During the course of 2011, manufacturers were confronted with a number of challenges. They had to deal with supply chain disruptions caused by natural disasters; an ongoing and deepening European debt crisis; and continued weakness in the U.S. labor and housing markets, among other problems. However, manufacturers appear to be recovering nicely and the sector is a bright spot in the nation's economic picture.
The latest data shows that, in December 2011, factory production had advanced 15 percent above its low of two and a half years prior, and the November to December gain of 0.9 percent represented the largest monthly increase since December 2010. The Consumer Confidence Index also jumped to 64.5 in December from November's 55.2. And In the latter half of 2011, consumers spent more on automobiles; businesses increased spending on industrial machinery and computers - perhaps spurred on by a federal tax credit that was set to expire at year's end - and companies restocked supplies. The Institute for Supply Management's factory index thus climbed higher into positive territory in December, registering 53.9.
There were signs of improvement in the employment picture too: the Bureau of Labor Statistics' December household survey showed sizeable employment gains for the fifth straight month, reducing the unemployment rate to 8.5 percent. Importantly, manufacturers added 5,000 workers to their payrolls in December, following the addition of 2,000 workers in November 2011.
How has all this relatively positive news affected companies' facility plans and priorities? Area Development's annual Corporate Survey of our readers, which was conducted in late October/early November just as these economic events were unfolding, might provide an answer to that question. Let's take a look.
Who's Making the Decision?
Of those individuals responding to our 2011 Corporate Survey, nearly half are with manufacturing companies, and another fifth are with distribution and logistics or warehouse services firms (Slideshow, Figure 1), twice the number represented by the 2010 Corporate Survey respondents.
Nearly half are also the highest-ranking persons in their companies, i.e., owner, chairman, or CEO. Another 17 percent are their firms' chief financial officer, and a similar percentage is responsible for directing their companies' real estate or facilities (Slideshow, Figure 2).
Not surprisingly, therefore, 80 percent of the 2011 Corporate Survey respondents are involved in their companies' final or preliminary location decisions (Slideshow, Figure 3). Based on the caliber of the respondents, we can safely judge the responses to our 2011 Corporate Survey to be a good indication of where - and how - our corporate readers' firms are making their location and/or expansion decisions.
In addition to executive management, also involved in these decisions, to a lesser extent, are individuals from the responding firms' real estate and tax and finance departments, as well as their supply chain/logistics and human resources departments. Importantly, 31 percent of the respondents say other operations or business unit management at their companies are also involved in the location decision (Slideshow, Figure 4).
How Big Are Their Firms?
Nearly half of the 2011 Corporate Survey respondents are with firms that operate five or more domestic facilities. Only 34 percent say they operate foreign facilities, but 60 percent of those that do claim to operate five or more (Slideshow, Figure 5). And almost half the respondents (45 percent) are with mid-size firms in terms of employment (100-499 employees), while 30 percent say their companies have 1,000 or more workers (Slideshow, Figure 6).
Sixty percent of the 2011 Corporate Survey respondents did not make a change in their companies' number of facilities over the 12 months prior to taking the survey. However, the good news is that 30 percent of the respondents claim to have increased their number of facilities and only 10 percent to have decreased their number of facilities over that period (Slideshow, Figure 7). This is an improvement over last year's Corporate Survey results, when only 22 percent of the 2010 Corporate Survey respondents said they had increased their number of facilities over the 12 moths prior to taking the survey.
Forty-seven percent of the 2011 Corporate Survey respondents who had increased their number of facilities say they did so to gain better access to new or existing markets; 38 percent also say the increase in number of facilities was a result of increased sales/production (Slideshow, Figure 8). Nearly all (92 percent) of the respondents who claim to have decreased their number of facilities over the 12 months prior to the survey say they needed to lower operating and/or labor costs (Slideshow, Figure 9).
What Is Their Outlook?
The editors of Area Development magazine also asked those taking the 2011 Corporate Survey if the sluggish economic recovery is affecting their facility plans. Again, the responses are more optimistic than those we received when we posed this question in 2010. Thirty percent of the 2011 Corporate Survey respondents say they still plan to open new facilities and/or expand (up from 22 percent who made that projection in 2010), and 27 percent still plan to increase hiring (up from 20 percent in 2010). Only 16 percent are deferring hiring (as opposed to 19 percent in 2010), and 22 percent are deferring capital spending (as compared with 30 percent reluctant to spend in 2010) (Slideshow, Figure 10).
Nonetheless, only 19 percent of the 2011 Corporate Survey respondents expect the economy to improve significantly this year. More than a third of the respondents do not expect the economy to improve significantly until 2013, and 43 percent are holding out hope for 2014 (Slideshow, Figure 11).
Do They Have New Facility Plans?
