The subprime mortgage crisis that has resulted in a near meltdown of the financial system, a decline in consumer confidence and spending, increasing unemployment, and near-bankruptcy for the nation's largest manufacturers - the U.S. auto industry - has pushed the U.S. economy into a recession that may prove to be more severe and lengthy than previously assessed by the economic pundits. The National Bureau of Economic Research has, in fact, just announced that the recession officially began in December 2007. This slowdown in industrial activity - which was actually predicted by the respondents to our 2007 Corporate Survey, although to a lesser degree - is reflected in U.S. GDP contracting by 0.5 percent in the third quarter of this year. Some analysts are already predicting it will shrink by another 1 or even 2 percent in the September-December period, once the numbers are finally crunched.
According to the third quarter edition of PricewaterhouseCoopers Manufacturing Barometer, two-thirds of U.S.-based industrial manufacturers are, in fact, pessimistic about the U.S. economy over the coming year. They are scaling back growth projections for their companies' revenue, estimating a 2.8 percent average revenue growth rate in the third quarter - down from the 3.7 percent revenue growth rate predicted the previous quarter.
A report by the Manufacturers Alliance/MAPI piles on more bad news. That group predicts growth in manufacturing production will decline by 1.4 percent this year, following low growth of 1.7 percent in 2007. This will be followed by a steep 4.2 percent drop in growth in 2009, as companies scale back. U.S. demand for goods is down as consumers' wealth has decreased due to declining home values and shrinking nest eggs. And many who still have jobs are not sure for how long, with companies announcing plant closures and layoffs almost daily. In fact, U.S. demand posted its first annual contraction in 17 years - a 1.8 percent decline - according to the Bureau of Economic Analysis.
Since corporate decisions to expand and open new facilities are generally based on heightened consumer demand, we should expect the results of our 2008 Corporate Survey to reflect the current economic slowdown. However, readers should note that this survey was conducted in August 2008, with most of the responses received early to mid-September, thus not reflecting the events taking place in the financial markets and other industries during the year's final quarter. Let's examine the Corporate Survey results.
Who Responded?
This year, just about two-thirds (64 percent) of those responding to our 2008 Corporate Survey are with manufacturing firms (Figure 1). Some 45 percent are the chief executives of their firms, with another 29 percent being highly ranked corporate officers (Figure 2). Similar proportions of the respondents are involved in their companies' final location decision (49 percent) or preliminary location decision (30 percent) (Figure 3).
About a quarter of the respondents' companies operate just one domestic facility. However, 43 percent operate five or more domestic facilities, and more than half of those with foreign operations run more than five foreign operations (Figure 4). Thirty percent of these firms employ 1,000 or more people in total, but the majority (45 percent) of the respondent companies are mid-size in terms of work force, with between 100 and 499 employees (Figure 5).
When asked about their facilities activity in the past 12 months, 58 percent of the respondents to our 2008 Corporate Survey said their number of facilities had not changed over that period (5 percent fewer than reported by the respondents to our 2007 Corporate Survey), while 30 percent had actually increased their number of facilities in that 12-month window (again, 5 percent fewer than reported increasing their number of facilities in last year's survey) (Figure 6). Again, take note that this survey was conducted in late August 2008 so the 12 month-period being referred to is August 2007-August 2008, before the current onslaught of economic woes.
Nearly three-quarters (72 percent) of those reporting that they had increased their number facilities said these additions were in response to increased sales/production, and 60 percent said they needed to serve new markets. All of the mere 12 percent of respondents reporting that they had decreased their number of facilities during the 12 months prior to taking the survey were consolidating existing operations, while about half (56 percent) said they needed to lower operating and/or labor costs (Figures 7 and 8). Only 35 percent of those reporting they had decreased their number of facilities last year cited that need.
When asked about how the downturn in the U.S. economy (up until late summer 2008) had affected their facility plans, just 24 percent of the respondents said their new facility plans had been put on hold, while 22 percent said they were still planning to open new facilities; however, 15 percent actually planned to close or consolidate facilities. In response to this question, only 13 percent of the respondents said they were still planning to increase hiring, and nearly a fifth planned to reduce current employment and/or defer hiring plans (Figure 9).
Now that we have a profile of these respondents and their current facility status, let's find out more about their location and expansion plans and priorities for the years ahead.
What Are Their New Facility Plans?
About one-fifth of the respondents to our 2008 Corporate Survey said they expect to open new facilities within one year, while 35 percent have plans for new facilities opening in the next two to three years. Last year, a similar percentage of survey respondents had one-year new facility plans, but only 25 percent had two- to three-year plans. However, only 38 percent of the 2008 respondents said they have no plans for new facilities - far fewer than the 49 percent reporting no new facility plans last year (Figure 10). These responses don't seem to reflect current economic conditions, and one wonders if the responses would have been different if the survey had been conducted closer to year's end.
