The Eight Most Common Site Selection Mistakes for Those in the Automotive Industry

(And How to Avoid Them)

By John T. Warden

Labor unions, workers' compensation insurance, wage rates, land costs, utility costs, taxes, transportation expenses ... those in the automotive industry considering expanding or relocating to the South have a unique opportunity to dramatically improve profitability by seeking out locations in which these and other recurring costs can be minimized.

But many in the automotive industry, especially suppliers, run headlong into expensive expansions or relocation of production capacity without a serious, objective analysis and comparison of important operating costs.

This article will serve as a guide to the most common mistakes automakers and suppliers make in examining new facility issues, as well as provide some pointers on where and what to look for in your next site.

1. Waiting too long to start the search.

Thorough analysis and negotiations typically require four to six months. Although this time frame can be compressed, it means sacrificing breadth and depth of analysis and negotiating leverage. To obtain the best results, corporations should consider at least four locations in two or more states. This will maximize negotiating leverage and provide a good cross section of community options.

Procrastination in the analysis also can lead to conflict with the business' seasonality. The best time to move or expand is in a seasonal downturn, but this often requires building large inventories during seasonal peaks, which may tax the company's production capacity. This underscores the need for a long range plan incorporating four to six months for analysis of site alternatives and at least six months to construct a new facility for a supplier, or three months for a retrofit of a second-generation building. In the northern portions of the American South that may experience severe winter weather, this time frame may expand an additional three months.

A hasty decision also is probably a poor quality decision. Set realistic milestones and deadlines and limit the number of individuals involved in the process. While input into the decision making process from all functional areas of the business is desirable, actual completion of the site selection analysis is best left to one or two individuals to ensure uniformity of methodology, perceptions and opinions. As much as the process should be quantified and objectified, there are invariably important judgemental components and the only meaningful comparison of these issues between communities comes from having a limited number of people exposed to every location option.

2. Too much focus on real estate.

Far too much emphasis is typically placed on real estate issues. In many cases, finding an existing facility that can be retrofit is a top consideration for a Tier-2 or Tier-3 supplier. However, Tier-1 suppliers usually must build-to-suit. Real estate receives so much emphasis because it is one of the few areas in which needed information is readily available.

But should it guide the search? Absolutely not! Unless a supplier has a very unusual facility requirement, the problem will likely be eliminating buildings from consideration, rather than finding one that works.

Real estate will typically comprise no more than five to 10 percent of total annual recurring expense for the new operation. Consider these numbers. A "typical" 200-employee automotive supplier operation can operate quite nicely in a 100,000-square-foot building. A good-to-excellent quality facility in this size range can be purchased for $2 million and financed with a fixed rate, 25-year taxable bonds at 7.5 percent. Under this scenario, the annual debt service is approximately $179,000. In contrast, this 200-employee plant with an average hourly wage of $10 and a 35 percent benefits load will incur annual wage and benefits approaching $5 million. If the company uses one million kilowatt-hours of electricity per month, electricity costs could be in the neighborhood of $650,000 per year. Clearly, real estate expenses pale in comparison to recurring costs and suppliers should focus on the most significant costs first.

3. Concentrating the search on too small an area.

Unless your automotive concern has a pressing requirement to locate close to an OEM or other important infrastructure, for example a port or international airport, take off the blinders and examine a broad, multi-state or regional area. There are hundreds of communities that can satisfy all of the site selection objectives of most companies, but the search is often restricted to a small area based on a preconceived notion about the advantages of the area being examined.

A narrowly focused site selection analysis erodes your negotiating position on inducements, especially if the search is restricted to a single state. This also limits your ability to gain major operating cost reductions in critical expense categories such as wages and benefits, utilities, taxes and so forth. All of these expenses will vary from site to site and the differences could be significant. Cost differentials on the order of $10,000 per employee per year are achievable for suppliers and for a 200-person automotive supplier plant, this could mean $2 million in savings that drop straight to the bottom line.

Also, examine rural locations with great detail. The South's automotive industry has experienced excellent results from locating in rural counties. Even more, state incentives are much greater when locating in a rural location.

4. Not being skeptical.

One of the most important jobs of the executive vested with responsibility to select the site is separating fact from fantasy. That's especially true in a site search of the American South, where fact and fantasy seem to run parallel. Nearly every person the site selection team will be dealing with has a not-so-hidden agenda; they want you to locate your new facility in their state, county, city or service territory. They employ salespeople whose job is to get you to "buy their product." Rarely have they been heard to say, "our school system is under-funded," or "we have a union problem," or "the quality of our electrical service is poor," or "our property taxes are high." But these and other problems may be awaiting you, so be prepared to question every statement or claim made by local or state economic developers to search out these hidden problems.

Be skeptical of unsubstantiated claims and ask questions. Ask for a long-term history of electricity and gas service interruptions, examine a history of union elections and meet with existing major employers to discuss incipient union activity, quantify spending per pupil in the secondary school system and the school system's graduation rate. In short, accept nothing as an article of faith.

