How to Select the Location of Your New Manufacturing Plant
Determining where to locate your next manufacturing plant can be a difficult decision, and it’s one that requires significant due diligence. We take a comprehensive look at the key factors — from the availability of skilled workers to effective corporate tax rates and quality of life issues — that can make your manufacturing relocation plan a success.
First, a quick disclaimer: as well all know, no two manufacturing operations are alike. For example, the needs of a specialized, R&D-driven medical devices company will be different from a price-sensitive, mass-market consumer goods operation. Likewise, an OEM electronics component supplierwhose output delivery needs to be timed to the minute to satisfy a major automotive manufacturing plant will have different location requirements than a manufacturer processing raw materials sourced from a mining operation in Wyoming.
In other words, even though we’re presenting a comprehensive framework of manufacturing relocation factors, we hope it’s obvious that the importance of any one factor will be determined by the specific needs of your organization! Having said that, let’s take a look at hard costs first, followed by indirect, soft costs. Then we’ll look at some future trends to consider when weighing a manufacturing relocation decision, followed by a short list of some of the leading low-cost domestic and foreign locations. Finally, we’ll take stock of the pros and cons that could influence your own decision.
Manufacturing Relocation: Direct Hard Cost Factors to Consider
In this section, we’ll look at five relocation factors that can have a direct, measurable impact on the bottom line.
1. Supply Chain Infrastructure / Logistics and Access to Customer Markets
Does the candidate location bring you closer to your customer markets? Moving your manufacturing plant closer to your customers can help you increase profits or build up market share by speeding up delivery times, reducing inventory, and cutting costs.
Can you build an efficient, end-to-end supply chain in the candidate city, or will delivery of some components or raw materials be compromised by long distances or unreliable connections? Will weather conditions create unacceptable delays during part of the year?
We recommend performing a complete review of the region’s infrastructure, e.g. deepwater ports, freight rail access, trucking and highway connections, international airports, expediting and transshipment services, as well as Internet, communication, power and water utilities to determine if they are reliable and efficient enough to meet your specific needs.
2. Effective Corporate Tax Rates and Incentives
For each candidate location, it’s crucial to calculate the total impact of local, state, and national taxes, including property-based taxes. Quite a few jurisdictions offer tax breaks and rebates to companies in exchange for activities that benefit their community, such as renovating existing facilities or remediating brown-field sites, investing in targeted industries that create new jobs or conducting research and development activities.
(If your customer includes the Federal Government, don’t overlook preferential contract treatment set-asides — through the HUBZone program, for example — for companies headquartered in historically low-income census tracts.)
It’s also becoming more common for major companies, such as Boeing or Amazon, to conduct highly-publicized campaigns when choosing the location of a new facility. Many cities, regions, and states are willing to negotiate multi-year tax incentives or abatements in exchange for creating new jobs or locating facilities in their jurisdictions. Incentives may be available at the country level as well; for example, France has become notably more aggressive in courting tech-oriented companies.
3. Tax Domiciles, Exchange Rates and Economic Conditions
While smaller manufacturing companies are likely to keep things simple by limiting themselves to domestic operations, large corporations, such as Apple and Nike, have recently been thrust into the news as details of their highly complex tax domicile and ownership structures have been leaked to the press.
That’s quite a bit beyond our remit to provide that level of corporate advice*, as we’d rather stick to much more transparent considerations, such as exchange rates and general economic conditions. With respect to exchange rates, quite a few multi-national companies find it advantageous to hedge against dramatic shifts in exchange rates by having multiple manufacturing bases around the world. When one currency goes up, production can shift to a location with a more favorable exchange rate. And countries with long-term economic growth (and rising consumer incomes) obviously make better candidates for locating consumer goods manufacturing plants — unless your goal is to export 100% of the goods from countries with very low, depressed wages.
*We do note that proposed changes to the US Corporate tax code now before Congress (as of late November 2017) are worth careful monitoring as potential changes to the tax code may encourage US companies to repatriate their foreign-earned profits back to the USA.
4. Business Regulatory Regimes and Customs/Trade Agreements
Substantial trade agreements (such as NAFTA in North America), customs unions (such as the European Union), and special economic zones (such as China’s Shenzhen, the city immediately north of Hong Kong) have helped create regional manufacturing zones, where goods in process (as well as completed goods) can travel across country borders with minimal delays or customs duties. Harmonizing regulations across borders has also reduced non-tariff-based trade barriers. This combination has led to the development of highly-sophisticated manufactured goods supply chains; for example, oftentimes the individual components of automobiles produced North America make multiple trips across the Mexican, US, and Canadian borders before final assembly.
There are also new agreements are on the horizon that may impact manufacturing relocation decisions as well, such as the revived negotiations for a pan-Pacific trade agreement (once known as the Trans-Pacific Partnership) that will stretch from Canada to Chile, to New Zealand and Australia, to Japan and, potentially, Korea. (The US has opted out, and China has yet to be invited.)
On the one hand, so important are the ramifications of major trade agreements and customs unions, such as NAFTA and the EU, that they can be considered in some cases to be the sole determining factor when deciding where to locate a new manufacturing plant. On the other hand, these agreements can be politically controversial: witness the UK’s vote to leave the EU over issues such as free movement of people — despite repeated warnings from companies, such as Honda and Airbus, that a ‘hard’ Brexit would put their UK manufacturing operations at risk. Similarly, many American workers have come to resent NAFTA, for whom the agreement represents nothing more than jobs shifting to Mexico. However, changes to the NAFTA agreement recently proposed by the US trade representatives may prove just as disruptive to workers in the Detroit automobile industry as it will to mid-west farmers who depend upon grain sales to Mexico.
North American automotive manufacturing experts discuss ways that changes proposed by the US Administration to NAFTA’s rules-of-origin content regulation will affect North American manufacturing competitiveness.
The bottom line: when choosing a manufacturing location, have your eyes wide open to potential treaty and regulatory regime changes that may be on the horizon. Carefully investigate business regulations, permitting times (maddeningly long in Brazil and Greece), environmental regulations, and labor rules that would apply in your proposed new location. For example, European Union rules governing environmental pollution (such as the elimination of lead in manufacturing processes) and greenhouse gas reduction can be surprisingly strict, as can requirements for compensation and notice due to workers facing potential layoffs.
5. Business Operating Costs
Performing due diligence on direct business operating costs is next. You’ll want to collect data on these areas:
Facility / Real Estate Costs
What is the market for purchasing or leasing real estate? Will it be more advantageous to build or rent a new facility or renovate an existing one? Can you get an option for potential expansion? What are the tax implications (mentioned above) for owned property, including tools and inventory?
