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Communities Enable “Disruptive” Advantage for Advanced Manufacturers

To attract and retain core manufacturing businesses in the twenty-first century, communities will have to offer significant workforce development support, combined with a business climate package that makes their companies competitive with producers that enjoy lower labor costs and more favorable taxation throughout the rest of the world.

Jeff Troan, Director, Lockheed Martin Corporate Treasury (Advanced Industries 2014)
American management structure and process owes its origins to three individuals: Deming, Drucker, and Sloan. Of the three, W. Edwards Deming probably remains the most pertinent today. His definition of quality as a product “produced to the customer’s specification, at or ahead of schedule, at the lowest possible cost” forms the basis of a host of process optimization programs, from Six Sigma to Total Quality Management.

Since the early 1980s, aerospace and technology companies around the world have embraced Deming’s principles, and strained waste and defects from the manufacturing process. That has led to the realization by many business sectors that, given targeted workforce development support, a very broad class of labor can produce high-technology products around the world. Thus, today we see German cars produced in rural China, communication satellites built in southern Mississippi, and software development projects executed in Puerto Rico (and that’s just a snippet of mankind’s recent workforce development accomplishments).
Increasing world competition is driving an increasingly complex business paradigm for aerospace and other technology companies.
At the same time, the fall of the Soviet Union in 1989 has led the world to the realization that any sustainable economic system has to be rooted in capitalism. That, combined with other environmental factors like improved networking capabilities and the spread of English as a common business language, has led to an explosion of productivity in the former Eastern Bloc and developing world, opening both new markets and new production location opportunities for the world’s corporations.

And so, the planet has become a very competitive place, where it is increasingly difficult to differentiate one’s company based solely on heritage factors like business process optimization and workforce. What arises is an extension of the business process optimization model to the business climate.

This trend isn’t something one can ignore as a product line manager, site selector, or commerce official. In a mature industry sector, even the most process-efficient company with the highest quality workforce will find survival challenging if its tax climate is unfavorable, it operates in an area with a high cost of living (driving up its labor costs), utilities are expensive and/or unreliable, and the infrastructure is aging. Capitalism, despite its many faults, is a wonderful driver of efficiency. Unless you’re producing at or near Deming’s optimal production point, Adam Smith’s invisible hand will strike you from the field, posthaste.

Extending Business Process Optimization to the Business Climate
New business managers at major aerospace and technology corporations talk about discriminators and disruptors. Discriminators provide a notable technical, cost or schedule advantage that improves the chance of winning a major proposal or building market share. Disruptors are much more rare. They are such significant changes in operating practice, that it is difficult for a competitive intelligence team to predict them, and they have a market reshaping impact on new work.
Expand A Lockheed Martin F-35 fighter aircraft being produced at the company’s factory in Fort Worth, Texas
Close A Lockheed Martin F-35 fighter aircraft being produced at the company’s factory in Fort Worth, Texas
A Lockheed Martin F-35 fighter aircraft being produced at the company’s factory in Fort Worth, Texas
Business climate modifications are reaching proportions that put them in the disruptive category. Boeing’s relocation to South Carolina and Oklahoma; L3 Corporation’s relocation of Aircraft Maintenance, Repair and Overhaul operations to Waco, Texas; Northrop Grumman’s new aircraft design and manufacturing facilities in Saint Augustine and Melbourne, Florida; and Airbus’ new aircraft fabrication facilities in Alabama are just a few examples of disruptive level moves in aerospace and technology.

Business climate modifications are the province of public-sector economic developers, the consulting agencies that support them, and the corporations forward-thinking enough to see the paradigm shift. Economic development is a method by which a local community can artificially modify its business climate to enable targeted industry sectors to continue to produce, where natural capitalist principles would drive the work elsewhere.

Economists break out producers into two categories: core and noncore. Core businesses import cash into a community and export product (either a good or service) outside the community (either domestic or internationally). These are the core engines of capitalism that propel all the other sectors of the economy. Noncore businesses take the “spend” generated by the payroll and procurement of core businesses and create secondary activity. These businesses are also important because they create induced employment in sectors as diverse as construction and retail. They also create the taxable transactions that provide the revenue necessary for municipalities to maintain public services and retain core employment.

A community that lacks core employment is either in economic decline, or serving as a bedroom community to someone else’s core business (economic seepage). A community that lacks noncore employment can’t generate secondary and tertiary taxation and employment. The core money slips away (economic leakage).

