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The Production and Corporate Headquarters Connection

In many key sectors, the initial alignment of corporate and production operations has shaped regions and influenced the industrial landscape in a very permanent way.

Q2 2014
Headquarters locations frequently trace back to a company’s foundation — when it was launched, and by whom. Bill Gates and Jeff Bezos both were in Seattle when they started Microsoft and Amazon, respectively, which is the main reason those Fortune 50 firms are still there. And when it comes to “industrially focused” companies — those organizations that manufacture and move goods — their bases of operation often have ties to their production operations as well.

In some cases, these correlations shape the evolution of a marketplace. The pharmaceutical industry in the state of New Jersey is a prime example. When that industry’s founders began operations back in the late 1800s and early 1900s, they needed a place to manufacture. New Jersey had the land for building and the water for shipping. In short, it was a perfect place to develop plants and headquarters offices alongside them.

Flash forward to 2014, and New Jersey still serves as home to many of these leaders. Johnson & Johnson, which established in New Brunswick in 1885, is still there. Beckton, Dickinson & Company, founded in East Rutherford in 1897, remains a Bergen County-based firm. The list goes on and on.
Headquarters of the Johnson & Johnson Company, New Brunswick, New Jersey
Headquarters of the Johnson & Johnson Company, New Brunswick, New Jersey
And during the course of the last century, even as some manufacturing migrated elsewhere, New Jersey’s educational system and specialized labor catering to life sciences research and development, operations, and sales have become second to none. According to the state of New Jersey’s website, more than 22,000 students graduate from state universities with degrees in life sciences each year. And New Jersey houses the highest concentration of scientific professionals in the United States, with 126,000 life sciences/biopharma workers statewide. It is little wonder that New Jersey today is known as “The Medicine Chest of the World.”

The Central Role of Resources
This phenomenon repeats throughout the country. Arguably, the emergence and solidification of manufacturing industry clusters is quite often resource-based. Just as skilled labor continues to draw pharmaceutical companies to New Jersey, it also is central to the staying power of Michigan’s automotive industry, California’s high-tech clusters in Silicon Valley and San Diego, and the strength of the garment industry in Los Angeles and New York.

Other industry concentrations have sprung up around the availability of natural resources. Consider the energy industry in oil-rich Houston, the rubber industry in Akron, Ohio (where inexpensive water power from the Ohio canal was key to fueling late 19th century factories), and the furniture industry that thrived in North Carolina with its vast hardwood forests. Salt Lake City’s great outdoors has made it a magnet for hiking, skiing, and other recreational equipment companies.

It is safe to say that this trend will continue. It certainly will be interesting to watch up-and-coming industries like wind and solar. Where will they go? Will new energy clusters emerge in formerly out-of-the-way markets, such as those where fracking is taking place? Looking ahead, we expect that mergers and acquisitions, incentives, and taxation will remain the driving factors behind headquarters decision-making for industrial companies.

Why Would an Industrial Company Move?
Most major industrial corporations have a U.S. headquarters supported by regional offices, and manufacturing and distribution operations scattered across the country. While those satellite operations may shift, headquarters frequently remain anchored in place for generations (a quick look at the histories of some of the country’s oldest corporations confirms this). Headquarters relocations, when they do happen, typically tie to a major financial event, such as a merger or acquisition.

Last fall, some of our colleagues brokered a 310,000-square-foot headquarters lease for a multinational specialty pharmaceutical company in New Jersey. The firm already had a presence in the local market, and now will consolidate multiple locations and 800 employees into its new U.S. headquarters. The motivator? The client recently acquired a leading global eye health organization. That company had been headquartered in the same location since its founding 160 years ago.

For smaller industrial companies, headquarters relocations often reflect a company lifecycle progression. The start-up location might be the right place for a while, but as the market for the organization’s product grows, or as it begins to try to sell in other parts of the country, things can change. For example, the company may suddenly be located too far from its customers — rendering shipping costs too high and order cycle times too long.

In turn, management then faces the difficult choice to stay and grow in place, or open a plant and/or distribution operation someplace else. Can they achieve the branding they need to become a national or global player in their hometown, or do they need to be in a major market? They may be thinking about opportunities to get bought out, and whether they could be more attractive to an investor if they were based somewhere else.

