These essential tactics have proven useful on many companies’ successful location projects, and they were each put to the test on a grand scale during ThyssenKrupp’s search for the optimal location for its new, state-of-the-art facility.