Didi and Justin dive into site selection and how you need to take into account the costs, quality, and risks of a location to make the decision!
Listen to the full episode below and subscribe to the podcast on Apple.
- Understanding the requirements for a project – 1:15
- Interacting with brokers – 4:34
- Focused on additional capacities – 7:45
- A period of great changes – 10:19
- Not doing direct marketing – 14:33
- Providing optimizations – 15:23
- Site selection – 18:55
- Doing a network optimization – 20:50
- An expert in location strategy – 23:13
- The costs, quality, and risks of a location – 27:10
- What happens if two locations are the same – 32:09
- What makes the difference in a final location – 35:08
- A non-financial incentive – 40:17
- Getting all the tax information – 52:13
- The challenge of being a site selection consultant – 54:13
- Do benchmark – 57:18
- Connect with Justin Smith
Since the 1970s, Global Location Strategies has assisted clients in choosing the optimal location for their new, expanding, or relocating operation. Headquartered in Greenville, South Carolina, the company provides consulting services to companies and organizations in over 50 countries around the world. Their experience in water, wastewater, air, energy, labor, ports, roads, and rail has allowed them to provide value to clients by way of understanding their natural resource, human resource, and logistic concerns for both domestic and foreign direct investment projects.
- There are three main areas where site selectors can be of service to manufacturing and distribution companies.
- The underwriting and analysis of expansion into new geographic regions due to capacity constraints
- Adapting to changing business conditions will cause companies to migrate to certain areas over time as labor availability, infrastructure and geopolitical risk shift.
- Evaluating redundancy, consolidation, plant closures and reinvestment necessary during mergers and acquisitions
- Network optimization is a tool that site selectors deploy when attempting to take different modes of production and help decide which areas to setup distribution to reach specific customer bases
- When evaluating labor, start at a high level to get an understanding of each market’s attributes
- Labor quality – Concentration of workers in a particular industry or occupation, the number of degrees or certifications awarded on an annual basis, turnover rates, productivity, etc.
- Availability – size of workforce, number of workers with the requisite skills, unemployment rates, etc.
- Costs – Wages, benefits, unemployment insurance, and workers compensation
- There are several different kinds of incentives. Your Site Selector will help you understand the different lens through which you can approach incentives.
- There is cash up front or something that acts like cash such as free land, or the investment in infrastructure improvements, or site prep to benefit your project.
- Sometimes, investments have been made before the prospect gets to the location and that is the difference between an incentive and an investment.
- Another type of incentive is performance-based incentives which are realized as the project develops. As you create jobs, as you invest money, you are able to realize the value of these incentives. A good example is property tax abatements.
- There are non-monetary incentives like expedited permitting.
When does your world collide with brokers?
A lot of the larger firms like JLL, CBRE, Cushman & Wakefield, Newmark have site selection practices that directly compete with us. They have consultants in their firms that are dedicated to site selection. For this reason, I tend to interact with these firms less often, although it does happen.
For example, we have a very large publicly traded Fortune 100 Consumer Products client that went through a major supply chain realignment several years ago. They have a broker from one of the big brokerage houses that is embedded with their internal team. For this project, we worked with them on five large warehouse and distribution operations across the country and one flagship manufacturing facility. The logistics consulting firm that was doing network optimization would determine the region for a facility, the brokers would identify sites within that region, and then we would come in to help evaluate those sites, perform the due diligence, and help them determine which site was best. The brokers in the local markets were doing the site identification and also helping us gather more information about the sites during the due diligence phase.
Site selection consultants differ from brokers in several ways, one of which is the way we are compensated. Typically, we are fee for service and not paid based on the transaction. To that extent, I feel like our interests are very much aligned with the best interests of the client. There’s no reason for us to advise them anything that would not fit them, even if the advice was, “Maybe you should just stay where you are. Maybe you don’t need to go to another space.”
We have more interaction with real estate firms that do not have their own site selection practice. Even though every broker will say that they do site selection, they really don’t focus on nor are they compensated to help with location strategy, particularly for multi-state or international projects. Before a company can decide on a site, they need to have a location strategy. Often, if a broker’s client needs help not just determining where in a particular market they should be, but where in the country or world, they should be, a consultant that focuses on location strategy can help the client narrow down to specific markets more quickly and efficiently. Consultants that focus on location strategy and site selection are equipped with the methodology, the data, the technology, and the analysis tools that help companies walk through the process and move forward on a future transaction with confidence.
