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.
"Green" Incentives
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.
R&D Incentives
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.
Handling Mergers and Acquisitions
As the consolidation of the automotive supply chain reaches its peak, mergers and acquisitions have a big impact - especially to previously negotiated incentive agreements. Incentive agreements are often viewed as insignificant to acquisition due diligence; however, early timing is critical and incentive agreements should be reviewed prior to acquisition in order to identify opportunities for continuation and the proper process of transferring the incentive agreement when possible. When consolidations are on the table, while due diligence up front is preferred, at a minimum, the first 60 days post-acquisition are critical. Active incentive agreements must be identified and evaluated for transfer options and compliance requirements. Pending decisions of consolidation, plant closure, or reduction in force may alter government incentive agreements and require renegotiating terms and compliance extensions in order to prevent closure or even to retain a percentage of the work force.
Extension requests or amendments can be made in the event of a planned downsizing or relocation. In a situation such as downsizing for economic reasons, government agencies are often willing to waive clawbacks. However, if a decision is to relocate operations to another location, the firm should have an exit strategy that includes compliance with clawback provisions. In some instances, claw backs can be waived in the case of a relocation if the company operates other facilities in the jurisdiction.
Post-Award Compliance
Incentive awards are only effective toward reducing project costs if the company meets the minimum eligibility and compliance requirements - whether legislatively required or mandated through the negotiation process. Incentive awards, particularly in the case of multiple incentives, require due diligence and management. Each program has a different reporting requirement. A company must meet the minimum term negotiated in its reporting - including investment, job creation, and employment - and must document expenditures in order for cash to be disbursed. In all cases, the terms and reporting requirements must be tracked, documented, and reported timely. Incentive terms are subject to audit and reporting should be thoroughly reviewed for accuracy, often by more than one person. For instance, if a company has an incentive award that requires wages to be 150 percent of federal minimum wage, the compliance team should be aware of and communicate the recent increases in the minimum wage; if wages are not increased to meet the requirement, then the company risks losing the incentive.
A company awarded an incentive package or accessing statutory incentives should also be prepared to manage the compliance process. Many companies spend innumerable man hours to negotiate a lucrative incentive package only to neglect its compliance. Firms that have no compliance team to track and organize compliance reporting requirements may find they lose their eligibility for the incentive award due to lack of due diligence or compliance violations -or, more often, inability to meet investment, employment, and wage requirements.
Overall Good News
There is an abundance of government incentives available to automotive suppliers, whether the company seeking the incentives is a manufacturing concern, warehouse, distribution, headquarters, R&D, or back-office operation. These incentives are there to encourage investment and contribute to lowering project costs. A company should not ignore these opportunities when making strategic decisions that impact capital investment or work force.
Dawn Baetsen and Kathy Mussio are managing partners at Atlas Insight, LLC, a global provider of site selection, credit and incentive consulting, and economic development consulting services. Visit the company's website at www.atlasinsight.com.
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