Area Development
It's a case of déjà vu. In last year's survey, I wrote about how our readers' plans reflected moderating growth of the U.S. economy brought about by a softening in the housing market and rising energy prices.about the Federal Reserve Bank lowering interest rates to boost borrowers' confidence.
Fast forward to December 2007 and the situation has gone from bad to worse. Many economists are saying the nation is on the brink of a recession, yet the latest Commerce Department reports indicate that U.S. GDP grew 4.9 percent in the third quarter of this year thanks to an acceleration in exports. This is the strongest performance in four years. And while rising energy prices might lead to a rise in inflation, the Federal Reserve noted in early November that core inflation had improved.

 Even business leaders' predictions for the economy are at odds. Executives at heavy-equipment maker Caterpillar say the United States might fall into recession in 2008, but their peers at Intel, Ford, and Dupont disagree. The latter group believes falling housing prices and the crisis in the subprime mortgage market are not enough to put the U.S. economy into recession. In fact, a Business Council survey of chief executive officers conducted in late October predicted that growth would slump to 2 percent or less next year but there would be no recession.

Additionally, only 63 percent of large and 76 percent of small manufacturing companies responding to a National Association of Manufacturers (NAM) third-quarter survey had a positive business outlook, representing the lowest level of optimism in roughly four years. Nevertheless, both groups of manufacturers expect pricing to remain stable and sales to increase, albeit moderately, over the next year. They also expect to continue to increase capital expenditures, although there will be a significant slowdown. Large manufacturers' capital expenditures are projected to rise by only 0.3 percent, while small manufacturers' capital expenditures are expected to increase by 1.6 percent. Both groups of respondents to the NAM survey also expect to increase employment over the next 12 months, with employment increases at large firms being more modest (just 0.4 percent) than at smaller companies (1.6 percent).

How do all these findings and predictions compare to our readers' plans? Once again Area Development's editors have surveyed our readers to determine their plans and priorities for the next several years. The results of our 22nd Annual Corporate Survey follow.

Profile of Respondent Companies
More than 70 percent of the Corporate Survey respondents represent manufacturing firms; 16 percent are with warehouse/distribution operations (Slideshow, Figure 1). Nearly half of these companies operate five or more domestic facilities, and more than half also operate five or more foreign facilities. Only about a fifth of the respondents said their companies have just one domestic and/or foreign facility (Slideshow, Figure 2).

More than half of the 2007 Corporate Survey respondents (57 percent) are with mid-sized firms in terms of employment (100-999 employees). Just 6 percent have fewer than 100 workers, but another 38 percent employ 1,000 or more people (Slideshow, Figure 3).

Interestingly, there's been a rise in the number of firms increasing their number of facilities over the past 12 months - 35 percent of the respondents said their firms had done so. Last year, only 25 percent of the respondents made a similar claim. And 53 percent reported no change in their number of facilities (as compared to 65 percent last year), while just 13 percent decreased their number of facilities, 3 percent more than reported last year (Slideshow, Figure 4).

Of those respondents reporting an increase in their number of facilities, more than half said this was in response to an increase in sales/production; 44 percent reported the need to serve new markets; and 37 percent said their companies had been acquired by or merged with another firm (Slideshow, Figure 5). About three-quarters of the respondents are also happy with the "service after sale" in their new facilities' locations - a nice compliment to economic development and other government entities that garnered this new business (Slideshow, Figure 6).

Three-fourths of these respondents also had no problem recruiting labor at their new locations. Of the 23 percent who did experience such difficulties, 88 percent said they couldn't find highly skilled workers, especially high-tech/IT employees (47 percent) (Slideshow, Figure 7).

Nearly all of those respondents whose companies decreased their number of facilities said this was in response to a consolidation of operations, with 30 percent saying their companies were acquired by or merged with another firm. About a third also cited the need to lower operating/labor costs as the reason for closing facilities (Slideshow, Figure 8).

