Making the Most of Auto Industry Incentives
Dawn Baetsen, Managing Partner, Atlas Insight and Kathy Mussio, Managing Partner, Atlas Insight, LLC (Automotive Site Guide 2008)
Driven by consumer demand for fuel efficiency and alternative fuel vehicles, the automotive supply chain has been deeply affected by the cuts in production of SUVs and trucks, plant closures, and shifts in production location. The industry is adapting through consolidations, mergers and acquisitions, relocations, and expansions. Automotive suppliers are in the throes of shifting production to meet the needs of original equipment manufacturers (OEMs). With the spotlight on the changes in the automotive industry, incentives often factor into the decision-making process. This article will examine current incentive trends and issues pertaining to the automotive industry.
Current Incentives Trends
Although the OEMs drive the supply chain, cost containment remains a key factor. Industry surveys - such as the annual surveys of readers and consultants conducted by Area Development - identify key site decision drivers. While factors including proximity, labor, and transportation continuously rank as top factors in location decisions, incentives also continue to rank in the top 10, regardless of whether the location decision is based on a consolidation, expansion or relocation.
There have recently been new incentive programs created in around the globe, caused by global production shifts that are driven by consumer demographics and product demand. Countries where OEM producers choose to locate generally establish incentive programs that support the automotive supply chain. Incentives vary from one country or region to another, depending on tax structure, cost of living, economy, and other factors. In some cases, countries are reducing incentives offered, while others are becoming more aggressive. Eastern European countries, for example, are adding government incentives and expanding incentive programs to automotive suppliers in the last several years as car production expands in the region. China, on the other hand, has recently reduced the tax incentives for foreign investors or transplants. This has caused a few automotive suppliers to close operations and move production back to the United States (or the company's home country) due to increasing costs.
The decision to move operations back to a home country will open the door for incentives. Trends in the United States are to support the automotive supply chain through retention efforts and related government incentives. The United States is highly experienced in supporting manufacturing in general, and states typically will adapt incentives to the needs of the automotive industry, particularly in the current contracting climate. The keys to securing incentives in any location are to plan early, prepare to negotiate, draft the required paperwork, know the region, identify trends in government support, communicate your needs, identify government champions who will support the project, and avoid publicity before incentives are fully committed.
The trend globally and regionally is to establish incentive policies for the supply chain. Most countries and local governments are willing to provide incentives for typical expansion projects that meet the eligibility requirements for their respective programs. Depending on the size of the investment and the number of new jobs to be created, incentives range from statutory incentives - typically investment tax credits and employment tax credits - to discretionary incentives, offering cash and in-kind services or contributions to the project. Discretionary incentives can take many forms, such as free land, build-to-suit, property tax relief, pre-hire training, post-hire training, and rebates, to name a few. In the United States, for example, there is currently a general shift to cash reimbursement programs for capital investment in buildings or machinery and equipment, zero percent financing options, and flexible training grant programs that focus on the labor needs of the employer, rather than cafeteria-style training offered through the local community college.
Another recent trend we have noticed is that sustainability has moved to the forefront of many automotive suppliers when considering expansion, a new facility, or upgrading existing plant and equipment. Europe has been a leader in encouraging and supporting energy efficient production installations, and many countries financially support rehabilitation projects when they include investment in sustainable, energy efficient, and environmentally friendly installations.
The United States has experienced increased support for local property tax relief, cash grant programs for experimental green initiatives, and expanded state and local incentives for installing alternative energy and environmentally friendly solutions to existing and new facilities. However, more can and should be offered in order for companies to implement sustainable environmental programs when considering investment in property, plant, and equipment.
Research and development (R&D) activities are highly desired and are supported globally through incentives. All countries appreciate the economic benefits that R&D brings in terms of a highly-skilled, highly-compensated work force. Although we see firms accessing statutory research and development tax credits for increasing research capabilities, we continue to find many that do not access negotiated incentives for their expansion and new capital investment in R&D. With proper negotiations, capital investment and job creation for R&D are almost always considered to be valid negotiated incentive projects. We recently worked with an automotive supplier that initially came to us for an R&D study. However, once we dug deeper, we found that the supplier was also making significant capital investment in the domestic headquarters facility to accommodate R&D growth, but had not considered discretionary incentives. The company was pleased in the end to be awarded significant incentives for its investment and creation of employment for its research and development activities.