The Eight Most Common Site Selection Mistakes
for Those in the Automotive Industry
(And How to Avoid Them)
By John T. Warden
Labor unions, workers' compensation insurance, wage rates,
land costs, utility costs, taxes, transportation expenses
... those in the automotive industry considering expanding
or relocating to the South have a unique opportunity to dramatically
improve profitability by seeking out locations in which these
and other recurring costs can be minimized.
But many in the automotive industry, especially suppliers,
run headlong into expensive expansions or relocation of production
capacity without a serious, objective analysis and comparison
of important operating costs.
This article will serve as a guide to the most common mistakes
automakers and suppliers make in examining new facility issues,
as well as provide some pointers on where and what to look
for in your next site.
1. Waiting too long to start the search.
Thorough analysis and negotiations typically require four
to six months. Although this time frame can be compressed,
it means sacrificing breadth and depth of analysis and negotiating
leverage. To obtain the best results, corporations should
consider at least four locations in two or more states. This
will maximize negotiating leverage and provide a good cross
section of community options.
Procrastination in the analysis also can lead to conflict
with the business' seasonality. The best time to move or expand
is in a seasonal downturn, but this often requires building
large inventories during seasonal peaks, which may tax the
company's production capacity. This underscores the need for
a long range plan incorporating four to six months for analysis
of site alternatives and at least six months to construct
a new facility for a supplier, or three months for a retrofit
of a second-generation building. In the northern portions
of the American South that may experience severe winter weather,
this time frame may expand an additional three months.
A hasty decision also is probably a poor quality decision.
Set realistic milestones and deadlines and limit the number
of individuals involved in the process. While input into the
decision making process from all functional areas of the business
is desirable, actual completion of the site selection analysis
is best left to one or two individuals to ensure uniformity
of methodology, perceptions and opinions. As much as the process
should be quantified and objectified, there are invariably
important judgemental components and the only meaningful comparison
of these issues between communities comes from having a limited
number of people exposed to every location option.
2. Too much focus on real estate.
Far too much emphasis is typically placed on real estate
issues. In many cases, finding an existing facility that can
be retrofit is a top consideration for a Tier-2 or Tier-3
supplier. However, Tier-1 suppliers usually must build-to-suit.
Real estate receives so much emphasis because it is one of
the few areas in which needed information is readily available.
But should it guide the search? Absolutely not! Unless a
supplier has a very unusual facility requirement, the problem
will likely be eliminating buildings from consideration, rather
than finding one that works.
Real estate will typically comprise no more than five to
10 percent of total annual recurring expense for the new operation.
Consider these numbers. A "typical" 200-employee
automotive supplier operation can operate quite nicely in
a 100,000-square-foot building. A good-to-excellent quality
facility in this size range can be purchased for $2 million
and financed with a fixed rate, 25-year taxable bonds at 7.5
percent. Under this scenario, the annual debt service is approximately
$179,000. In contrast, this 200-employee plant with an average
hourly wage of $10 and a 35 percent benefits load will incur
annual wage and benefits approaching $5 million. If the company
uses one million kilowatt-hours of electricity per month,
electricity costs could be in the neighborhood of $650,000
per year. Clearly, real estate expenses pale in comparison
to recurring costs and suppliers should focus on the most
significant costs first.
3. Concentrating the search on too small an area.
Unless your automotive concern has a pressing requirement
to locate close to an OEM or other important infrastructure,
for example a port or international airport, take off the
blinders and examine a broad, multi-state or regional area.
There are hundreds of communities that can satisfy all of
the site selection objectives of most companies, but the search
is often restricted to a small area based on a preconceived
notion about the advantages of the area being examined.
A narrowly focused site selection analysis erodes your negotiating
position on inducements, especially if the search is restricted
to a single state. This also limits your ability to gain major
operating cost reductions in critical expense categories such
as wages and benefits, utilities, taxes and so forth. All
of these expenses will vary from site to site and the differences
could be significant. Cost differentials on the order of $10,000
per employee per year are achievable for suppliers and for
a 200-person automotive supplier plant, this could mean $2
million in savings that drop straight to the bottom line.
Also, examine rural locations with great detail. The South's
automotive industry has experienced excellent results from
locating in rural counties. Even more, state incentives are
much greater when locating in a rural location.
4. Not being skeptical.
One of the most important jobs of the executive vested with
responsibility to select the site is separating fact from
fantasy. That's especially true in a site search of the American
South, where fact and fantasy seem to run parallel. Nearly
every person the site selection team will be dealing with
has a not-so-hidden agenda; they want you to locate your new
facility in their state, county, city or service territory.
They employ salespeople whose job is to get you to "buy
their product." Rarely have they been heard to say, "our
school system is under-funded," or "we have a union
problem," or "the quality of our electrical service
is poor," or "our property taxes are high."
But these and other problems may be awaiting you, so be prepared
to question every statement or claim made by local or state
economic developers to search out these hidden problems.
Be skeptical of unsubstantiated claims and ask questions.
Ask for a long-term history of electricity and gas service
interruptions, examine a history of union elections and meet
with existing major employers to discuss incipient union activity,
quantify spending per pupil in the secondary school system
and the school system's graduation rate. In short, accept
nothing as an article of faith.