We also know the responses to our Survey are the "real deal": 68 percent of the respondents to
our Corporate Survey are involved in their companies preliminary or final location decisions. Nearly 30 percent are their companies' owner or chief executive; 39 percent are corporate officers; and another fifth are real estate or facilities managers (Slideshow, Figures 9 and 10).

Respondents' Priorities
In order to ascertain how the respondents make their location decisions, the editors of Area Development asked them about their site selection priorities. We asked them to rate the various site selection and qualify-of-life factors as either "very important," "important," "minor consideration," or "of no importance" (Slideshow, Figure 11). We then added up the percentage of respondents rating a factor as either "very important" or "important" and rounded to the nearest tenth of a percent in order to rank the factors in order of priority (Figure 12).

As in past years, highway accessibility and labor costs are our corporate readers' top priorities when locating or expanding facilities. This year, highway accessibility is the number-one ranked factor, considered "very important" or "important" by 96.9 percent of the 2007 Corporate Survey respondents. Labor costs is ranked second, with a 92.3 percent rating. (These factors were ranked in reverse order last year, with labor costs receiving a 95.0 percent rating and highway accessibility a 90.9 percent rating.)

It's no surprise that the corporate executives responding to our survey are concerned about access to highways. With the cost of fuel over $3 per gallon and rising, companies need the shortest access to those highways connecting them to their markets. In fact, proximity to major markets jumped from 13th place in last year's rankings (with a 76.9 percent rating) to 10th place this year (tied with tax exemptions), rated "very important" or "important" by 82.8 percent of the survey respondents. Additionally, proximity to suppliers moved up from 21st place in the 2006 rankings to 15th place this year. This factor actually showed the largest percentage gain among all the site selection factors. It added 22.5 percentage points and was considered "very important" or "important" by 71.8 percent of the 2007 Corporate Survey respondents, as compared to only 49.3 percent of the 2006 survey respondents who gave it a similar rating. With suppliers passing their additional fuel costs on to manufacturers and other end-users, corporate executives have a new rationale to locate in proximity to suppliers.

And, another transportation-related factor - railroad service - showed the second-largest percentage increase among the site selection factors. Although it is still ranked toward the bottom of the list at 22nd, its combined "very important" and "important" rating increased from 20.8 percent in 2006 to 38.1 percent this year - a jump of 17.3 percentage points. Rising fuel prices may be causing many manufacturing executives to consider rail over truck transport.

It stands to reason that energy availability and costs moved up to third place in the rankings with an 89.0 percent rating. Last year this factor ranked ninth at 82.4 percent. Energy costs of operating facilities have been rising throughout 2007 and company executives are figuring this added expense into their bottom line.

Availability of skilled labor was considered "very important" or "important" by more of 2007's survey respondents (88.7 percent) than by those responding to last year's survey (85.1 percent), moving this factor from eighth to fourth place in the rankings. In fact, if we break this factor's rating down, more than three-fifths of the survey respondents actually rated availability of skilled labor as "very important" (comparable to the "very important" rating given to highway accessibility), with less than 30 percent giving it just an "important" rating. Manufacturers have been saying for quite some time that the United States is facing an increasing shortage of skilled labor. The "Dream It. Do It." campaign to attract and educate young people about the opportunities of advanced manufacturing was launched by the National Association of Manufacturers and its research, education, and work force arm - The Manufacturing Institute - in response to this concern.

The occupancy or construction costs factor also moved up in the rankings to fifth place, with an 88.2 percent rating, from seventh place in 2006, with an 85.5 percent rating. Again, we need to look more closely at this factor's rating. If we do, we can see why it will always take a back seat to highway and labor concerns. While slightly more than half of the survey respondents rated occupancy or construction costs as "important," only about a third rated this factor as "very important."

