Assembling Success in the U.S.

The waning dollar and active industrial market attract international investors.

Now more than ever, manufacturing companies are competing with the efficiency of their production and supply chains. While yesterday’s strategy was to build and adjacently consume products, the global focus has shifted to how cheaply, quickly, and responsively companies can produce goods in one market and distribute them to consumers in other — perhaps far away — locales. But after a decade of expanding geographic dispersion, supply chains worldwide are experiencing unforeseen friction, costs, and variability in their operations and profitability.

In response to these unexpected problems, many foreign companies are launching large direct investments in U.S. industrial real estate markets. For example, international corporations such as ThyssenKrupp AG locating in Calvert, Ala., BMW Group doubling its Spartanburg, S.C., production, and Volkswagen AG announcing its Chattanooga, Tenn., facility give credence to foreign companies’ increasing interest in U.S. industrial locations.

The economics driving these location decisions are pertinent, and understanding foreign corporations’ unique user profiles and approaches — when compared to those of domestic enterprises — are critical to capturing a part of this “on-shoring” flow.

Forces Pushing Supply Chains

The geographic length of supply chains has increased during the past few decades. As more industries entered competition on a global scale, firms sought manufacturing facility locations where products could be produced at the lowest possible cost and transported to the markets where the goods were consumed. Recent forces have compelled companies to revisit these projects’ original analysis and underwriting.

First, increased energy costs are dramatically changing the expense of transporting goods. In any analysis metric, transportation’s primary variable — fuel costs — has increased beyond any company’s reasonable forecast. Not only has the price of fuel increased, but the primary modes of transportation have operated below capacity for many years. The transportation industry has been slow to respond to increases in demand, so both labor and actual vessels — planes, ships, and semi-truck trailers — have become more in demand, driving up costs.

In addition, long-term trends in the U.S. dollar’s exchange rate are eroding the gains once relished by companies producing products in certain locations. For instance, BMW’s multibillion dollar expansion of its Spartanburg manufacturing facility was driven partially by the dramatic shift in the exchange rate. When the plant opens in 2011, BMW will manufacture its sport utility vehicles in Spartanburg and ship them to dealers around the world, including back to Germany.

BMW Group’s multibillion expansion of its Spartanburg, S.C., manufacturing facility illustrates international corporations’ increasing interest in direct investment in U.S. industrial real estate.

Many companies failed to take into account supply chains’ sensitivity to the trend toward wider geographic dispersion and the push toward just-in-time manufacturing and supply. As evidenced by the 2002 longshoremen strike, disruptions to a long JIT supply chain can reverberate through the entire production chain with huge effects. For weeks, companies were unable to restore the flow of goods, causing many of them to realize the fragility of these extended supply chains.

Finally, the hidden costs of carrying inventory over longer distances have become burdensome for many enterprises. Consider that the typical transportation time from loading at a China port to unloading in Long Beach, Calif., is 38 days. For very large manufacturers and retailers, the cost of carrying inventory as it is transported from the production point to consumption point is an enormous drain on working capital.

In response to the increased fragility and higher costs through the supply chain, foreign companies are turning their attention and focus to domestic production for the world’s largest consumer marketplace. Whereas production abroad once was a competitive advantage, the situation now is reversed due to the aforementioned factors compelling many enterprises to locate facilities in the U.S.

Location Differences

There are several notable differences between companies locating for the first time in the U.S. and domestic firms that are seeking space. Chief among these differences is that international corporations’ “must haves” and “would like to haves” are markedly different than those of domestic enterprises.

First, international companies are less likely to be constrained by what already exists, whereas domestic manufacturers often want to retain the infrastructure already built into their logistics platforms by locating near current sites or where key employees will live. Foreign users do not have the same needs, and as a result, are more likely to expand their initial search areas and rank locations based on individual merits, not those relative to existing locations.

Second, foreign corporations are more likely to entertain secondary, tertiary, and rural locations as opposed to top-tier markets. Many domestic corporations choose locations that carry the least risk, which typically are large, stable markets such as Chicago, Atlanta, and Seattle-Tacoma, Wash. Foreign corporations moving to the U.S. are more willing to accept the higher risk of lesser-known locations in exchange for cost advantages.

These companies realize that they now are competing on relatively equivalent labor costs with domestic users, so minor cost differences in labor due to locating in rural areas with higher unemployment could be of significant benefit to the long-term production economics. Additionally, many of these foreign firms are better trained, through their foreign production facilities, to work with fewer available local resources. As a result, rural U.S. sites do not raise the same questions as they would for domestic manufacturers.

Third, most foreign firms seek multiple locations simultaneously while many domestic manufacturers stage expansions more sequentially. Foreign users generally build redundancy into their supply chains and production facilities immediately. Many corporations learned through the last decade’s disruptive shocks, such as the 2002 longshoremen strike and the attacks of Sept. 11, 2001, that lack of redundancy in the tightening timelines of retailers’ deliveries equals huge penalties or loss of key customers.

Beyond the Location Decision

Similar to location selection, generalizing about the on-shoring trend while it is still in its infancy is difficult. However, even early data and anecdotal evidence reveal patterns in foreign companies’ preferences once they have made it past the initial location decision.

While U.S. firms locating facilities abroad often prefer to invest the least possible amount of funds in the real estate, international companies locating in the U.S. typically express a preference to own their properties. The U.S. real estate market long has been known as the most stable on the planet, so foreign companies can utilize the stable asset on their balance sheets to counter the higher volatility in their local markets.

Another reason pushing foreign companies to own U.S. real estate is the current exchange rate. Few economists believe the dollar’s current depression will exist forever, and foreign firms are leveraging a future favorable shift in exchange rates to realize significant, non-operating gains. Buying real estate at the current exchange rate and selling at a point when the dollar has appreciated is a strategy many foreign users and investors are using. (See sidebar for more details on how exchange rates affect foreign interest in U.S. real estate assets.)

Another facet of foreign direct investment into the U.S. industrial market is the strong proclivity toward constructing new assets rather than acquiring existing facilities. Foreign corporations realize that U.S. labor costs are much closer to equilibrium, so they are pulling other levers to drive down their production costs. Many of these other levers, such as production flow, energy efficiency, and new machinery, require state-of-the-art facilities designed to the manufacturer’s exact needs.

Also, many of the incentives granted to international corporations depend on job creation and fixed investment. A method for dramatically raising the fixed investment of a project — and thus raising the incentives granted — is to construct a new facility.

When international corporations that choose to manufacture products in the U.S. move past the specific location decision, their preferences for industrial facilities shows their inherent differences from domestic producers. As the distance between where a good is produced and where it is consumed extends, the friction, fragility, and variability in costs grows exponentially larger. Foreign companies increasingly are realizing that this complexity has a cost attached and are shrinking the dispersion in their production portfolios to bridge the cost gap. While the trend toward moving production back on shore in the U.S. is still emerging, the cost impacts already are beginning to impact supply and production chains worldwide.


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