5. Leaving money on the table.
In many ways, negotiating inducements and incentives is the
blackest of the black arts, even though it's a common practice
with virtually every significant deal. You must decide what
you want to negotiate and how far you think you can push.
Most states, counties and cities have published "inducements"
that are available to any industry that wishes to secure them.
Perhaps the most visible of these are worker training, inventory
tax exemptions or jobs creation income tax credits. But there
are more valuable inducements that are not or will not be
For example, outside larger metro areas land prices plummet,
typically ranging from $5,000 to $20,000 per acre for an improved
site. In many communities the land can be obtained at no cost
if the community feels it is necessary to secure the industry.
The same can be said of existing buildings as well, although
this is less common.
Also, many electric utilities have special rates that can
significantly reduce the cost of power in the critical start
up years of an automotive supplier operation. Again, these
rates may not be offered unless they are negotiated.
Other areas to target in negotiations are construction of
rail spurs and switch installation, arterial road improvements,
property tax concessions, more rapid depreciation schedules,
interest rates on loans for industrial and residential construction,
payments in lieu of taxes and many others.
Of course, the aforementioned unpublished potential incentives
apply to automotive suppliers first and foremost. Original
equipment manufacturers (large assembly plants) have an incentive
category all their own.
6. Ignoring the weather
Suppliers and assemblers with a single production facility
run the risk of severe business interruptions due to weather
and in the South the greatest threat is posed by tornados.
On average, the chance of being hit by a tornado is very,
very small, but the risk varies significantly from location
The accompanying map shows the American South divided into
a grid, with each vertical and horizontal line representing
1 of longitude and latitude, respectively. Within each box
is shown the number of tornados that have touched down from
1980-2000. There is a "1 box" along the New Mexico-Texas
border (shown with an arrow) in which 35 tornados have touched
down in this 20-year period, an average of 1.2 per year. In
the adjacent box 1 east, 212 tornados have touched down, or
7.1 per year. The likelihood of a tornado is six times greater
on 1 of latitude distant.
Prudence dictates that companies have business interruption
insurance, but such insurance does not guarantee the loyalty
of customers and distribution channels.
7. Believing what you read about the demise of labor unions
Positioned directly in front of the expanding Mercedes plant
on Interstate 20/59 in Vance, Ala. is a billboard promoting
the United Auto Workers labor union. However, no Mercedes
workers in Alabama are members of UAW. In fact, there has
never been a vote for organization at the plant.
On the other hand, in Smyrna, Tenn., there have been votes
on union organization at the massive Nissan plant there. All
attempts to organize at the massive Nissan facility in Smyrna
have failed. Regardless, labor unions, while much more prevalent
in other regions of the U.S., are readily present in the American
Labor union membership in the U.S. is nowhere near levels
seen just 20 years ago. However, the bottom line is unions
are spending large amounts of money on recruiting new members
throughout the country, including the South. While their success
at organizing new automotive plants in the South have essentially
failed (many older domestic plants in the South built prior
to 1970 are unionized), that doesn't mean they have stopped
trying. Nothing could be further from the truth.
8. Ignoring secondary, yet important issues
The site selection process mandates the examination of a
host of issues that are not static. The dynamic variables
can be examined historically and in the present, but what
of the future? Unfortunately, many site selection projects
fail to examine critical though secondary issues which may
have significant longterm impact on project viability and/or
community desirability. The following are just a few of the
secondary issues that may effect your project:
Landfills: Disposal of non-hazardous solid waste is handled
most efficiently if the community has a landfill. But landfill
capacity is rapidly being consumed and the permitting of new
ones can proceed at a snail's pace. Automotive suppliers searching
for sites are urged to quantify tipping fees, years of life
remaining at the current rate of fill, and whether additional
capacity has already been permitted.
Government fiscal health: The stagnant economy has not only
hurt financial, manufacturing and other sectors, but has impacted
city, county and state governments as well. Tax collections
have fallen and new tax collections are stagnant because new
investment is flat. What effect has this had on the local
government's fiscal health? Is there are surplus or deficit,
what is the source and size of revenues collected and how
is this likely to be impacted by continuing economic malaise?
What are the local government's spending patterns and flexibility
in cutting or reallocating funds? Does the city or county
own a hospital and how much subsidy does the medical facility
Community leadership: How broadbased is the community's effort
to attract you as a company? Was your sole point of contact
the economic developer or industrial recruiter, or was it
a more widespread effort involving leaders from different
aspects of the community? A recruiting team drawn from all
facets of the community is indicative of high quality leadership
and broad support of the efforts to attract industry.
Other critical issues to address are whether the city and
county governments are consolidated, and if not, are there
strong political and community ties between the two. More
often than not, there is intense competition between city
and county government, with the county losing in its efforts
to build infrastructure.
Selecting a site for a multi-million dollar investment is
not without risk. However, with careful planning and foresight,
the risks can be minimized and long-term profitability enhancement
John T. Warden is vice president of The Walker Companies
in Atlanta, Ga.