Of those planning new facilities, about half (46 percent) plan to open only one facility, and about a quarter (26 percent) said they would open just two (Figure 11) - similar percentages to those reported by 2007's survey respondents. Nearly half of the new domestic facilities (48 percent) will be manufacturing operations, and more than a quarter (27 percent) are planned warehouse/distribution facilities (Figure 12). Additionally, 90 percent of the respondents reported that, all told, they would create fewer than 500 jobs at these new domestic facilities; just 22 percent will create between 100 and 499 jobs (Figure 13).
Fourteen percent of the new domestic facilities are planned for the South (Alabama, Florida, Georgia, Louisiana, and Mississippi), with the Midwest (Illinois, Indiana, Michigan, Ohio, and Wisconsin) and Southwest (Arizona, New Mexico, Oklahoma, and Texas) each garnering 13 percent of the new planned domestic projects. The South Atlantic region (North Carolina, South Carolina, Virginia, and West Virginia) follows, accounting for 12 percent of these projected facilities. Interestingly, last year only 9 percent of the planned projects reported by the Corporate Survey respondents were slated for the Southwest. Also, plans for the Middle Atlantic region (Delaware, Maryland, New Jersey, New York, and Pennsylvania) have tapered off, with only 7 percent of the new domestic facilities slated for this region - down from 12 percent reported by last year's respondents (Figure 14).
Nearly half (44 percent) of the planned new foreign facilities will be manufacturing operations, and a quarter are slated to house warehouse/distribution centers (Figure 15). It also appears that more jobs are expected to be created at the new foreign facilities than the domestic ones - 12 percent of the respondents will be creating 500 jobs or more in total at new foreign facilities, and 31 percent will be creating 100-499 jobs at these facilities (Figure 16).
As for the location of new foreign facilities, 13 percent are planned for Canada, nearly double the percentage planned for Canada by last year's Corporate Survey respondents. Ten percent of these new foreign facilities will be established in Eastern Europe - with just 6 percent slated for this region last year. There's a slight decline for the traditional picks of Western Europe (with just 9 percent of the new foreign facilities planned for this region, down 2 percent from last year), and for Asia, which was expected to garner 42 percent of the new foreign facilities last year, but will only get 38 percent of the 2008 Corporate Survey respondents' new foreign facilities (Figure 17).
Significantly, when it comes to the new facilities planned for Asia, 44 percent will go to China - down from 54 percent last year. India is holding its own - accounting for a quarter of the new foreign projects slated by the Corporate Survey respondents (Figure 18). Let's hope the recent tragic events in Mumbai do not cause this nation to lose its appeal to foreign investors.
Of those planning new foreign facilities, 40 percent or more of the Corporate Survey respondents expect to encounter legal and regulatory problems, as well as a shortage of skilled labor. More than a quarter of the respondents also expect to find the infrastructure (both utility and transportation) lacking and to run into social/cultural barriers (Figure 19).
Do They Have Expansion and Relocation Plans?
When asked about their expansion plans at their current location, more than half of the 2008 Corporate Survey respondents said they had no plans (similar to last year's results). Just 16 percent said they planned to expand in one year, and 33 percent had longer-range expansion plans (Figure 20). Unfortunately, more than two-thirds of these expansions will create fewer than 50 jobs in total (Figure 21).
About three quarters of the respondents also have no plans to relocate a domestic facility. Of those with relocation plans, only 8 percent expect to make the move within one year (Figure 22). These results are remarkably similar to those reported in 2007.
More than half of those respondents with relocation plans cite the need to lower operating and occupancy costs (up from 33 percent last year), and more than a third need to be closer to suppliers and/or markets served (up from just 12 percent in 2007) (Figure 23). The escalating costs of fuel over the months preceding the survey mailing are no doubt reflected in this response.
Interestingly, 96 percent of the Corporate Survey respondents with relocation plans said they did not plan to relocate a domestic facility overseas or an overseas facility back to the United States (Figure 24).
What Are Their Location Priorities?
As in years past, we asked our survey-takers to rate the factors on which they base their location and expansion decisions as "very important," "important," minor consideration," or "of no importance." We then added up the "very important" and "important" ratings and rounded to the nearest tenth of a percent in order to rank the factors in order or priority. These findings are presented in Figures 25 and 26.
The top two ranked factors - highway accessibility and labor costs - have not changed their position from last year, although their percentage ratings have dropped slightly. Highway accessibility was rated as "very important" or "important" by 95.4 percent of the 2008 Corporate Survey respondents. Obviously, sites that cannot satisfy a company's transportation infrastructure needs for receiving supplies, getting products to market, and giving employees and others access to the site will not make the cut.