When asked specifically about their plans for new facilities, 25 percent of the 2011 Corporate Survey respondents say they have plans to open new facilities within one year. This is comparable to the 2010 Corporate Survey results. Another quarter have new facility plans for two to three years out (Slideshow, Figure 12).
Of those with new facility plans, 41 percent of the 2011 Corporate Survey respondents say they plan to open two new facilities, and 30 percent expect to open just one (Slideshow, Figure 13).
Interestingly, there's been a heightened interest in the Southwest region (Arizona, New Mexico, Oklahoma, and Texas). The largest percentage of new facilities (15 percent) is slated for this region, up from 10 percent as reported by the 2010 Corporate Survey respondents. The Mid-Atlantic (Delaware, Maryland, New Jersey, New York, and Pennsylvania), Mid-South (Arkansas, Kentucky, Missouri, and Tennessee), and Midwest (Illinois, Indiana, Michigan, Ohio, and Wisconsin) regions will each garner 11 percent of the new facilities planned by the 2011 respondents. There is also and even spread of projects among the South Atlantic (North Carolina, South Carolina, Virginia, and West Virginia), Southern (Alabama, Florida, Georgia, Louisiana, and Mississippi), and Western (California, Nevada, Oregon, and Washington) regions, with each expected to receive 10 percent of the respondents' new facilities (Slideshow, Figure 14).
Most of these new domestic facilities will house manufacturing (32 percent) or warehouse/distribution (28 percent) operations (Slideshow, Figure 15). Unfortunately, more than four fifths of these facilities are expected to create fewer than 100 jobs (Slideshow, Figure 16), and 88 percent will account for only up to $50 million in investment (Slideshow, Figure 17).
The disbursement of new foreign facilities shows a continuing interest in Asia: 33 percent of the new foreign facilities planned by our 2011 Corporate Survey respondents are slated for this region of the world. However, that is down from 48 percent of the new foreign facilities that were planned for Asia by those responding to our 2010 Corporate Survey (Slideshow, Figure 18). And more than a third of the 2011 Corporate Survey respondents who are planning new facilities for Asia expect to place them in China; a fifth have their sights on India (Slideshow, Figure 19).
Mexico is looking good to our 2011 respondents as well. Our neighbor to the south is projected to garner 10 percent of the new foreign facilities planned by the 2011 respondents, up from only 6 percent of those planned by the 2010 Corporate Survey respondents. And Canada is holding steady with 10 percent of the projects slated for our neighbor to the north.
There's also been a surge in interest in Western Europe - 20 percent of the foreign facilities planned by the 2011 Corporate Survey respondents will go here, as compared with just 8 percent of those planned by the 2010 Corporate Survey respondents. This result is surprising in light of the European debt crisis that may adversely affect multinational firms with FDI in Europe.
Similar to the domestic breakdown of operations, a third of the new foreign facilities are expected to be manufacturing operations, and a quarter to be warehouse/distribution centers (Slideshow, Figure 20). Three quarters of the new foreign facilities will represent less than $50 million in investment. However, 16 percent will account for between $100 million and $500 million in investment (Slideshow, Figure 21) - more than is being spent on new domestic facilities.
Are They Expanding or Relocating?
About half of the 2011 Corporate Survey respondents say they have plans to expand their facilities at their present locations, with 40 percent expecting to do so within the next two years (Slideshow, Figure 22). However, the projected job creation number for these expansions is dismal: 86 percent of the planned expansions will create fewer than 100 jobs (Slideshow, Figure 23).
Importantly, 54 percent of the 2011 Corporate Survey respondents note that excessive government regulations are preventing them from spending more of their earnings on investment in U.S. facilities, and a whopping 65 percent note that they are put off by the nation's current state of economic instability (Slideshow, Figure 24).
Nonetheless, relocation plans are picking up: 34 percent of the 2011 Corporate Survey respondents say they plan to relocate a domestic facility, with nearly a quarter expecting to do so within the next two years (Slideshow, Figure 25). Of those with relocation plans, more than 40 percent cite high taxes at their present location as the reason behind their projected move, with a quarter also citing excessive government regulation, high labor costs, and the need to be in closer proximity to suppliers and/or markets served (Slideshow, Figure 26).
Nonetheless, offshoring and onshoring moves are not on the horizon. Nearly all of our 2011 Corporate Survey respondents say they do not expect to relocate a domestic facility to an offshore location or a foreign facility back to the United States (Slideshow, Figure 27), despite what we are hearing about U.S. manufacturers bringing their operations back home.
Which Site Selection Factors Are Important?
In order to find out how our corporate executive readers make their location and expansion decisions, as in years past, the editors of Area Development magazine asked our survey-takers to rate the site selection and quality-of-life factors as either "very important," "important," "minor consideration," or "of no importance." We then added the "very important" and "important" percentage ratings in order to rank the factors on which the corporate executives base their decisions. The results of the 2011 Corporate Survey respondents' factor ratings and rankings are shown in figures 28 and 29.
