Area Development Magazine - Q1 2014 by Area Development

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SUSTAINABILITY SHAPES LOCATION DECISION

OPTIMIZING GROWTH IN SHALE ZONES

PORTS PREPARE FOR CANAL EXPANSION

Q1/2014

MANUFACTURING IN

AMERICA: BIGGER BETTER &

BOLDER

www.areadevelopment.com

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A D VA N C E D M A N U FA C T U R I N G

IN M I S S I S S I P P I

mississippi.org/manufacturing

INTELLECTUAL TALENT. A SKILLED WORKFORCE. UNLIMITED POSSIBILITIES.

Nissan North America — Canton, Mississippi

Mississippi’s higher education network provides a robust platform for building continued business success. The state’s research universities have a strong reputation for partnering with industries to bring innovation from concept to reality and are contributing to the success of global leaders every day. Mississippi’s community colleges equip today’s students and workforce with the skills needed to get the job done. That’s why more companies like GE Aviation, Northrop Grumman, and Yokohama are choosing Mississippi.

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MISSISSIPPI RANKS

TOP 5

MISSISSIPPI’S

ENERGY COSTS up to

20%

MISSISSIPPI RANKS

TOP 5 IN ADVANCED

DOING BUSINESS LOWER MANUFACTURING OVERALL COST OF

THAN THE NATIONAL AVERAGE

Expansion Solutions Magazine, 2013

Area Development Magazine, 2012

Discover all the possibilities at mississippi.org/manufacturing.

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“ MADE

IN THE USA: PERFECTED IN MISSISSIPPI —

“

MANUFACTURERS KNOW MISSISSIPPI SPURS SUCCESS. Success in today’s marketplace requires a competitive advantage — and companies are finding that advantage in Mississippi. With low energy rates and lean operating costs, more companies are choosing Mississippi for business investment. The state’s nationally ranked one-stop permitting speed and a highly skilled workforce have created a winning formula for global companies to thrive. As a result, Mississippi landed a string of significant global investment projects in the last 12 months. Most notably, Yokohama Tire Corporation selected West Point, Mississippi, in April 2013 for its first U.S.-built commercial truck tire plant. Officials broke ground in September 2013 on Phase I of the project, creating 500 jobs with a company investment of $300 million. Future expansions are projected to create 2,000 total jobs with investments exceeding $1.2 billion. Yokohama joins an impressive list of companies that already call Mississippi home including Nissan, Toyota, PACCAR, and nearly 200 automotive suppliers. Customized skills training and pride in a job well done create Mississippi’s workforce advantage. To meet today’s workforce needs, advanced manufacturers have access to the robust training programs offered by Mississippi’s 15 community colleges throughout the state. These customized workforce programs equip Mississippi workers with the necessary skills to get the job done. Mississippi’s four research universities also provide access to world-class R&D opportunities in aerospace, automotive, advanced materials, and healthcare. Innovation moves from the research lab to commercialization quickly through these strong partnerships with industry. Mississippi’s automotive industry is a leader in the Southern Automotive Corridor. Nissan North America has had a strong, successful presence in Mississippi for more than a decade. The company has invested more than $2 billion in its Canton operations and employs more than 5,600 workers. Since production began, employees have built more than 2.3 million vehicles. In July, Nissan announced it was constructing a one-million-square-foot supplier park in Canton — the company’s first in North America. The project supports 800 jobs. Direct foreign investment continues to be a trend in the state known for its centralized location, which provides easy access to many U.S. and international markets, allowing companies to efficiently distribute their products. In January 2014, GRAMMER AG, a leading supplier of automotive interiors and seating systems for commercial vehicles, announced its new Mississippi location and official U.S. headquarters in Lee County, Mississippi. The company will create 650 jobs in two phases in North Mississippi. In September 2013, Germany-based crankshaft manufacturer Feuer Powertrain announced plans to locate its first U.S. operations in Tunica. Feuer will begin production in 2014, adding 300 jobs to Mississippi’s thriving economy. An environment that supports growth is a top priority for Mississippi’s leaders. In May, Governor Phil Bryant enacted landmark legislation for sales tax exemptions on energy for manufacturing and a 25 percent rebate on research and development costs, helping ensure the state has the capacity to meet companies’ needs. With available sites and a highly skilled workforce, opportunity is abundant in Mississippi.

