Question

Explain each of the factors that you would consider in choosing a suitable location for a car manufacturer The factors should be presented in order of importance (most important first) and justified.

Answer 1

As the recovery continues, the average age of vehicles has increased to an all-time high of 13 years; numerous existing OEMs have announced additional production at their facilities. This projected OEM growth continues to be focused in the central and southern corridor and is expected to result in the creation of approximately 5,900 new jobs. It is also rumored that Tata and Nissan may also be considering the location of new production facilities. All of these indications of expanded OEM production point to increased site location activity for suppliers.

Given overall recovery, the clear intent of OEMs to expand existing facilities and likely build new facilities; OEM suppliers are considering new and expanded locations with increasing frequency. Suppliers will also consider the most basic elements of site location as the attempt to find new locations that optimize operational efficiency and financial return.

As manufacturers gear up for expanded production footprints, it is important that they consider the following key elements of site location analysis:

1) Site Characteristics

Site utilization for car manufacturers from a feasibility, cost, and developmental risk perspective is typically driven by confirmation that the following location criteria are satisfied:

• Size, shape, topography and room for future expansion; site buffer should provide protection from residential and commercial neighbors. Industrial parks often provide good locations for multiple users with similar buffer and utility requirements.
• Elevation and risk of flooding.
• Geotechnical status including bearing capacity and verification of seismic risk and water table elevation.
• Environmental status typically verifying wetlands, if present, will not inhibit construction footprints and that ground contamination from previous users or other sources does not exist; the absence of endangered species and archeological remnants should be verified.
• Site access confirming acceptable ingress and egress for employees, inbound raw materials and outbound finished product.

2) Proximity to OEMs, Suppliers

Given the current concentration of automotive original equipment makers (OEMs) and series of recent announcements of new car manufacturing capacity, a key site selection factor for automotive suppliers is proximity to their upstream customer. This is the OEM for Tier 1 automotive suppliers. A common location strategy is to locate proximate to multiple customers along interstate access.

3) Availability of Utilities

Availability of reliable and reasonably priced utilities is important for manufacturing locations. Special consideration should be given to verifying utility capacities (water, sewer, gas, electricity and telecommunications) that meet near-term and expansion requirements. Many facilities may also require redundant sources of utilities.

4) Labor Draw

Car manufaturers are becoming increasingly capital-intensive, applying more capital investment per employee hired. The availability of a workforce capable of performing in this increasingly capital-intensive and technology-driven environment is critical to success. Employees must possess a positive work ethic and a focus on quality, safety and productivity. Labor draw typically does not recognize political jurisdiction boundaries.

5) Disaster Risk

Risk of hurricane, earthquake and tornados; other potential natural and man-made risks such as proximity to high-speed rail lines should be analyzed.

6) Business Climate

Key elements of a positive business climate include:

• Support of manufacturers by local citizens and the political and business community
• A business and political community that does not support labor union activity
• Acceptance of foreign firms and local support for cultural and educational activities
• Proximity of educational institutions that support manufacturers that compete on a global basis

7) Start-up and Operational Costs

Critical to projecting profitability and accurate rates of return is a thorough understanding of all project costs. Example costs include land acquisition; site preparation; geotechnical or environmental remediation; utilities; drainage and transportation infrastructure; permitting and tap fees; construction costs.

8) Value of Incentives

Incentives are an important and often complicated topic for automotive supplier executives. State, local and utility incentive packages are often complex and it is critical to conduct a professional analysis to verify which incentives offered have value and which may not. It is also important to understand the costs associated with incentives; typical analysis tools include Net Present Value (NPV) and Internal Rate of Return (IRR).