An area's labor costs are always a top concern when companies make location decisions, and with profit margins shrinking in these tough economic times, these recurring costs take on even greater significance. The labor costs factor was rated "very important" or "important" by 91.4 percent of the 2008 Corporate Survey respondents, closely followed by occupancy and construction costs, which ranked third among the factors with a 90.4 percent rating.
Those site selectors looking to build to suit will find that the cost of construction has gone up. However, there is plenty of vacant space already built out; this should result in lower occupancy costs. Nonetheless, those shrinking profit margins previously referred to are forcing companies to look for savings wherever they can. (See the article on this factor in this issue of Area Development.)
Another way for companies to save money is through tax exemptions. This factor holds the fourth place spot this year, receiving an 88.6 percent rating in importance from the survey respondents - up from tenth place in 2007 when it was rated "very important" or "important" by just 82.8 percent of the respondents.
Two related factors - state and local incentives and corporate tax rate - also grew in importance ratings, although they did not jump ahead in the rankings. The former ranked seventh with an 87.2 percent rating, and the latter followed in eighth place with an 85.3 percent rating. Reduced tax revenues brought about by the current recession will obviously curtail state and local governments' ability to offer generous incentive packages or tax exemptions, but these factors will always rank high with site selectors.
When asked specifically about types of incentives, more than half of the Corporate Survey respondents said tax incentives were most important, while nearly half also cited the importance of incentives such as free land, utility rate subsidies, infrastructure and training support, etc. (Figure 27). In fact, the training programs factor advanced 5.7 percentage points in this year's ranking, receiving a 62.3 percent combined "very important" and "important" rating.
More than half of the respondents indicated their companies had received some type of incentives in the past, and nearly two thirds of these recipients were satisfied with their benefits. Of those who felt the incentives had fallen short, half claimed that the tax incentives expected had failed to materialize (Figures 28, 29, 30). Perhaps these firms had not met their end of the deal with respect to promised investment or job creation commitments in exchange for the incentives.
Energy availability and costs was ranked fifth by the 2008 respondents, receiving an 87.9 percent "very important" or "important" rating. Surprisingly, this was down from third place in 2007 with an 89 percent rating. However, when asked how rising energy costs were affecting their companies, nearly half of the Corporate Survey respondents said they were affecting operations, and a quarter claimed these costs were affecting supply and distribution network decisions (Figure 31). Additionally, 92 percent of the respondents claimed to have undertaken energy-saving facility modifications, and nearly 80 percent were recycling or re-using waste products from their operations (Figure 32).
Availability of skilled labor has taken a back seat this year to some of the more pressing cost issues. This factor dropped from fourth to sixth place in the rankings, while its combine "very important" or "important" rating actually only declined one percentage point to 87.7 percent. But the low union profile factor has seen its importance rating advance over the last two years - registering 78.4 percent in 2006, 80.6 percent in 2007, and 82.7 percent in 2008. Concern about bringing costs down is causing companies to increase their focus on avoiding locations where unions have negotiated generous packages for their members to the detriment of the company's bottom line (i.e., just look at the stranglehold UAW benefits have put on the U.S. auto industry). It's no surprise then that right-to-work state has gained in importance as well, with a 67.1 percent combined "very important" or "important" rating in 2006, 72.1 percent rating in 2007, and 76.6 percent rating in 2008 - a 14 percent increase overall.
The available land factor went from sixth place last year to 10th in this year's rankings, down to an 82 percent importance rating from 85.4 percent in 2007. However, the 2008 Corporate Survey respondents are more concerned about availability of buildings. This factor jumped from 14th to 11th position, with its importance rating increasing from 79.3 percent to 80.8 percent. Companies that need to fast track their projects will first look at locations where available facilities can satisfy their site selection needs. Similarly, expedited or "fast-track" permitting has increased in importance, moving up in the rankings to 15th place with a 72.5 percent "very important" or "important" rating.
Although two-thirds of the 2008 Corporate Survey respondents said environmental concerns are more important now than in the past (Figure 33), when rating the environmental regulations factor in relation to others, it ended up in 14th place for 2008 with a 76.1 percent rating, down from ninth place last year with an 83.2 percent rating. Perhaps as companies are becoming more aware of sustainable development for its inherent advantages, the environmental regulations of specific areas have become less of a determinant in location decisions.
At the time this survey was conducted - late summer 2008 - credit markets had yet to completely freeze up. This is the only plausible explanation for more than two-thirds of the 2008 Corporate Survey respondents claiming that tightening credit was not affecting their facility plans (Figure 34) and for ranking availability of long-term financing in 17th place with a 64.2 percent rating. However, this was actually up two spots in the rankings and 1.2 percentage points from 2007. Again, if this survey were conducted today, the answers might be much different.
