A World of Choices

A World of Choices

Whether it's locating a plant across the street or halfway around the world, manufacturers face complex and costly decisions on where to place their facilities.

In November 2011, Siemens celebrated the official grand opening of its $135 million gas turbine production plant in Charlotte, N.C. The 450,000-square-foot plant adds the third leg to Siemens' Charlotte Energy Hub, which encompasses 1 million square feet of manufacturing capacity to produce generators, steam turbines and gas turbines.

Growing Siemens' presence in the U.S. energy market was an important consideration in the Charlotte expansion, explains Brian Maragno, director of operations, gas turbines, for the Charlotte facility. According to an estimate by Intek Inc. for the U.S. Energy Information Agency, 750 trillion cubic feet of recoverable shale gas resources exist in the United States. That will help drive steady growth in the demand for gas turbines, which will account for 40% of U.S. generation by 2020, according to the U.S. Department of Energy.

Only 13 months passed from the groundbreaking ceremony to shipping of the first products, Maragno notes. He says the expanded facility brings engineering and manufacturing together for three product categories, optimizing the synergies among them. And it offers customers, many of whom utilize all three lines, a convenient single site to visit.

While Siemens and Charlotte officials celebrated the new facility, there was bitter reaction last July in Hamilton, Ontario, where gas turbines had previously been built at a 100-year-old facility employing 550 workers.

"The provincial government has failed to ensure that its resources were fully used to maintain these important manufacturing jobs for this large group of workers, their families and the community of Hamilton," says Ken Lewenza, national president of the Canadian Auto Workers. "It's another example of the government's failure to act to protect jobs in the manufacturing sector."

Perhaps more than anything, the move of gas turbine production from Hamilton to Charlotte demonstrates the dynamic nature of manufacturing, where a host of factors are at play in decisions by companies to build, relocate or close facilities in order to meet the needs of global markets and shifting market conditions.

That dynamism is evident in the most recent data from the U.S. Bureau of Labor Statistics on plant openings and closings. In 2010, according to Dan Meckstroth, chief economist for the Manufacturers Alliance for Productivity and Innovation, 37,000 plants opened in the United States and 44,000 plants closed. Those figures represent 12% and 14%, respectively, of all U.S. manufacturing facilities.

Pulling the Trigger


Economic development experts say the manufacturing community presents a very mixed bag in terms of plant expansions and openings. Wally Gruenes, national managing partner for Grant Thornton, says recent economic upheavals have left manufacturing leaders "very, very cautious," despite the fact revenue levels and profits have returned to pre-recession levels in many cases. He notes that while nearly half of manufacturers say they would make capital investments last year, not nearly that many did that.

What's keeping some companies on the sideline? Gruenes says uncertainty over both personal and corporate taxes and the regulatory climate continues to be a major concern. For example, the Dodd-Frank bill requires that public companies track whether they produce products that contain conflict minerals -- minerals such as tungsten, tin, tantalum or gold mined in the Democratic Republic of the Congo. Mining sales have been used to finance armed militias that commit atrocities in the area, and the intent of the law is to cut off this funding. Gruenes says manufacturers often get such minerals through a series of suppliers and have difficulty tracking if their products are subject to the law. While the intent of the law is good, he notes, the end result is to increase the difficulty of doing business in the United States.

Frank Spano, a director at Austin Consulting, a U.S.-based international firm offering architectural, engineering, design-build, and construction management services, believes manufacturers still are "reluctant to pull the trigger" on new projects. But, he notes, that can change quickly as business conditions improve and plants reach their production limits. "Once that capacity issue is triggered and a company can't produce any more out of a facility, then it becomes a real hurry up," observes Spano. "It becomes very challenging."

That was the case for Prism Plastics, an injection molding firm with plants in Port Huron, Mich., and Harlingen, Texas. The company saw its business in providing tight-tolerance products such as seat belt and airbag parts for Tier 1 and Tier 2 auto suppliers grow by double digits. Over the next three years it will need an average of 50% more capacity to meet orders. As a result, the company needed additional space. In nearby Chesterfield Township, Mich., the firm found a new building with the right footprint and proximity to highways for easy transportation. Because it is only a half-hour away from the Port Huron plant, it allows the company to share technical personnel between the two sites.



Prism Plastics' owners (left to right) Gerry Phillips, Rod Bricker, Jerry Williams are opening a new facility in Chesterfield Township, Mich., to meet increased capacity needs.

