Auto Industry Site Selection: The Driving Factors

By Lance Frazer

The typical auto industry plant site can represent a $1 billion investment, said Jim Kupferer of Fluor Global Services, with a selection process of perhaps no more than five months passing between the initiation of a search and the delivery of a site fully committed to be furnished. The combination of so little time and so much money means that a wide range of factors has to be carefully weighed, whether you're talking about a headquarters facility, a manufacturing plant, or a new facility for a primary supplier.

Kupferer, a principal in Fluor's Global Location Strategies business, said his experience has shown that the prime consideration generally tends to be transportation.

Where to Locate

"It most often comes down to where you are, versus where your customers are, versus where the raw materials for the product come from," he said. "There are many other factors, such as labor, which is a very high cost of doing business, but which is less variable. In most all cases, you have a national labor rate that you have to maintain. If it's a union operation, the union will have national labor rates negotiated no matter where you are, and if you're non-union, you will still have to offer higher compensation packages to pay your workers at or above what they'd be making in a unionized operation. Where you are, and what it costs to get materials to you, and your product to the customer, is the key factor."

Recently, after an intensive site search, the Mercedes-Benz Corporation opened its North American facility in Tuscaloosa, Ala. "Mercedes wanted to put a production facility in the U.S.," Kupferer said, "but its engines, as well as a number of other components, are still manufactured in Europe. That caused it to gravitate to sites on the East Coast, particularly to port sites. In addition, Mercedes planned to export a large number of these vehicles back to Europe, so these two factors caused them to gravitate to the Southeast, a decision reinforced by available land and the need for a trainable workforce."

The type of transportation may depend upon the components being shipped, Kupferer pointed out. "But, bottom line, quality rail is a must. A very high percentage of the finished goods in the auto industry go out by rail. Trucking is a valuable support industry, so you need safe access to high-quality interstates to access both your markets and your suppliers, and you need direct access to ports via truck or rail."

With the industry's demand for specialized facilities, it's unlikely that a company will find a site ready-made to meet its needs, but Kupferer said "it's difficult to make things work without the infrastructure being in place. You need the roads, the streets, the sewer lines and what-have-you, and you need those in and waiting, as far as is possible."

When you're dealing with the purchase of hundreds of acres of land, geography is bound to play a role. All transportation-related factors being equal, is it reasonable to assume that a European-owned firm will want its facility closer to the East Coast, while an Asian car company will prefer a more westerly location? Not at all, Kupferer said.

"Compare Nissan and Mercedes," he said. "Nissan is a Tokyo-based company, run by European management, and it picked a site in the Southeast (near Canton, Miss.). Of far more importance is where the raw materials come from, and where the customer base lies. That's why Mississippi was great for Nissan, with its new engine facility located in Tennessee. It wants to add 4- and 6-cylinder engines, as well as V-8s, and it will machine and assemble all components in Tennessee (just north of the plant in Mississippi). That's great proximity for the company and also to its extensive supplier base throughout the middle part of the country. That's why you look at transportation costs, for both the components and the finished product, and how much it's going to cost you to get the elements in and the finished product out."

Toyota Motor Corporation recently started production of its Tundra pickup trucks and new Sequoia SUVs at a $700-million facility in Princeton, Ind., near Evansville. The facility, which was begun in 1996 and employs 2,400, will be augmented by another new facility nearby, for which ground has just been broken (to produce the new Sienna minivan).

"Our two biggest concerns were transportation and location," said public affairs specialist Nina Schultheis. "We ship many of our vehicles by rail, so that was a big consideration. However, we not only ship many of the vehicles by truck, we also get a good deal of our supplies from our Midwestern supplier base via truck (many of those suppliers also supply the manufacturing facility in Georgetown, Ky.). That's why this was a good location. We're near rail lines, our plant is on north-south Highway 41, and only a few miles from east-west Interstate 64, so we're right at the heart of a solid transportation network."

Southern Indiana does not have a strong manufacturing base, Schultheis said, "But Toyota has both a sophisticated assessment process and a strong employee training program of its own, so that wasn't really an issue. We looked for a solid, trainable employment base, but we didn't need to find a place where there was a lot of training programs in place. Nor did we focus on whether or not the labor force was unionized. Toyota is nonunion at this time, but it's not a prime selection criteria for us."

Toyota runs according to just-in-time inventory principles, which eliminates the need for costly and impractical warehousing operations, but which did require it to find a location convenient to its supplier network. Additionally, the company had to take into consideration the product going out, as well as the supplies coming in. "The vehicles we produce here are only for North America," Schultheis said. "Which meant we didn't have to look for a coastal facility. The Midwest is the heart of a major truck market, so it made sense to locate the plant somewhere that would be convenient to both suppliers and the customer base."