Once again highway accessibility and labor costs remain the top-two ranked site selection factors in that order, rated as "very important" or "important" by 93.8 percent and 88.4 percent, respectively, of the 2011 respondents.
Highway accessibility is always at the top of the survey-takers' list of site selection factors, so it follows that proximity to major markets is also very important. In fact, proximity to major markets showed the greatest jump in importance - 16.6 percentage points - moving from 17th place in the 2010 Corporate Survey rankings, with a 66.4 importance rating, to ninth place for 2011, considered "very important" or "important" by 83 percent of the 2011 Corporate Survey respondents.
Not only are the respondents concerned with labor costs, but also with the availability of skilled labor. This factor is actually tied with labor costs for second place in the 2011 rankings, having received the same 88.4 percent importance rating, and moving up from seventh place in the 2010 Corporate Survey rankings.
Moreover, although the U.S. unemployment rate remains high, two thirds of the 2011 Corporate Survey respondents say this is not making it any easier for their companies to find the labor they need (Slideshow, Figure 30). In fact, more than 40 percent of the respondents say the unemployed are lacking both basic skills in reading and math, as well as advanced skills like machine tool programming, bioprocessing, etc. This combination of a lack of basic and advanced skills might also account for the fact that nearly 40 of the 2011 respondents say they are dependent on contract or contingent workers who perhaps help to fill the skills gap (Slideshow, Figure 31).
Additionally, a lack of basic skills among the unemployed might also be behind the added importance given to the availability of unskilled labor factor. Although this factor was only ranked 20th, it shows the second-greatest increase in importance among the factors - advancing 13.5 percentage points and considered "very important" or "important" by nearly 60 percent of the 2011 Corporate Survey respondents.
As the economic recovery sputters along, the focus on costs is further reflected by our 2011 Corporate Survey results. Occupancy and construction costs is the fifth-ranked factor, with 85.9 percent of the respondents considering this factor "very important" or "important." And the tax-related factors are also among the respondents' top-10 priorities. Corporate tax rate is ranked fourth in importance; state and local incentives is tied with occupancy and construction costs for fifth place; and tax exemptions is ranked eighth among the site selection factors. All of these tax-related factors were rated "very important" or "important" by more than 80 percent of the 2011 Corporate Survey respondents.
Although tax exemptions dropped from the third place spot in 2010 to eighth in the current results, showing a decrease of 7.3 percentage points in importance, two thirds of the respondents say they consider tax incentives the most important type of incentive when making a location decision (Slideshow, Figure 32). Nonetheless, only about half of those responding to the survey have actually received and utilized incentives in the past (Slideshow, Figure 33), and only 38 percent say they actually received 75-100 percent of the incentives initially estimated value (Slideshow, Figure 34). However, almost all of the respondents say they never had to repay incentives monies because investment and/or job creation criteria were not met (Slideshow, Figure 35). Among the more challenging aspects of assessing, negotiating, and securing incentives are understanding the programs and the time required for the overall process (cited by nearly half of the respondents), as well as projecting the value of incentives offers and documenting the terms (Slideshow, Figure 36).
Energy availability and costs is ranked seventh among the site selection factors. Nearly a third of the 2011 Corporate Survey respondents also say high energy costs are affecting their facility operations (Slideshow, Figure 37), and almost two thirds say sustainable development is more important to their companies now than in the past (Slideshow, Figure 38).
Eighty percent of the respondents claim to be making energy-saving modifications to their existing facilities in order to reduce their companies' carbon footprint, while a quarter are also seeking LEED certification for new or existing facilities (Slideshow, Figure 39). Unfortunately, two thirds of the respondents say communities are not offering specific incentives for "green initiatives" (Slideshow, Figure 40). On the other hand, 86 percent say neither are they encountering "green performance" requirements as a stipulation for receiving incentives (Slideshow, Figure 41).
Rounding out the top-10 factors is low union profile, considered "very important" or "important" by 81 percent of the 2011 Corporate Survey respondents. Additionally, the right-to-work state factor, which is ranked 12th in importance (up from 16th in the 2010 Corporate Survey), showed the fourth-highest increase in importance - jumping 9.6 percentage points and considered "very important" or "important" by more than three quarters of the survey respondents. Companies have found it less costly to operate where they don't have to meet union salary and benefit demands, and high-profile cases - e.g., Boeing opening its new facility in right-to-work South Carolina instead of non-right-to-work Washington State - may have pushed these factors to the forefront. In fact, as we went to press, Indiana became the first state in a decade to enact a right-to-work law.