To learn more, visit www.mississippi.org or call the Locate in Mississippi team at 1.800.360.3323. Material supplied by the Mississippi Development Authority

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CONTENTS 18

FEATURES 15 OPTIMIZING ECONOMIC

GROWTH IN SHALE ZONE COMMUNITIES

The ability to access oil and natural gas reserves found in the nation’s shale regions has presented new opportunities for economic growth along with a host of infrastructure and real estate challenges.

22 QUALITY OF PLACE AND ITS ROLE IN LOCATION DECISIONS

As companies compete for talent, “place” is an asset that can be honed, improved, and marketed to potential employees.

24 PORTS JOCKEY FOR

COVER STORY American manufacturing is on the upswing, with advances in innovation and productivity buoyed by decreased energy and transportation costs, and new efforts to increase work force skills.

PANAMA CANAL “POLE POSITION”

East and Gulf Coast ports are gearing up to accommodate the supersized containerships that will be able to traverse the expanded Panama Canal — and the delayed expansion process has given them the advantage of time to get ready.

76 STRONG PERFORMANCE PROPELS INDUSTRIAL SECTOR INTO 2014

78 THE IMPACT OF TAXES & INCENTIVES ON DATA CENTER LOCATIONS

Many states and communities are using incentives to lure data centers and establish clusters of these facilities, which, in turn, stand to benefit from tax breaks and cash grants for necessary infrastructure improvements.

81 SUSTAINABILITY: THE

“INVISIBLE HAND” SHAPES NEXT-GENERATION LOCATION SELECTION

Companies that view their location strategies through a “sustainability filter” are more likely to achieve competitive advantage and long-term stakeholder value.

93 TAX TECHNOLOGY:

CREATING A STRATEGIC ASSET

A tax technology strategy will enable a company to align with the company’s business priorities, tax function strategy, and enterprise technology investments.

Following the best year since 2005, real estate is poised for continued progress.

Exclusive O N L I N E Content FEATURES NOW ONLINE... How Will You Know When to Reshore? There are many factors to consider when “rebalancing your manufacturing,” reshoring some operations to the U .S. and leaving others in place to serve the growing Asian market. One Size Fits All: “Vested” for Large and Small Companies Companies of all sizes are finding that negotiating and nurturing relationships with suppliers can provide a sustainable competitive advantage. Learn how the “Vested” model is allowing one small, Oregon-based contract manufacturer to help bring its client’s products to market at scale.

Location Notebook: Opelika Alabama Builds High-Speed On Ramp to the Future Opelika is developing a comprehensive broadband fiberoptic system, connecting the city and a growing industrial base to the booming global business opportunities of the future. Location Notebook: Wisconsin’s Bioscience Industry Achieves Global Recognition Wisconsin’s bioscience industry continues to expand, often led by spinoff companies that are established to commercialize groundbreaking university research.

Area Development® Site & Facility Planning (USPS 345-510) is published five times per year (Q1/Winter, Q2/Spring, Q3/Summer, and Q4/Fall — and Annual Directory in December) at Richmond, VA, by Halcyon Business Publications, Inc., 400 Post Ave., Westbury, NY 11590. Periodicals postage paid at Westbury, NY, and additional offices. Single copies, $10. Yearly subscription U.S. & Canada, $75; foreign, $95.

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Volume 49 | Number 1

Q1/2014

Quote:

If we are serious about providing upward mobility and building a skilled work force, pre-school is the place to begin.

Madeleine M. Kunin (1933– ), American diplomat and politician, and governor of Vermont from 1985 until 1991.