Labor is also a key issue for the automotive industry, and the approach differs, depending upon whether you're talking about a manufacturing facility or a headquarters/design operation. For manufacturing operations, Kupferer said, "you don't want to locate near another company's facility. Let's say you start out with 4,000 people, with plans to expand in the future. That's a pretty significant pull on the area, so you want to stay away from the competition. If you don't, that competition could end up driving up your labor costs significantly, as you compete for a dwindling pool of workers."

Location Selections Differ for Auto Management

Things are different on the management and design end of the industry. When Lincoln-Mercury relocated the North American Headquarters of the Ford Premier Automotive Group from Detroit to Irvine, Calif., part of the driving force was the desire to immerse the company in the well-documented car culture of Southern California. Paul Hiller, managing director of Destination Irvine (a public/private partnership of the City of Irvine, the Irvine Chamber of Commerce and 40 private sector businesses), said the car culture was the factor that began to push the decision Irvine's way.

"Lincoln-Mercury wanted to make some basic changes in its marketing and production concepts," Hiller said. "The Southern California area, with its long history of automotive culture, has reached a critical mass of the sort that tends to attract industry. This is very much an industry where the best and brightest minds feed off of interaction." "True," said Jeff Keiffer, human resources manager for Lincoln-Mercury. "This area is where a number of the significant trends in the industry begin, and in design, you need to be exposed to that sort of thing. There are 20 different auto companies with design studios nearby, and that's great critical mass."

Headquarters are also different in their personnel needs, in that they're typically looking for white-collar to mid- and upper management. Lincoln-Mercury recruits heavily from major colleges, both in the region and across the country, "and we wanted an area where we could use the lifestyle as a selling tool to a prospective recruit," Keiffer said. "We could certainly have gotten the real estate we needed at a lower price almost anywhere else in the country, but this was one of the few places that combined all of these factors."

For headquarters-type facilities, both Keiffer and Hiller agreed that the cost of real estate is not typically a motivating factor in site selection.

"Immersion," Keiffer said. "That's the key in management and design. We could have gone elsewhere, and picked up the land at less than half the price. But we view this type of a product as an investment in long-term quality."

Like manufacturing, transportation plays a role, but it's an entirely different one. With a headquarters facility, the need for rail access is minimal. Of far more importance, both Keiffer and Hiller said, is a road system that is easy and convenient for employees, as well as supporting industries. "For instance, Hiller said, "when Ford moved here, Young & Rubicam (the company's public relations agency) followed, and now it has an office with 400 employees. Its whole goal was to be within five minutes of a major client. It could have gone to Santa Ana (where it could have benefited from Enterprise Zones and other incentives), but it didn't want to be half an hour away from its client."

Mazda, which has had a presence in Irvine since the late 1980s, consolidated its North American operations in Irvine in 1997. "We had to look at quality of life issues for our people," said Fred Aikens, manager of product communications. "We also had to look at the overall business climate. This is an industry that thrives on interaction and feedback, the whole culture-thing, so that was a factor. Transportation did play into it. We're right at the intersection of two major highways, and we've got two international airports nearby. Our parent company is in Japan, so we had a preference for a West Coast facility. As things stand, we're 10-12 hours from Japan and 10-12 hours from Europe, which puts us equidistant from two major global commerce centers.

"Siting a facility like ours (combined corporate headquarters, design center, technical center and western regional operations) is different from a manufacturing facility," Aikens continued. "A manufacturing facility would look for a greenfield site, with rail access, and it would be more reluctant to locate close to a competitor and risk straining the labor pool. We picked an area with a built-in automotive culture, and we picked a location that creates a strong draw with people around the world."

AM General has been manufacturing military vehicles at its Indiana facility since the 1960s, and the company recently signed an agreement to expand its current facilities to produce an SUV-type version of the Hummer military vehicle (which will be sold by General Motors). AM General's Craig McNab said there were two key factors in his company's decision to expand production facilities in South Bend, rather than relocating.

"We've been in South Bend since 1964," he said. "That gives us a real commitment to the community, but we also needed the support of the state, county and local governments to make this work. Without that support, we wouldn't have been able to do this."

The existing 96-acre site will be expanded by 35 acres, to add 630,000 square feet of additional production space. The new factory will be completely separate from the existing one, with a separate workforce (composed of members of UAW Local No. 5, which also supported the project). The new facility will produce vehicles destined primarily for the U.S. market, and McNab said this project is an example of many important factors all coming together.