5. Leaving money on the table.

In many ways, negotiating inducements and incentives is the blackest of the black arts, even though it's a common practice with virtually every significant deal. You must decide what you want to negotiate and how far you think you can push. Most states, counties and cities have published "inducements" that are available to any industry that wishes to secure them. Perhaps the most visible of these are worker training, inventory tax exemptions or jobs creation income tax credits. But there are more valuable inducements that are not or will not be publicized.

For example, outside larger metro areas land prices plummet, typically ranging from $5,000 to $20,000 per acre for an improved site. In many communities the land can be obtained at no cost if the community feels it is necessary to secure the industry. The same can be said of existing buildings as well, although this is less common.

Also, many electric utilities have special rates that can significantly reduce the cost of power in the critical start up years of an automotive supplier operation. Again, these rates may not be offered unless they are negotiated.

Other areas to target in negotiations are construction of rail spurs and switch installation, arterial road improvements, property tax concessions, more rapid depreciation schedules, interest rates on loans for industrial and residential construction, payments in lieu of taxes and many others.

Of course, the aforementioned unpublished potential incentives apply to automotive suppliers first and foremost. Original equipment manufacturers (large assembly plants) have an incentive category all their own.

6. Ignoring the weather

Suppliers and assemblers with a single production facility run the risk of severe business interruptions due to weather and in the South the greatest threat is posed by tornados. On average, the chance of being hit by a tornado is very, very small, but the risk varies significantly from location to location.

The accompanying map shows the American South divided into a grid, with each vertical and horizontal line representing 1 of longitude and latitude, respectively. Within each box is shown the number of tornados that have touched down from 1980-2000. There is a "1 box" along the New Mexico-Texas border (shown with an arrow) in which 35 tornados have touched down in this 20-year period, an average of 1.2 per year. In the adjacent box 1 east, 212 tornados have touched down, or 7.1 per year. The likelihood of a tornado is six times greater on 1 of latitude distant.

Prudence dictates that companies have business interruption insurance, but such insurance does not guarantee the loyalty of customers and distribution channels.

7. Believing what you read about the demise of labor unions

Positioned directly in front of the expanding Mercedes plant on Interstate 20/59 in Vance, Ala. is a billboard promoting the United Auto Workers labor union. However, no Mercedes workers in Alabama are members of UAW. In fact, there has never been a vote for organization at the plant.

On the other hand, in Smyrna, Tenn., there have been votes on union organization at the massive Nissan plant there. All attempts to organize at the massive Nissan facility in Smyrna have failed. Regardless, labor unions, while much more prevalent in other regions of the U.S., are readily present in the American South.

Labor union membership in the U.S. is nowhere near levels seen just 20 years ago. However, the bottom line is unions are spending large amounts of money on recruiting new members throughout the country, including the South. While their success at organizing new automotive plants in the South have essentially failed (many older domestic plants in the South built prior to 1970 are unionized), that doesn't mean they have stopped trying. Nothing could be further from the truth.

8. Ignoring secondary, yet important issues

The site selection process mandates the examination of a host of issues that are not static. The dynamic variables can be examined historically and in the present, but what of the future? Unfortunately, many site selection projects fail to examine critical though secondary issues which may have significant longterm impact on project viability and/or community desirability. The following are just a few of the secondary issues that may effect your project:

Landfills: Disposal of non-hazardous solid waste is handled most efficiently if the community has a landfill. But landfill capacity is rapidly being consumed and the permitting of new ones can proceed at a snail's pace. Automotive suppliers searching for sites are urged to quantify tipping fees, years of life remaining at the current rate of fill, and whether additional capacity has already been permitted.

Government fiscal health: The stagnant economy has not only hurt financial, manufacturing and other sectors, but has impacted city, county and state governments as well. Tax collections have fallen and new tax collections are stagnant because new investment is flat. What effect has this had on the local government's fiscal health? Is there are surplus or deficit, what is the source and size of revenues collected and how is this likely to be impacted by continuing economic malaise? What are the local government's spending patterns and flexibility in cutting or reallocating funds? Does the city or county own a hospital and how much subsidy does the medical facility receive?

Community leadership: How broadbased is the community's effort to attract you as a company? Was your sole point of contact the economic developer or industrial recruiter, or was it a more widespread effort involving leaders from different aspects of the community? A recruiting team drawn from all facets of the community is indicative of high quality leadership and broad support of the efforts to attract industry.

Other critical issues to address are whether the city and county governments are consolidated, and if not, are there strong political and community ties between the two. More often than not, there is intense competition between city and county government, with the county losing in its efforts to build infrastructure.

Selecting a site for a multi-million dollar investment is not without risk. However, with careful planning and foresight, the risks can be minimized and long-term profitability enhancement ensured.

John T. Warden is vice president of The Walker Companies in Atlanta, Ga.