What is usually happening within a company when they decide they should reach out to you for help?
There are four major trigger points:
The first and most common is that they need more capacity, usually associated with growth of sales. They’re either maxed out of their existing facilities, or they need manufacturing capacity to serve an additional market in a different geographic location.
A good example of this is the production of toilet tissue and paper towels. Shipping tissue is like shipping air because it’s so light and bulky. So, companies need to be close to wherever their market is. If you have a facility in let’s say Pennsylvania or New York, and you’ve got a big market in the southeast, well, serving that market from the northeast doesn’t really make sense. It is a lot cheaper to ship the raw material, which is primarily pulp, than shipping the toilet paper. With the growth of population in the sun belt and the change in preferences in toilet tissue – we like light and fluffy kind – there was an imbalance in where we have demand and where we have supply. So, we have helped several companies site six new tissue machines in the southeast.
The second relates to changing business conditions that causes a relocation of capacity to be necessary. This type of project is more common in less capital-intensive industries that can more easily be moved; but even large capital-intensive industries will migrate geographically over time if economic conditions that support that move persist. If a company has spent 100 million, 200 million, or a billion dollars on a facility, they are not going to relocate because labor rates are $2 cheaper, or electricity rates are $10 a megawatt cheaper in another location. Over the last several decades, many labor-intensive industries like textiles and even some capital-intensive industries such as steel have moved overseas. But, with cheaper electricity, changes in the markets, and increasing geopolitical risk, the tide has turned for many projects. It’s not so much about moving from Ohio to Alabama or California to Texas, as it is about moving from China to Mexico or Germany to the United States.
The third major reason for new site selection projects is a structural change within the company like a merger or acquisition. They may have redundant facilities that cause them to move certain lines from one location to another and consolidate or close others. A lot of times we’re involved in helping them decide which operations should go where, which facility should be closed, and what other facilities need further investment.
The fourth reason, similar to the first, is about scaling up emerging technologies. Many early stage companies may be scaling up from a pilot to a small-scale demonstration plant, from a demonstration plant to a small commercial plant or even up to a full-scale commercial plant. For example, last December we helped Kairos Power, a Bay Area company developing a safe, reliable nuclear reactor technology to select an existing building in Albuquerque, New Mexico for an engineering, research and development, and testing facility. In March, one of our clients Nacero announced a $3 billion natural gas to gasoline facility in Casa Grande, Arizona utilizing a new technology that produces cleaner gasoline than that refined from crude.
Do you find most people find you or you are finding them?
It’s very difficult for me to find them unless I have an existing relationship with them or a referral partner. There are literally tens of thousands, maybe even hundreds of thousands, of these decisions that are being made on an annual basis; but most companies don’t make major location decisions very often, maybe once every 20 years, if that. It’s very difficult to find a company that’s at exactly the right stage and identify the correct person within the company. There is no consistent title for “I’m selecting the next location for my company.” The internal lead could be the head of marketing, the finance guy, or head of engineering. Many companies don’t know that there are consultants that can help them make their location decision, and so they may not even be looking for us or have a budget allocated to outside assistance.
It’s like trying to find a needle in a stack of needles. For this reason, we don’t do a lot of direct marketing or direct outreach to companies. The vast majority of our leads come from previous clients and service providers that are in adjacent space that learn of projects and refer clients to us. Examples are a consultancies that assists clients with strategic matters in specific industry verticals such as metals, a realtor that focuses on industrial space, a public relations firm that work with companies on capital projects, and engineering and construction firms.
Then there’s the good old, “We found you on the internet”. We do put significant effort into search engine optimization, content, and thought leadership; but we get the most bang for our buck by focusing on referral partners. Sometimes people say, “We found you on the internet;” but, if you dig a little bit further, they normally say, “Well, somebody mentioned that you were good and so we Googled you.”
Do you see a lot of network optimization?