While ranked lower than occupancy or construction costs, tax exemptions and state and local incentives actually scored higher in just the "very important" category. Corporate tax rate, state and local incentives, and tax exemptions ranked seventh, eighth, and tenth - in that order - for 2007, with combined "very important" and "important" ratings of 83.8 percent, 83.4 percent, and 82.8 percent, respectively. These ratings are below last year's scores and are responsible for dropping these factors from their respective third, fourth, and sixth place rankings in 2006. It seems that tax and incentive issues are becoming more of a tiebreaker among locations that can satisfy the more important criteria of highway access and affordable, high-quality labor.

When it comes to incentives, nearly half of the 2007 Corporate Survey respondents think tax credits and exemptions are most important, while a third of the respondents also highly value grants, bonds, loans, and the like. More than half of the respondents also think other incentives like utility rate subsidies, infrastructure support, training, etc. are also significant inducements (Slideshow, Figure 13). About two-thirds of the survey respondents have received incentives in the past, and 80 percent of these recipients derived the expect benefits from the awarded incentives. Those not benefiting from the incentives cited tax and financial awards as having fallen short (Slideshow, Figures 14 and 15).

The available land factor jumped from 14th place in the rankings last year to sixth place this year, with an 85.4 percent combined "very important" and "important" rating, as compared with only 73.3 percent in 2006. This may be a reflection of the fact that the average occupancy rates at industrial properties nationwide are now in the low- to mid-90 percent range, up from the high-80s range just three years ago, according to experts at Wachovia Securities. And when it comes to overseas markets, real estate analysts say there is an acute shortage of available land. Therefore, with less existing space to occupy, companies looking to open new facilities or to expand need to look for available land.

In response to a question posed last year about available buildings, 68 percent of the 2006 survey respondents said available buildings were equally or more important than other factors. For 2007, we added availability of buildings to the ratings of survey factors. It is ranked 13th and considered "very important" or "important" by 79.3 percent of the 2007 Corporate Survey respondents. Again, this is probably a reflection of today's high occupancy rates at industrial facilities.

Also showing a big jump in the rankings is environmental regulations. This factor moved from 15th place in 2006 (with a 68.9 percent rating) to ninth place this year, with an 83.2 percent rating. Company executives are realizing the implications of "green" or sustainable development to their companies' image as well as profitability and responding with an elevated environmental consciousness.

In past surveys, we asked the respondents to rate availability of telecom services separately from availability of high-speed Internet access. Since telecom service is ubiquitous, we eliminated this factor from the 2007 ratings. We also replaced availability of high-speed Internet access with availability of advanced ICT (information and communications technology) services. This factor was ranked 11th by the 2007 Corporate Survey respondents with an 82.2 percent combined rating.

Another factor new to the 2007 Corporate Survey is expedited or fast-track permitting, which received a 71.5 combined "very important" or "important" rating and is ranked 16th. The ever-increasing pace of technology development has made speed-to-market critical for many companies. Hence, they need to get new facilities up and running as quickly as possible.

As in past years, the quality-of-life factors are ranked separately from the other site selection factors. Notably, low crime rate is the only quality-of-life factor that was rated "very important" or "important" by more than 70 percent of the 2007 respondents. As throughout our Corporate Survey history, low crime rate is the number-one ranked quality-of-life factor, with a 74.0 percent rating this year. It's actually surprising that this factor is not rated even higher in importance this year because FBI reports indicate that crime - especially violent crime in urban areas - is on the rise. Also, as in past years, ratings of public schools, housing availability and housing costs, and health facilities were all rated and ranked higher than climate, cultural and recreational opportunities, and colleges and universities in area.

In addition to the site selection and quality-of-life factors noted in the rankings, many companies also consider whether there are businesses performing similar activities to theirs in the area of search. About two-thirds of the 2007 Corporate Survey respondents said this was a consideration, with more than 60 percent noting that the presence of such companies was very or somewhat important (Slideshow, Figure 16). Yet, only 19 percent of the respondents choose to meet with representatives of area companies when making site visits. Community representatives are sought out by more than half of the respondents, and 9 percent meet with representatives of area schools (Slideshow, Figure 17).