The process of maintaining the balance between core and noncore business has become much more complex over the last 50 years. Gone are the days following World War II, when the United States had the majority of the viable production capacity on the planet. First, Europe and Japan recovered production capacity, followed by the modernization of the former Eastern Bloc nations, and finally the developing world. The significant core business loss that the United States endured during the early years of the 21st century has reduced the number of core employers, and made the surviving companies very cost-conscious.

To attract and retain (yes, retain) core businesses in the twenty-first century, communities will have to offer significant workforce development support, combined with a business climate package that makes their companies competitive with producers that enjoy lower labor costs and more favorable taxation.

The good news is, to a large extent, noncore businesses will follow the new cash spend of core businesses, so they can endure a harsher business climate than one’s core engine, rebalancing community financial models. However, communities should remain cognizant of quality-of-life issues and acceptable residential housing stock, to ensure core business employees locate (and spend their salaries) in the community.

“But shouldn’t every company be taxed the same?” The answer is, really, no, and such a policy can be very destructive to community economic balance.

First, flat taxation is never fair. For example, communities that tax primarily on capital investment inherently overburden capital-intense industries, and those that primarily tax wages, unfairly burden research and development firms.

Second, different employers face different economic pressures and provide different value to the local economy. In the new world economy, “new cash spend” is king, and that can only be provided by a dwindling number of core employers. Economic balance is maintained by the community through a combination of judicious fiscal policy, modified taxation, and affordable housing stock.

What the Paradigm Shift Means to Aerospace and Technology Companies
Core businesses in the aerospace and technology sector need to be attuned to the business climate and partner with host communities to preserve a competitive position. Until recently, this usually meant moving operations to a receptive community, because public-sector economic development officials tended to view economic development packages for heritage employers unfavorably.

While moving an entire operation (millions of square feet and thousands of jobs) to a new community is certainly a decisive way to improve a company’s overall business climate, it does have its disadvantages. Such a strategy has the following negatives:
  • An accounting write-off of all assets at the former operations site;
  • Carrying cost on the vacant facility before resale;
  • The cost of the new facility;
  • Operations shutdown as the company relocates tooling to the new site (or purchase of duplicate tooling);
  • Relocation of key employees to the new location;
  • Recruiting of most of the workforce as new; and
  • Significant training obligations to enable the new workforce.
Many of these costs can be covered via a well-negotiated economic development partnership with the new town’s public-sector coalition (state and local government, domestically). A good package will include all four categories of economic development incentives: (1) statutory; (2) discretionary; (3) legal construction; and (4) legislative. Generally, a legislative move is utilized to commit enough funds from general revenue to support project financing. This is also a good time for the public coalition to modify ancillary statutes to best accommodate the targeted industry in general.
The process of maintaining the balance between core and noncore business has become much more complex.
Once complete, the public coalition constructs facilities to the requirements of the company, and leases them the assets at a discounted rate. In many states, such public-sector “ownership and lease” will define a form of legal construction that exempts the property from ad valorem taxation. Discretionary and statutory economic development programs can then be combined to help support equipment relocation, calibration, and installation, as well as play a major role in workforce development and recruiting. Key employee relocation costs seem to be the most difficult expense to get reimbursed, but they occasionally can be recovered through a discretionary fund.

All that said, many companies fail to realize that this support is not free, and they are going to be bound by possible recapture obligations by the same contract that brought them the favorable business climate. Economic development recapture, commonly known as “clawbacks,” comes in many forms. In general, failure to achieve job generation, average salary, and capital investment goals means the corporation will forfeit part or all of its economic development partnership support. Recapture terms may increase its lease rates, or the public coalition may simply require cash penalties for failure to meet targets. Further, many states have “digital rules” on recapture, where missing a target by one job can cost the corporation a significant penalty.

Clawbacks have to be considered in the company’s financials and either covered via termination liability from its customers, if possible, force majeure, or reserve funds. The economic development contracts are best monitored as part of the quarterly financial process, so that operations management remains aware of the consequences of its day-to-day decision-making.

The good news is that the heritage model is changing, as the public sector is coming to the conclusion that preserving core employment through economic development principles is both ethical and cost-effective. Even states like New Jersey and California are now participating with multiple economic development programs that look to retain key employers.

Companies need no longer assume they have to relocate to survive. The changing emphasis in the public sector on retaining the economic base opens a myriad of options, from facilities consolidation efforts to new business economic development partnerships. These preserve and improve the heritage workforce and minimize new investment in facilities and infrastructure.

So, whether you are a corporate executive or a public-sector policymaker, I will leave you with a passage from Charles Darwin. “The future belongs not to the strongest or most intelligent, but to those most able to adapt.” Good hunting.
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