"This project will add back to the state's economy," he said, "but we had to have a number of incentives in place to make the numbers work for us. For example, we had been running off of a well, but it was where the new factory would go, so the (nearby) city of Mishawaka ran lines out to us. (The plant is in a Tax Increment Financing district, which allows a local government to provide infrastructure without increasing property taxes.) The county and the state also got together and accelerated highway improvements for the area around the site, and we received an EDGE credit from the state, as well as training grants for the workforce. We put together a business plan, where we would make a vehicle for GM, and it had to be done profitably."

Pat McMahon, executive director of Project Future, said his organization worked closely with AM General when it was preparing a proposal to General Motors, to evaluate what was needed to allow the project to go forward.

"We worked with a variety of different agencies, including the county, to improve access to what was a somewhat landlocked site," he said. "We basically accelerated 15 years of work into a few years, infrastructure work that benefited the whole area, not just the plant. The county also had to relocate 51 homes from an existing neighborhood, which had never been done."

The project took place on urban land, rather than a more typical greenfields site, which had both its pluses and minuses, McMahon said.

"On the one hand, we were acquiring residential land, not cornfields at $2,000 per acre," he said. "On the other hand, it gave us the chance to accelerate improvements that benefited a large segment of the community, and it also gave us the opportunity to see an existing plant extended in its useful life, which certainly benefits the employment base of the area."

It's not known for certain, but McMahon said if AM General had not received the incentives that allowed it to proceed at its Indiana site, it could have resulted in the eventual loss of both plants.

"In the short run, I think AM General would have just selected a new site for the new plant," he said. "It's also possible that GM could have made the decision to proceed with the project by renovating one of its existing plants. We looked at AM General as vulnerable, given the recent history of military appropriations, so this was a vital development."

Community Support Factor

Studies have shown that automotive facilities have a tremendous impact upon regional economies. According to one study quoted by Kupferer, an automotive facility provides seven employees for every direct employee at the facility itself. "That takes into account the impact on the multiple tiers of suppliers," he explained. "As well as industry-related services, like trucking. When you factor in the indirect impact - the growth in service industries like banks, tax specialists, even the new grocery store down the block - you can see it has a tremendous ripple effect." That means regions can typically grant substantial incentives to manufacturers and suppliers, with every expectation of a solid return on that investment.

"Incentives," Kupferer said, "when evaluated and applied correctly, reduce up-front capital investment and/or long-term operating costs, allowing a company to be more competitive in the marketplace. That being said, state and local governments are very willing to work with companies to determine the economic impact they will bring to the area, and discuss ways in which they might be able to assist them in being successful."

How different are the requirements of a supply industry facility, compared with a primary auto manufacturer? Kupferer said transportation still ranks at the top of the list.

"You still have the basic issue of getting raw materials in and the finished product out," he said. "But the supply facility needs to decide on its needs and processes. Is it producing something larger, that has to be shipped by rail, or is it producing a smaller product that can be shipped via truck? Does it deal with a system of intermediate warehouses? Does it serve several plants out of one facility, and do those plants receive equal shares of the product, or does one receive the lion's share? What are the requirements of the plant being served? Is it set up for warehousing, or is it a just-in-time process? All those have to be figured in."

It's difficult, Kupferer said, for an auto manufacturer building a plant to negotiate incentives for suppliers "because it doesn't know what they can commit to, what the businesses' utility requirements are, that sort of thing. Obviously, manufacturers want to create an atmosphere conducive to their business, but this (negotiating for suppliers) isn't usually done."

Auto industry suppliers are typically divided into three tiers, Kupferer explained, with tier one being the primary supplier directly serving the industry.

"These suppliers are being asked to do much more than ever before," he said. "The trends include increasing demands for just-in-time delivery and inventory management, and an increasing involvement in the design of the components and the actual production of the automobile. Tier two and three suppliers supply up the 'food chain,' so as pressures increase on tier one suppliers, they'll impact the others as well."

There is a general rule of thumb within the industry that suppliers prefer to locate within 250 miles of a customer, but Kupferer said this is dependent upon the tier level of the supplier.

"If you're supplying a cockpit, for example, your location requirements might be different than a tier two supplier who is supplying a subcomponent of that cockpit, or a supplier of a single element of the subcomponent," he explained. "The 250 miles is quickly dissected to include evaluation of sites nearby, based on the number of minutes from loading dock to assembly line. Many companies are able to supply products from outside the 250-mile radius by locating warehouses within these vicinities."

Tire manufacturer Michelin North America, Inc. recently announced plans to invest at least $400 million into an expansion of existing facilities in South Carolina. According to a press release from the company, investment was contingent upon approval by Anderson County of special source industrial revenue bonds financing and a fee-in-lieu of property tax agreement, as well as the "timely closing" of public roads on the proposed new site in Anderson County.

Michelin representatives declined to comment further on the financial aspects of the expansion, but senior real estate associate Chris McNutt confirmed that some of the final determining factors for this site (in addition to being near a similar facility) included close proximity to customers, labor and tax incentives.