Respondents' Plans
From the responses of our 2007 Corporate Survey participants, we can see how their site selection priorities have changed since last year. Now we need to find out their plans for new facilities, expansions, and relocations and how these might have changed over the last several years.

As we had expected, plans for new facilities are down (Figure 18). Only 20 percent of the 2007 survey respondents expect to open new facilities within one year, as compared to 25 percent of the 2006 survey respondents who had expected to do so, and 24 percent of the 2005 respondents with one-year new facility plans. The percentage of respondents with no plans at all for new facilities has increased from 40 percent in 2004 to 45 percent in 2005, 46 percent in 2006, and now 49 percent in 2007 - clearly a reflection of the economic downturn. However, perhaps the 2007 respondents expect this downturn to be short-lived because 25 percent of those with plans expect to open new facilities within the next two to three years. This is more than last year's 23 percent who had new facility plans over the two-to-three-year range.

Of those with plans, 45 percent expect to open only one new facility (as compared with 47 percent last year) and 25 percent will open two (as compared with 34 percent last year). But 29 percent of the 2007 respondents have plans to open three or more new facilities (Slideshow, Figure 19). This represents an increase from last year, when just 19 percent of the respondents indicated they had plans to open three or more new facilities.

Interestingly, there's been a slight shift in the location plans for new domestic facilities. Figure 20 shows that an equal percentage of new domestic facilities (14 percent) are planned by the 2007 Corporate Survey respondents for the South (Alabama, Florida, Georgia, Louisiana, and Mississippi) as for the Midwest (Illinois, Indiana, Michigan, Ohio, and Wisconsin). The West (California, Nevada, Oregon, and Washington) follows closely behind, expected to garner 13 percent of the new domestic facilities planned by the 2007 respondents. And the Middle Atlantic (Delaware, Maryland, New Jersey, New York, and Pennsylvania) is next in line, with 12 percent of the projects slated for this region. In 2006, survey respondents only slated 5 percent of their new domestic facilities for the West and 4 percent for the Middle Atlantic; the 2007 results show renewed interest in these two regions.

Half of the new domestic facilities will be manufacturing plants and another 30 percent of the projected facilities will house distribution/warehousing operations (Slideshow, Figure 21). In terms of employment, our 2007 Corporate Survey results indicate that more than 70 percent of the respondents expect to create fewer than 100 jobs at new facilities, with just a quarter creating between 100 and 499 new jobs (Slideshow, Figure 22).
Once again Asia will be the leading recipient of new foreign facilities, garnering 42 percent of these (Slideshow, Figure 23). This is, in fact, the same result recorded last year. Some 15 percent of the new foreign facilities planned by the 2007 respondents are slated for Mexico, 11 percent for Western Europe, and 7 percent for Canada. Only 6 percent will go to Eastern Europe, down by more than half from 13 percent that were slated for that region by the 2006 survey respondents. According to the, last year foreign direct investment in Eastern Europe hit a peak, and a decline is forecast for 2007 and beyond. Apparently, Eastern Europe is failing to rise to Asia's competitive challenge.

Of the new facilities planned by the 2007 survey respondents for Asia, twice as many will go to China as India (Slideshow, Figure 24). And more than a fifth are planned for other Asian nations such as Singapore and Malaysia. Nearly half of the new foreign facilities planned by the respondents will be manufacturing operations, and about a third will be warehouse/distribution facilities (Slideshow, Figure 25).

Our survey results indicate that more jobs are going to be created by new foreign facilities than by new domestic ones. Less than half of the new foreign facilities are expected to create fewer than 100 jobs, with 20 percent responsible for the creation of 500+ jobs (Slideshow, Figure 26). Importantly, more of these jobs (42 percent) will be high-skilled manufacturing jobs than low-skilled manufacturing jobs (35 percent) (Slideshow, Figure 27). In confirmation of manufacturers' concerns about a shortage of skilled labor, survey results indicate that it's not just low-skilled jobs going offshore.