The factor showing the third-highest increase in importance is availability of long-term financing, advancing 11.5 percentage points and now considered "very important" or "important" by 70 percent of the 2011 Corporate Survey respondents. Although credit markets have loosened up somewhat since the financial crisis, many companies are still struggling to obtain financing.
Area Development's editors also asked our survey-takers about the importance of available buildings and shovel-ready sites in their location searches. Although available buildings dropped out of the top-10 site selection factors listed for 2011, 80 percent of the survey respondents still say the existence of an available building is very or somewhat important (Slideshow, Figure 42), and 57 percent consider the existence of a shovel-ready or pre-certified site very or somewhat important in their location search (Slideshow, Figure 43). The necessity of getting facilities up and running quickly and speeding products to market in today's highly competitive and fast-changing business environment is reflected by these responses.
We also asked if our corporate executive readers consider whether or not there are businesses performing activities similar to theirs in the area of search. More than half of the 2011 Corporate Survey respondents say yes, and that this factor is very or somewhat important as well (figures 44 and 45).
Quality-of-life factors were once again ranked separately from the primary site selection factors. If these were ranked together, low crime rate - the number-one quality-of-life factor this year and over the 26-year history of Area Development's survey - would be ranked among the top 10, considered "very important" or "important" by 82 percent of the 2011 corporate respondents. Among the other quality-of-life factors, ratings of public schools had the largest increase in importance - 7.6 percentage points with a 68.8 percent importance rating - perhaps reflecting the 2011 respondents' belief that the nation's available labor pool lacks even the most basic skills. Other than low crime rate, though, none of the quality-of-life factors would rank among the top 10 overall, indicating that these factors only come into play once other primary site selection criteria have been satisfied.
Where Do They Get Their Information?
More than 70 percent of the respondents to our 2011 Corporate Survey say they get their site selection information from magazines like Area Development. About 40 percent also utilize general business magazines and economic data aggregators when performing a location search.
Interestingly, only 53 percent of the 2011 Corporate Survey respondents say they use the Internet for site and facility planning information, down from 76 percent of the 2010 survey respondents who made that claim. Of those that do use the Internet for this process, three quarters are looking for data on specific locations, more than half for listings of available buildings and sites, and nearly half for economic development agency contact information. According to the responses from our 2011 survey-takers, for the most part, this is not an activity they engage in on a daily or even weekly basis.
More than 50 percent of the 2011 Corporate Survey respondents start the information-gathering process one or two years or more in advance of making a location decision. Another 31 percent start just six months to a year out. Once they've determined the locations of interest, a third make contact within a month, another third within three months, and a fifth not until about six months later.
Just one to five locations make the short list of nearly 90 percent of the survey respondents, and 60 percent will visit up to five of the prospective communities. About 40 percent of the 2011 Corporate Survey respondents say they reach a location decision within three to six months of making initial contact with the locations of interest; however, nearly another 40 percent say it takes them six months to a year after that initial contact to come to a location decision, and a fifth of the respondents will take one to two years to make up their minds!
More than half of those responding to our 2011 Corporate Survey do not use outside site selection or business consultants in the location decision process. Of those that do, two thirds ask the consultants to perform location studies or comparative analyses as well as help with the real estate transaction. Slightly more than a third of the respondents also say they utilize the consultants for performing feasibility studies, incentives comparisons and negotiations, as well as for help with the construction process.
What Does It All Mean?
The results of our 2011 Corporate Survey show that new facility and expansion plans remain steady - if not robust. Again, 80 percent of the respondents say they do not expect the U.S. economy to improve significantly until 2013 or 2014.
However, there is projected to be an increase in relocation activity brought about by a need to move to more pro-business areas, in terms of having a reduced tax burden and less onerous government regulations. The survey respondents have also placed greater emphasis on the need to find the right labor force - both skilled and unskilled - as well as to acquire the appropriate financing in order to innovate and grow their businesses. Reports of financing loosening up are welcome news.
A January 6 report from the Commerce Department also recommends that the federal government increase investment in initiatives to support business innovation. According to the report, "The government could directly fund basic research through support of government labs or grants to universities or private research laboratories. Additionally, government policy could increase the returns earned by the private sector on basic research - through policies such as tax credits and a well-functioning patent system - and encourage the private sector to do more basic research."
The Commerce Department report also cites the need for more government initiatives that encourage students to pursue science, technology, engineering, and mathematics, or STEM, fields. This would help in the long term to satisfy companies' needs for qualified labor, i.e., to close the skills gap.
Of course, this being a presidential election year, government policies could change across the board - for better or worse. We will have to choose between competing views of what the government's proper role in the economy should be. Additionally, the euro crisis, a slowdown in the Chinese economy, and other global events could further stall the U.S. economic recovery. Let's hope those in Washington can work together to implement policies that drive growth so that there will be no need to continue to ask our readers when they expect the economy to improve!