Typically, when I’m involved in a warehouse and distribution, and often in manufacturing projects, they have either done a network optimization or they are in the process of doing one. If they just need more space in the same market, I am not usually involved in those kinds of decisions.
For example, we did a project with Caesarstone from Israel, a manufacturer of quartz countertops. They were looking at setting up their first manufacturing operation here in the US to improve their lead times and customer service since all of the products had to be shipped from where they were manufactured in Israel.
One of the first things that we did for them was a network optimization of what was the best configuration of two new production lines to serve customers across the US. In question was how many facilities they should build- one for both lines or two with one line each- and where they should be. A one facility solution may favor a more central location, but a two-facility solution may be optimized by locations that are far apart, perhaps one in the east and one in the west. But you never really know what the optimal solution is going to be until you run the analysis and test it under many different scenarios. At the end of the day, the optimal solution for them was to have one East coast facility close to a port where they would be bringing quartz from Turkey and India. The built their facility close to the Savannah port in Richmond Hill, Georgia.
When does labor come into play and what are the important components of it?
When evaluating labor, we start at a high level to get an understanding of each market’s attributes labor quality- (concentration of workers in a particular industry or occupation, the number of degrees or certifications awarded on an annual basis, turnover rates, productivity, etc.), availability (size of workforce, number of workers with the requisite skills, unemployment rates, etc.) and costs (wages, benefits, unemployment insurance, and workers compensation). Once we understand these at a high level, we begin to narrow down on the locations that are going to be more advantageous for the particular project in order to get a deeper level of understanding of those different components which involves not just secondary data but also primary research through surveys and face-to-face interviews with employers in that area.
If we’re benchmarking MSAs across the country, for example, and we want to analyze them from a labor standpoint, we help our clients understand the dynamics between the cost of a location, the quality of a location and the location dependent risks. If you can find a location that has the highest quality, the lowest cost, and the least risk, then that’s the optimal location. Oftentimes, there are trade-offs. Our process helps them understand what those trade-offs are so that they can make the decision that’s right for them.
What does risk mean in terms of labor?
Risk in labor can mean a variety of things. When we consider risk in a site selection decision, we’re analyzing location-dependent risks associated with the company’s schedule, cost, or ability to start up and operate well into the future.
From a labor perspective, schedule risk could be, “Am I going to be able to find the people with the skills that I need and the quantity that I need them to meet my schedule?” Depending on the depth and breadth of industry-specific experience in that location, it will take more or less time to recruit, hire, and train your workforce.
Risk related to labor costs are often related to what’s happening to the labor market over the last couple of years. Is it tightening? Is it loosening up a little bit? What have been the trends in the wages? In addition, we look at the talent pipeline. What’s the median age? What does the population pyramid look like? Do they have a lot of highly skilled people but they’re all in their 50s that are going to soon be retiring or does this location have an abundance of younger workers that will provide a more reliable supply of future workers? How many certificates are being awarded in the areas that are important to your operation? Bottom line, if the demand starts to outstrip the supply, then the costs are going to go up.
A risk that could impact operating flexibility and costs is labor management relations. The impact of being organized by a union can have significant impact on a company’s operation. Many companies say, “I want to be in a right-to-work state.” It’s our job to push back and say, “Why?” I would say over the last 22 years that I’ve been doing this, for most companies, that priority has decreased significantly. We used to work with many, many manufacturing clients where states that were not right-to-work were eliminated at the outset. Since then more states like Indiana and Michigan have gone to right-to-work, and the percentage of the private workforce that are unionized has decreased. These two factors combined have made it so that it’s just not as big of an issue as it used to be.
We advise our clients that even if you go to a right-to-work state, you can still be organized, and companies sometimes don’t understand that. So, wherever you go, particularly for certain industries like automotive, you’re going to have union avoidance cost if you don’t want to be organized. You’re going to have to treat your employees very well and pay them well, or you could end up with a union. The 2019 documentary American Factory demonstrated how that remains to be true.
There are many, many companies out there that are afraid of the union. The real risk is what happens if you were to be organized. How does that increase the likelihood that you’re going to have work stoppages? How likely is it going to increase your costs or lower your productivity? Those are the kinds of risks that we look at. If a company employs less than a couple hundred employees, they’re not likely to be a large target. When operations employ several hundred people, it’s more likely that they will attract the attention of national unions, particularly if they do not have a strong company culture that values its employees.
