The unknown expenses of jurisdictions in the future is a big variable right now. We see in China, for example, wages that have been steadily climbing. We're finding the same thing in Southeast Asia. This isn't new from the trade wars, but many clients have been looking to exit China and look at other Southeast Asian locations. That's been great for Vietnam, for Indonesia, for the Philippines. However, what's happening now is that Vietnam, historically a low-cost location, is seeing rapid increases in salaries and wages. Due to the high demand, we're also seeing lease rates go up substantially, very quickly, in Vietnam. If you're looking for low-cost locations for manufacturing, keep in mind that what is low-cost today may not be low-cost next year, or five years down the road, or 10 years down the road.
We're also seeing some economies shift away from low-cost manufacturing. In fact, the Czech Republic just changed their rules — from allowing any company that qualified for incentives everywhere in the Czech Republic to now requiring large companies to have at least 80 percent of their workforce make average or above-average wages in the Czech Republic. That eliminates incentives for large companies looking to pay lower-than-average wages in that country.
This is a new trend that companies must be aware of as they're looking at locations. We tell our clients not to look at incentives first; however, if that's one of the draws that they were counting on in their cost modeling, they should be aware of recent changes in legislation and also proposed changes in legislation. The Czech Republic change was probably proposed at least a year before it happened. So we could anticipate that this was coming. We tried to get our clients in early and get them grandfathered in, but it’s a done deal now. These variables are changing the potential cost models for the future.
Top Factors to Consider in Overseas Site Selection
Obviously, wage rates are increasing…in some economies more than others. Tariffs are the big unknown right now. If the trade wars continue, then the cost of shipping goods back and forth will substantially increase. As some locations become hot markets, then we're getting more demand than available supply right now. Therefore, lease rates are going up, and we see the cost of land increasing. These costs are not one-time costs — these are costs that continue and build up over the duration of a company’s investment in these economies.
Tariffs and Trade Policies Are Slowing Site Selection Decisions
We have a number of clients that need to move their manufacturing closer to their markets. The trade wars are accelerating those discussions, but the political uncertainty has actually slowed down the decision-making process. We need to tell first-time investors to look beyond the coasts. Asia tends to look only at California and the West Coast, and Europe tends to look only at the East Coast. Karen Hensley-Chelstowska, Managing Director, Site Selection & Incentive Advisory
We have clients looking at their supply chains, trying to make them more efficient, but there’s uncertainty with Brexit in place. Again, as with China, the shift — especially with manufacturing from the UK to mainland Europe — is not a new thing. It's more expensive in the UK, and the incentives are much better in Eastern Europe. But now that we've got Brexit, what will the terrorism restrictions be? What free trade agreements might be negotiated? Those conversations are accelerating.
From the U.S. perspective, we continue to see more interest in moving manufacturing closer to markets in Southeast Asia, but also in Europe as well. As for inbound investment, we've seen a little bit of a slowdown, and those investments are not going to materialize until we see stability.
The decision-making itself, the process of gathering the data and making those analyses, is ongoing. But when it comes to pulling the trigger and making the call for that investment, we're seeing a slowdown or decisions being put on hold. It's a temporary thing. We're encouraging our clients to do their modeling, their basics including logistics, workforce, available sites. But as they build their models, they must put in their variables around these uncertainties and address those as the facts change.
The Learning Curve for Companies Seeking U.S. Sites
First-time investors will ask, “What are the best incentives in the United States?” I tell them to go back and do the basics. Who are your customers, where are you shipping to, what do you need? It’s not like Europe, where countries all work under the European Commission's state aid rules, and it's all very homogenous. In the United States, each of the states is independent, and they can compete against one another with no state aid rules to limit them on what they can give. The limit is, what's the return on investment to that particular community? And that's brand-new information, especially for companies from Western Europe. The Western European companies have not been able to enjoy traditional new job and capital investment incentives for years because of the way in which the European Union works. The EU has a socialist type of system where everybody pays in, and then funds are distributed back out according to gross domestic product per capita (GDP).
Poland, for example, is a big country with lower-than-average GDP. They have had a lot of the incentives revenues come back out. So the German, British, and Dutch firms are not accustomed to receiving really anything other than research and development (R&D)-type incentives. In the United States, they can get incentives for job creation and capital investment. Their first question often is, “Is that legal?” We have to explain that the way it works here is the return-on-investment model. States or communities look at the economic impact of your investment to the tax base over time. From an incentives perspective, it's legal, and their competitors are doing this, and they need to do this. Of course, incentives definitely aren't the first thing that we look at.
We need to tell first-time investors to look beyond the coasts. Asia tends to look only at California and the West Coast, and Europe tends to look only at the East Coast. They even forget that Texas has a port. Then we consider whether a location has infrastructure with highways, railroads, and airports. Then we talk about the ability to expand the scope of their search beyond just the East Coast cities. Then, if they haven't previously engaged in site selection, we advise them not to make a decision without first negotiating everything.