Gerry Phillips, one of three co-owners of Prism Plastics, says the company's approach to production is to run only small, controlled environments with no more than 15 machines. When that limit is reached, the company expands to a new location. Prism Plastics operates highly automated operations, Phillips explains, where "variation is the enemy." He notes that "99% of our parts are never touched by human hands." Manufacturing is done in enclosed, climate- and dust-controlled areas with excellent lighting. At the new facility, Prism will start with seven presses and eventually hire 21 additional employees. The new plant will serve as a beta site for a planned entry into medical products.

While Chesterfield provided Prism with property tax incentives, Phillips says the most important consideration in locating the new facility was proximity to automotive customers and to its existing facility. The company ships its products to Mexico, Asia and Europe as well as to U.S. locations. The new facility will start shipping products in March.

Key Factors

Twenty years ago, Gruenes notes, decisions about where to manufacture were "all about labor arbitrage. Manufacture where you produce the product the most inexpensively and ship back to the United States." But manufacturers increasingly are recognizing the value of being closer to their customers, whether that means the United States or other regions around the globe.

In addition, rising costs for labor in Asia and transportation, as well as factors such as the protection of intellectual property, energy and availability of water and other resources, are causing companies to take a more comprehensive look at locations and their costs.

Foreign direct investment in the United States was $194.5 billion in 2010, according to the U.S. Department of Commerce, a strong recovery from the recession. For international companies, says Spano, the United States remains an attractive place to invest because it is a huge consumer market and it is a stable political environment. "In many instances, for international companies this is a place you still have to be," he notes.

For both international and domestic manufacturers, incentives from state and local governments receive high-profile attention when companies decide to move to a new location, or to stay at home. For example, when Toyota announced in February 2007 it would build its latest automotive plant in Blue Springs, Miss., the announcement came with a state incentive package valued at $324 million. Plans originally were to build a plant that would produce Highlander SUVs starting in 2010. But the soft economy delayed the plant's opening and eventually Toyota decided to shift production of its compact Corolla to the Mississippi site. The plant started production last November and is expected to employ 2,000 people, with another 2,000 employed by area suppliers.

A sluggish economy has only sharpened competition between and within states for new manufacturing business, but site consultants caution that incentives should not be the underlying reason for a location decision.

"In a well-executed site-selection process, incentives are one of the least important factors," says Steve Weitzner, a partner with Silverlode Consulting Co. in Cleveland. Instead, he said, manufacturing site choices should typically center on labor cost and labor productivity, transportation, utilities and the cost of real estate and the facility itself.

"Incentives are temporary in nature," Weitzner points out. "They last for five or 10 years, sometimes longer, but then they run out and you're still stuck with those underlying cost factors."

Jeffrey Karrenbauer, CEO and co-founder of Insight Inc., a supply chain software firm, says companies have too often focused on "chasing cheap labor" and incentives rather than taking a more comprehensive view of factors that will impact their costs. "The right way to do it is to look at the entire supply chain from the source of raw material acquisition down to the customer and everything in between," he says.

Manufacturers can't afford to ignore having labor available in the quantities needed and with the right skills, notes Brent Sheffler, the team leader for Advanced Manufacturing Business Development at the Virginia Economic Development Corp. In Virginia, Rolls Royce has established a 1,600-acre industrial campus in Prince George County where it has a new jet engine plant and where suppliers and other partners will be located. To help ensure a skilled labor force, John Tyler Community College has established a program for precision machining training. The program is utilizing advanced CNC equipment from Mazak Corp. "It is a huge investment to install that kind of equipment, but it is also a recognition that this is the skill set that these employers need," says Sheffler.

Support of educational institutions such as Central Piedmont Community College and the University of North Carolina was a major help in Siemens preparing its new workforce in Charlotte, Maragno notes. Faculty at Central Piedmont helped develop the training curriculum and created user-friendly documentation, an important consideration as the Siemens workforce grew from 700 employees in September 2010 to some 1,400 today.

New sites provide opportunities to create more efficient facilities. Siemens' gas turbine facility, for example, has the same production capacity as the former Canadian facility but in a plant that is 100,000 square feet smaller and where material movement has been reduced 70%. The new facility also is LEED-certified gold.

Site consultants say it is important for companies to look not only at current needs, but also to plan for future eventualities. Austin Co.'s Spano says he will talk to clients about an initial facility and an ultimate facility. It's important for clients to consider growth potential and what they may need a few years down the road in terms of acreage, building size, raw materials, employment and other factors.

"If you're looking initially at a 200,000-square-foot building and you want to increase capacity in three years, you don't want to do another site location study," warns Spano. "You want to have enough room to expand."

See Also:

Honda to Build Next-Generation Powertrain Technologies in Ohio

Nearly Half of Manufacturing CEOs Say Taxes Drive Site-Location Decisions
 

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