What are the average sizes of operations that have projects large enough to warrant considering site selection and economic incentives?
The vast majority of jobs created are not associated with these “big splash” economic development projects. Those projects get all the headlines, but the reality is that companies adding 2, 5, 10 people at a time are the ones driving employment growth. We pat ourselves on the back thinking, “Oh, look what we did this for this community”, but I really want to give respect to the smaller employers out there that are really contributing the lion’s share of the employment and employment growth that often aren’t eligible for economic incentives because of thresholds for job creation and/or capital investment.
Economic incentives get a lot of attention both from companies and from the media. In the site selection process, they’re not nearly as important as some might have you believe, at least not in the early stages of a project. It doesn’t mean that they’re not important, and they can make a difference between the finalists’ locations, but they’re not going to get you in the game. If your location lacks the fundamentals to adequately support an operation so that it can be competitive in a global market, no amount of incentives is going to change that. A state or community might be able to buy a project, but after the incentives wear off, it won’t be a good investment for the community nor for the company 5, 10, or 15 years down the road, if the operation lasts that long.
We consider economic incentives early in the project, but we usually regard it as the icing on the cake. We really start talking about incentives in a serious way when we’re down to about four locations. We work the impact from those incentives into our financial analysis and really look at how they’re going to impact the return on investment for these projects.
One of the things I think that many communities don’t realize is that not every project is a slam dunk. Until a company is able to meet internal hurdles for return on investment, their board is not going to approve the project. Part of what we do as site selection consultants is give companies real world data to validate their business case. Sometimes the results of that validation are that they’re not going to meet the hurdle, so the project goes away, or it goes on hold until they’re able to improve the pro forma through higher sales or lower costs. Sometimes, however, economic incentives can be the difference. A little tweak here, a slight improvement there, can lead to an improved return and be the difference between a project that moves forward and one that gets shelved.
And, keep in mind, there are different kinds of incentives. There is cash up front or something that acts like cash such as free land or the investment in infrastructure improvements or site prep to benefit your project. Sometimes, investments have been made before the prospect gets to the location and that is the difference between an incentive and an investment. If the community on its own has bought the property and put in curb and gutter and all the infrastructure including building a building pad, that’s regarded as an investment. If the community has not done that before the company says, “I want to locate on that site,” and then they put the money in, that’s regarded as an incentive. In reality, the community is better off doing the investment up front, even though it’s a riskier proposition for them, because it makes it a much higher likelihood that the company is going to locate there. As we talked about earlier, companies do not like anything that puts their budget, their schedule, or their ability to get up and operating and continue operating successfully. Anything a community can do before they show up will lower that risk and increase the chances their location will be chosen.
Another type of incentive is performance-based incentives which are realized as the project develops. As you create jobs, as you invest money, you are able to realize the value of these incentives. A good example is property tax abatements. If you don’t invest any money, then a property tax abatement is worth zero because there’s nothing to abate. It’s the same thing with income tax credits or payroll withholding tax credits associated with job creation. If you don’t create the job or you don’t have payroll, you don’t get the credit. We’re seeing a shift towards more of these performance-based incentives because there have been instances. They are easier to sell politically, and in the scenario that the company doesn’t come through with their commitments, there have been less up-front incentives that may be difficult and messy to claw back.
But, incentives are not always financial. Some incentives that are non-financial can have just as much impact on the project. A good example is expedited permitting. Obviously, permitting agencies have to stay within the regulations, but they can speed up some of the things such as plan review in order to reduce the period of time it takes for a project to receive approval. For many projects, there is a direct relationship between return on investment and the speed with which they can start selling their product. The quicker the speed to market, the faster the payback period, the more likely the project is to move forward. Other non-financial incentives include things like temporary office space, where a company can establish a footprint in a market from which to operate, assigning an ombudsman to help companies navigate all the regulatory issues, and well-characterized, investment ready sites. All of these items are inducements to a company locating in your area even if there isn’t a line item on the financial pro forma.
For more information regarding this interview, please contact:
Justin Smith, SIOR
Senior Vice President