How to Choose the Perfect Location for Your Business
Selecting the correct site for a manufacturing plant or R&D facility is a decision that shouldn’t be taken lightly. Here are the five key steps to getting it right.
Any successful manufacturing company is always looking for new markets and new growth opportunities. In today’s global economy, that can mean scouring the world for locations for a new manufacturing or R&D facility. The process of site selection begins when a company decides that an existing office or manufacturing location should be moved or a new location should be added to the portfolio. Selecting a location for a manufacturing plant is a complex and lengthy process, often taking many months or even years. For that reason, many companies choose to engage outside consultants to advise them in selecting manufacturing sites. SGR regularly serves as site selection consultant to our clients.
1. Develop a detailed list of selection criteria
The first step in selecting a new site is to develop an exhaustive list of selection criteria. The list should capture the most important qualifications for the new site. How close are the company’s customers? Where is the nearest port? How much land is needed? What is the work force like? What are the minimum electricity needs for the new plant? The criteria will address these and many other questions, and will vary tremendously from project to project and company to company. What is unimportant to one company may be essential to another. For example, the U.S. headquarters and R&D facility of a Korean automotive manufacturer may prioritize the availability of experienced marketing and engineering personnel and proximity to the home office, thereby compelling the manufacturer to focus on urban areas of California. In contrast, a Swedish manufacturer of wood pellets as a fuel source might focus on the availability of resources to manufacture its products and will likely choose a location close to timber plantations in the southern United States. As a further example, U.S. suppliers to the automotive industry may focus more on the logistics to establish a chain of manufacturing locations that can efficiently supply products to automotive assembly plants located throughout the midwestern and southern United States.
2. Analyze qualitative & quantitative factors
Qualitative factors do not have a direct effect on the company’s bottom line, but are nonetheless crucial to its success. Qualitative factors include the size and surroundings of a community, the local educational system and the connectivity of the community to nearby markets.
Using the above three examples, it is easy to see how qualitative factors influence the site selection process. An automotive R&D center, for instance, requires access to experienced engineers, either locally educated or drawn to the location by other factors. In fact, the largest cluster of automotive engineers in the U.S. is educated and located in the greater Detroit area. California is not one of the centers of the U.S. automotive industry, but it is possible to draw automotive engineers to that state. The automotive supplier may want to avoid large metropolitan areas because the company is more interested in the type of loyal work force likely to be found in a small town. A community college focused on advanced automotive manufacturing processes located close to the plant may be necessary to educate the company’s work force. The Swedish wood chip manufacturer, however, might choose to locate its plant away from populated areas to avoid any disturbance to residential neighbors.
Quantitative factors, on the other hand, will produce a direct and calculable effect on a company’s operations. Among these are labor rates, building costs, logistics costs, utility rates and taxes. To produce an accurate assessment of the operating costs at each site, these site-variable costs have to be determined and projected out for a number of years.
The process is laborious and far from a science. But if the data are correctly gathered and assessed, the results can be highly useful. Doing this may require assistance from experts, such as a certified public accountant to assess and calculate the taxes and their effects on a company’s profitability. Moreover, available buildings should be evaluated by a suitable expert to determine the soundness of the building and the cost of any refurbishments that may be required.
3. Research competing communities and evaluate data
In most instances, a company and its consultants will request data from potential candidate states and communities, and will also review public and subscription databases to generate a preliminary field of potential sites. Initial visits are made to the sites that are deemed suitable. This early screening may be done by the company or its consultants. Typically, SGR will visit 10 to 25 potential sites together with our clients. The goal of the visits is to eliminate unsuitable sites and to narrow the field to a small number of sites that meet all of the company’s selection criteria.
4. Consider incentives and bonuses
When the field has narrowed to a handful of adequate sites, the company usually turns its attention toward incentives. Starting up a new plant represents a huge investment on the part of the business, and a good incentives package can reduce the investment risk and ultimately help the company open a successful and profitable plant. This is beneficial to all parties.
It is often said that incentives cannot make a bad site good; they can only make a good site better. Any site chosen by the company must meet the fundamental needs of the business – qualified work force, proximity to customers and suppliers, transportation, quality of life, etc. Incentives are the icing, not the cake itself. In addition, companies have to consider an incentives package against the overall cost of doing business at a location. One community may offer a generous incentives package, but if taxes, utility rates and labor costs at that location will be high over the long term, another location with lower overall costs might be preferred, even if its incentives package is weaker.
Incentives can be divided into two broad categories: statutory and discretionary. Statutory incentives are those that are codified by state or local law, and that are made available to all companies meeting the requirements of the law, such as a state jobs tax credit for any company that creates a certain number of jobs annually. Discretionary incentives are those that involve the discretion of the granting party. Prospects evaluate statutory incentives, but final site negotiations naturally center on discretionary incentives.
Discretionary incentives are limited only by available resources, applicable law and the creativity of the parties involved. A package of incentives may come from several different public sources including the federal government, state, county, city, public development authorities or development agencies, as well as private sources including private utility companies, private development organizations and even interested individuals. Depending on the site, incentives may include free or reduced cost of land and building, below-market rent, build-to-suit projects, cash grants, loans, loan guarantees, infrastructure improvements, site remediation, utility hookups and discounts, property tax reductions and job training. By this point in the site selection process, the company will have met several times with the finalist communities. It also will have established the beginnings of a meaningful relationship with economic development representatives and other local and state officials. In addition, each finalist community will have a good sense of what is most essential to the company’s success and whether the prospect is a good fit for the community. This is the proper and most natural time to discuss and negotiate a final incentives package.
5. Finalize the decision, memorialize the deal
After the finalist communities have put together their best incentives packages, the prospect is in a position to make a final, often agonizing, site decision. When the decision is made, the winning site and the prospect typically memorialize the deal with a written agreement, often called a memorandum of understanding or a development agreement.
In the final agreement, the prospect agrees to locate its plant in the winning community, and usually agrees to create a certain number of jobs and to make a minimum capital investment in the community. In return, the other parties agree to provide certain incentives. This final agreement is meant to capture with specificity the offers and commitments of the community made over the course of the site selection process. It also provides a road map for delivery of those incentives.
During the site selection process, no one wants to talk about the possibility that the project will fail. However, the final agreement will often highlight penalties in the event the prospect does not deliver on its jobs or investment commitments. As a matter of fiscal prudence as well as local politics, a community or state must be able to show that it received good value for the incentives offered. From the prospect’s standpoint, penalties, or “clawbacks” as they are sometimes called, are understandable, but should be fair and proportional. In other words, a small “miss” in the company’s jobs or investment goals should not lead to repayment of all of the incentives, but rather a proportional amount, if any.
With the site selected and the final agreement signed, the company and the community can work toward the next step in the process: the ribbon cutting.