The factor showing the greatest change in the rankings is availability of advanced ICT services, which fell from 12th place last year with a combined importance rating of 82.2 percent to 21st place among the factors this year with a combined 55.5 percent rating - a decline of 26.7 percentage points or an astonishing 32 percent. The 2007 survey form described advanced ICT services as "high-speed Internet, wireless, VOIP, etc." The 2008 Corporate Survey questionnaire described advanced ICT services as T1, T3, OC" - more esoteric terms. This change in description is the only way to explain the precipitous drop in the importance of this factor. Respondents may have been confused by the T1, T3, OC examples - designations not as universally understood as "high-speed Internet," etc. This is the only explanation I can offer for this anomaly.
The factor showing the second-largest decline in importance is railroad service. This factor fell nearly 11 percentage points to a combined "very important" or "important" rating of 27.2 percent. This decline was not expected. Railroads have made massive investments to expand tracks and equipment in the past several years; besides moving traditional commodities, they are now increasingly moving consumer goods. Many warehouse/distribution facilities are being built in proximity to these railyards. However, since only 14 percent of the Corporate Survey respondents are with warehouse/distribution operations, this might explain the decreased priority given to railroad service this year.
The quality-of-life factors are traditionally ranked separately from other site selection factors. Throughout our Corporate Survey history, low crime rate has topped the list of quality-of-life factors. This year is no exception, with low crime rate achieving a 78.2 percent combined "very important" or "important" rating.
The healthcare facilities factor jumped from fifth place among the quality-of-life factors in 2007 (with a 57.4 percent rating) to second place this year (with a 77.6 percent rating) - a 20.2 percentage point gain and the largest increase overall among all the survey factors, both site selection and quality of life. Each year business' costs for employer-sponsored healthcare have risen; thus, this factor has become a more important location determinant. Decision-makers must consider which states and communities offer the lowest healthcare costs and least risk to employers, while providing ample quality coverage.
The lowest-ranked quality-of-life factors for 2008 were recreational opportunities and cultural opportunities (both rated as "very important" or "important" by less than half of the 2008 Corporate Survey respondents). Tough economic times have resulted in leisure time activities being given low priority.
We also asked our survey-takers if they consider whether there are businesses performing similar activities to theirs in the area of search - 70 percent said "yes," and 60 percent said this factor was important in their site decision (Figures 35 and 36). It has been noted that clustering of industries provides greater access to material resources and employee talent. In fact, more than a third of the respondents making site visits said they meet with representatives of similar area businesses (Figure 37).
How Do They Get Their Location Information?
Corporate decision-makers are increasingly using the Internet to obtain site selection information: 61 percent of the 2008 Corporate Survey respondents said they were. Importantly, a larger percentage (64 percent) also use site magazines like Area Development; that is double the percentage using either general business publications or financial publications for this type of information (Figure 38).
Of the 2008 respondents using the Internet to help make their site and facility planning decisions, 94 percent obtain website addresses from general search engines like Google, etc. But two-thirds also get these addresses from print ads in magazines such as Area Development (Figure 39).
More than half of the survey respondents also find sites like Area Development Online to be most useful in making their location decisions, and about a third utilize property databases that list available land and buildings, e.g., FastFacility.com. Of course, 90 percent of the survey respondents take advantage of economic development websites as well (Figure 40).
This year, 52 percent of the Corporate Survey respondents said they use the services of consultants when site selecting. Most of these individuals (84 percent) ask the consultants to perform location studies, about half prefer that the consultants engage in incentives negotiations on their behalf, and nearly half (44 percent) actually allow the consultants to make the final site decision for them (Figures 41 and 42). On the following pages, we'll recap the results of our Fifth Annual Consultants Survey to see how they stack up against the corporate responses.
What Does the Future Hold?
Cliff Waldman, an economist for the Manufacturers Alliance/MAPI, recently acknowledged that "the rapidly declining U.S. and global economies have created a deep and worrisome slump in the U.S. manufacturing sector." He and others are counting on "the capacity of central banks and governments to implement effective countercyclical policies."
As stated at the beginning of this report, our 2008 Corporate Survey was conducted during late summer, prior to the tumultuous economic events of the fall. Therefore, the new facility and expansion plans projected herein may now have been altered in response to changing circumstances.
Nonetheless, as we go to press on this issue, there is a major "unknown," i.e., what the incoming Obama administration will do to help solve the nation's economic crisis. If the new administration puts in place stimulus plans to encourage business investment in new technologies, to create new jobs, and to restore consumer confidence, the current dire economic situation could start to turn around as early as the latter half of 2009. In that case, the plans reported by our 2008 Corporate Survey respondents could very well come to fruition, albeit at a delayed pace.
23rd Annual Corporate Survey
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