"The distance to our customers, which are our plants, is anywhere from 20-to-100 miles," he said. "Although, we do have the capability to ship to Nova Scotia or even worldwide, if the need arises." How about the cost of the land? "As with any major project, the cost of real estate is a small element in the overall picture of costs," he said. "In the real estate end of any business or personal home, the key is location."

Centralia, Ill. is located just off of Interstate 64, which puts it at the heart of the supply corridor to the South-eastern auto manufacturing area. The city is only 10 miles from a major interstate, has good rail access, and as a traditional manufacturing area, benefits from a good, experienced labor base. There are three large-scale suppliers in Centralia - Meridian Auto Systems, Little Fuse Inc. and Big Three Precision. Ed Basch of Centralia Area Development said the area has benefited from its relationship to the auto manufacturing industry.

"These firms have been here since at least the mid-1970s," Basch said (Meridian actually dates back to the late 1960s). "They're all in close proximity to 64, which is a four-lane limited access highway, and the businesses are all in Illinois Enterprise Zones. They had the benefit of 10 years of property tax abatement, sales tax abatement on materials, special low-interest loans and tax credits for some employees, and their presence has resulted in the employment of nearly 2,000 people in this area."

There are many factors to take into account before choosing an automotive facility. Be it access to labor, customers or raw materials, decisions have to be made carefully. When choosing automotive design and management locations, a company may be best served by choosing a region that features an automobile cluster. This will allow companies to collaborate and communicate with others in the industry and keep on top of advances in technology.

Lance Frazer is a free-lance writer from Cameron Park, Calif. He can be e-mailed at lwfrazer@pacbell.net.

Training and the Auto Industry

By Lance Frazer

Continuing education plays a prominent role in the automotive industry, and Paul Hiller, managing director of Destination Irvine, said he expects Irvine to follow the lead of other cities across the country where automotive industry training programs have sprung up. The programs are usually a cooperative effort between industry and local colleges and universities.

Charles Cosentino, staffing and assessment practice leader for Development Dimensions International (whose firm worked on human resource issues and team building within the Mercedes startup in Tuscaloosa, Ala.), said automakers have had to take a closer look at training "because of a growing shortage of workers in the United States. Not just technical skills, but problems dealing with differing management strategies."

Leadership teams for foreign companies, Cosentino said, "tend to be American, while the home office tends to be more hands-off, granting more autonomy at the local level. Some European and Japanese companies, on the other hand, have many of their top-level positions run by ex-pats, which frequently results in a problem of cultural differences. At the employee level, the U.S. focus is usually on fairness and equal treatment, which may not be the focus in other cultures. So, a part of the whole educational process frequently must deal with cultural differences, especially in management practices, and how to deal with them."

One innovative training program has developed at Indiana's Ivy Tech State College, home of the new Fast Track Recruiting Center. The Fast Track Manufacturing Training Program, said Kathleen Murphy, manager of regional relations, "is being established to produce a pool of workers equipped with the necessary skills to work in Michiana, Ind.'s growing manufacturing sector." The program provides intensive training during a 12-week period, and partners in the program include Ivy Tech, the Department of Workforce Development, the Northern Indiana Workforce Investment Board, Workforce Development Services, Project Future and a coalition of area manufacturers.

"Fast Track is an effort to encourage as large a segment of our workforce as possible to upgrade their skills," said Pat McMahon, executive director of Project Future. "It doesn't focus just on AM General, but on the rest of the manufacturing base in St. Joseph's and the surrounding counties as well. It's an intensive program, where the curriculum can be re-written to accommodate the needs of professions such as medical technicians, precision machining, sophisticated quality control and so on."

Stephen Arnold, director of business and industry training for Ivy Tech, describes Fast Track as a program designed "to make people employment-ready, to the point where they can go to work in a manufacturing industry and progress further with the additional training a specific company might give." The program will eventually consist of three phases (the current phase, focusing on the un- or under-employed, being the first), followed by the next phase (June 2001), focusing on the improvement of skills for incumbent employees. Phase three, set for fall 2001, will focus on union employees.

"It is becoming more and more common to set up training programs," said Jim Kupferer, principal, Fluor Global Location Strategies. "Employees need to understand manufacturing, productivity and workplace ethics, and any number of skills that aren't always taught. I think we see more of these programs set up through the Southeast, rather than somewhere like the Northeast, because the Northeast has the benefit of generations of manufacturing background and skills, while the Southeastern economy wasn't set up that way. The training component is an important part of the business, and that's why you see business going to great lengths to integrate local colleges into the system."

Published January 2001 by Business Expansion Journal
http://www.bxjonline.com/issues/jan2001/auto_industry.asp

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