Geography may not be the only factor. In cases where an industrial headquarters starts out alongside its manufacturing component, the company’s growth may lead to a proximate separation of “church and state.”

For example, our team currently is working with a Los Angeles-area apparel company that houses its warehouse, administrative, and creative design teams in one location (they outsource the manufacturing). The creative team no longer wants to work in a heavy industrial area, so they are bifurcating the operations. However, we are looking within the same market — not across the country — because the design team is in place and the executives live locally. Why now? The original owners were recently bought out by an investment team, which is taking the company private. It is a time of transition and one that is logical for this type of cultural rebranding.

The Taxation and Incentives Game
The bottom line is that most corporations — whether industrial or otherwise — do not move their headquarters without a good reason. In today’s world of mergers and acquisitions, it may well be that the number of corporate moves is growing. Cushman & Wakefield’s Research Services team has tracked nearly four dozen relocations involving headquarters operations larger than 350,000 square feet over the past three years alone.

More and more, taxes and incentives are playing a major part in the decision-making process. Major corporations will move away from places with high taxation. While straying from our manufacturing focus, Sears provides a good example. The department store chain got a lot of press in 2011, when its management announced it would consider leaving Illinois unless the state awarded it a major tax break. Illinois ultimately created a program that provides Sears with tax credits worth $15 million each year for 10 years, according to a Chicago Tribune article.

In the interim, however, several sources reported that a number of states, including Indiana, Wisconsin, New Jersey, and Ohio, offered Sears incentives packages in an effort to lure it away from its “home state.” As job creation remains slow, this approach has become common practice.

Some states, including New York and New Jersey, have reacted by creating new incentives programs and changing their taxation and permitting processes to ward off — and perhaps take advantage of — this type of poaching. In fact, the aforementioned New Jersey pharmaceuticals deal was awarded one of the first grants in the Grow NJ program; the firm was approved to receive up to $39.5 million over a 10-year period.

Our colleague Betty McIntosh, an incentives specialist and a managing director in our Global Consulting Group, noted it is important to remember that companies generally do not move because they are chasing incentives. However, incentives may enable them to move to a market they believe will best position them for growth. If a company with 800 employees decides to relocate to another state, some of its workers will come and others will not. The firm faces executive relocation and severance costs; interruption of business; and capital expenditures associated with the move itself, as well as with securing new space and equipment. According to McIntosh, having significant financial benefits waiting on the other side may be the only way they can justify the choice.

Potential Game-Changers
Looking ahead, we expect that mergers and acquisitions, incentives, and taxation will remain the driving factors behind headquarters decision-making for industrial companies. That said, some shifts in the business of manufacturing might also come into play.

Following many years of overseas trending, manufacturing companies are again beginning to look at the viability of moving production back to the United States. Major players like GE, Ford, Wal-Mart, and Whirlpool have recommitted to domestic manufacturing. They are investing in next-generation plants that reflect a belief that over the next 10 to 15 years their goals and most competitive cost structure will be best realized in the U.S.

As locations that offer a balance of lower costs and abundant labor draw attention from a production standpoint, is it possible that they could also lure headquarters operations as well? This is a fair question, especially considering that an entire generation of U.S.-based manufacturing organizations was born during a time when outsourcing production overseas was the only way to compete. If a company’s production is re-sourced to a contract manufacturer somewhere in the 50 states, it just might make sense to locate its executive and design teams nearby.

And in the evolving global marketplace, the same is true for foreign companies with interests in the United States. For example, McIntosh represented a Belgium-based carpet company with a well established sales and distribution arm in Atlanta. The transportation costs of importing product from Europe had become burdensome, so the company built a $70 million manufacturing plant in Georgia. That facility opened in 2010 and now serves as the company’s U.S. headquarters as well as its domestic production facility.

Without a crystal ball, predicting shifts in headquarters decision-making is challenging, at best. We can say with certainty that for most manufacturing companies, the alignment of their corporate and production operations is — or was — critical to their early progress. And in many key sectors, that initial alignment has shaped regions and influenced the industrial landscape in a very permanent way.

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