Nevertheless, the 2007 Corporate Survey respondents don't expect all to run smoothly at new foreign facilities. Nearly two-thirds indicated they are worried about legal as well as regulatory problems offshore, while more than 70 percent said social/cultural barriers are a significant problem (Slideshow, Figure 28).

The economic downturn is also reflected in the number of respondents who have expansion plans. More than half of the 2007 Corporate Survey respondents claim to have no plans to expand facilities, compared with 46 percent who said they had no plans in 2006, 45 percent who had no expansion plans in 2005, and only 41 percent with no expansion plans in 2004. Of the 47 percent who do have expansion plans, 22 percent said they would expand facilities in one year and 17 percent within two years (Slideshow, Figure 29). Job creation at expanded facilities will also be meager. More than 80 percent of the respondents said fewer than 100 jobs would be created by their expansions (Slideshow, Figure 30).

Additionally, the 2007 Corporate Survey respondents are not planning as many relocations as past years' survey respondents. Only 23 percent expect to relocate a domestic facility within the next three years (Slideshow, Figure 31).  In 2006, 36 percent of the survey respondents had one-to-three-year relocation plans. A third of this year's respondents cited the need to lower operating/occupancy costs as the primary reason for relocating, and a quarter said it is because of high labor costs at their present location (Slideshow, Figure 32). The majority of those planning to relocate a facility (72 percent) indicated that they would move the operation to another U.S. destination (Slideshow, Figure 33).

Respondents' Sources of Information
The final portion of our survey reveals how our corporate readers get the information on which they base their location decisions. More than half of the 2007 respondents said they use the Internet for obtaining this information. About half also said they use site magazines like Area Development. These are their primary information sources for site and facility planning. Only about a quarter claim to use general business or financial publications as well (Slideshow, Figure 34).

Nearly 90 percent of the 2007 Corporate Survey respondents who use the Internet for help with their location decisions obtained specific location website addresses from general search engines like Google or Yahoo. About two-thirds of the respondents said they found these addresses in site magazines like Area Development. Similar percentages of respondents found economic development websites (81 percent) and online site magazines like Area Development Online (65 percent) to be among the most useful online tools (Slideshow, Figures 35 and 36).

When asked if they also received help with site selection decisions from consultants, slightly more than half of the survey respondents said no. Of those respondents who do use the services of consultants, nearly all (89 percent) said the consultants perform location studies for them; about half said consultants help with incentives negotiation; and 45 percent claim they even let the consultants make the final site selection decision for them (Slideshow, Figures 37 and 38).

The 2007 Corporate Survey results appear to reflect the prevailing pessimistic mood of many business leaders and are aligned with other economic forecasts. For instance, in late November, the Conference Board said its index of leading economic indicators had fallen in both September and October and that consumer confidence had weakened as well. The board noted that tightening of credit markets was causing both consumers and businesses to cut spending. Only 24 percent of business executives responding to The Conference Board's CEO Confidence Survey said their companies had increased capital spending since January 2007, while 13 percent had scaled back plans, primarily as a result of a decline in sales volume.

And Chief Executive magazine's CEO Confidence Index fell to 127.5 in October, the lowest level since July 2003. Nevertheless, 75 percent of the CEOs polled by the magazine felt the likelihood of a recession in the next 18 months was less than 50 percent. In fact, 42 percent of those responding to the poll believed the chances of recession were less than 25 percent.

The Federal Reserve Board also expects economic growth to slow sharply in 2008. Its forecast for 2008 GDP growth ranges from 1.6 percent to 2.6 percent (down from the 2.5 percent to 3 percent growth rate predicted earlier this year). Those polled by The Business Roundtable in November are also assuming 2.1 percent economic growth for 2008. And we can probably find more surveys, polls, and prognostications by members of respected economic groups to corroborate our findings. Obviously the slowdown in location and expansion plans revealed by our 2007 Corporate Survey results was to be expected. Now we can only hope that when we attempt to analyze next year 's survey results, it's not déjà vu all over again.