4 EDITOR’S NOTE — Survey Results Provide Glimpse Ahead

FIRST PERSON

DEPARTMENTS 6

FRONT LINE

IN FOCUS

Solar Commercial Outdoor Lighting Benefits the Industrial Property Sector

8 IN THE KNOW • 2014 “Intelligent Communities” Announced • Increasing the Capacity of Public Transportation Infrastructure • Manufacturers Surveyed in Q4 2013 Optimistic • Business Location Tracker

Stephen Gray, CEO, Gray Construction

Shale Regions Face the Challenges of Rapid Growth Major New Developments for Keystone Pipeline

AD INDEX/WEB DIRECTORY

Ad Index/Web Directory

SPECIAL REPORTS 69 THE SOUTHLAND

S1 ANNUAL REPORT (S1 follows page 28) 28TH ANNUAL CORPORATE SURVEY & 10TH ANNUAL CONSULTANTS SURVEY The results of our survey show a modest improvement in short-range new facility and expansion plans, as well as a realignment of site selection priorities with the availability of skilled labor being the number-one concern.

Join Our Newsletter areadevelopment.com/newsletter Follow Us On twitter.com/areadevelopment

The southern states have embraced the transition from traditional to knowledge-based economies and work hard to attract new projects and the high-paying jobs that come with them.

85 PUBLIC POWER COMMUNITIES: FUTURE-FOCUSED

America’s public power communities are places where local governments and other public entities have taken charge to deliver services their communities need to prosper.

Online Database Resources www.facilitylocations.com

www.fastfacility.com

www.areadevelopment.com POSTMASTER: Send address changes to Area Development, Circulation Department, 400 Post Ave., Westbury, NY 11590. Subscribers requesting address changes must provide both old and new addresses. © Copyright 2014 by Area Development® magazine. ISSN: 1048-6534. Printed in the U.S.A. Area Development® is a registered trademark of Halcyon Business Publications, Inc.

AREA DEVELOPMENT | Q1/2014

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EDITOR’S NOTE

Q1/2014

Survey Results Provide Glimpse Ahead When compiling the results of our annual Corporate and Consultants surveys, I noted that the economic tide appeared to be turning. Real GDP grew at an annual rate of 3.2 percent in the final quarter of 2013, and economists were projecting strong economic growth for 2014. However, the severe cold and snowy weather of January and February now appears to be hampering that growth, particularly in manufacturing. The ISM’s overall index fell from 56.5 in December 2013 to 51.3 percent in January — still signaling expansion, but at a slower pace. “We’re still growing, but manufacturing seems to have been impacted to some degree by the very severe weather in January,” said Bradley J. Holcomb, chair of the Institute for Supply Management’s Business Survey Committee. December 2013 job gains hovered around 75,000 and just 113,000 jobs were added in January. If February jobs numbers are lackluster, analysts say that would dim hopes for economic momentum in 2014. Former Treasury Secretary Larry Summers and Nobel Prize winner Paul Krugman have warned that the economy is trapped by “secular stagnation” — meaning a period of weak demand and slow growth. Some fear the situation will be exacerbated as the recovering economy feels the effects of the retirement of the baby boomers. Therefore, fulfilling the need for skilled employees is at the top of companies’ priorities, a finding borne out by the results of both the Corporate and Consultants surveys. Many others who deal with manufacturers, in particular, also confirm the need for skilled labor. Stephen Gray, CEO of Gray Construction, tells us in our First Person column, “New hires will have to have some unique skills, and think about manufacturing things differently.” He adds, “This is not Henry Ford’s assembly line.” Interestingly, when attracting these highly skilled workers, the notion of “quality of place” comes into play — another facet of fulfilling work force needs. Matthew Tarleton and Evan Robertson of Market Street Services tell us skilled workers are at liberty to pick and choose where they want to live and work in today’s economic landscape. A company’s “location decision is not solely about cost; it requires an all-encompassing glimpse into the prospective community,” the authors add. Of note, eight of the nine quality-of-life factors evaluated by the respondents to our Corporate Survey increased their importance ratings this year. For a further look at all of the site selection and quality-of-life factors and more on our readers’ location and expansion plans; Stephen Gray’s interview; and “quality of place;” read the articles that follow in this issue or at www.areadevelopment.com. To request a copy of our survey reprint, e-mail gerri@areadevelopment.com.

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EDITORIAL

E-mail: editor@areadevelopment.com Editor Geraldine Gambale Staff and Contributing Editors James Berger Lisa Buddecke Dave Claborn Mark Crawford Clare L. Goldsberry Craig Guillot

Beth Mattson-Teig Phillip Perry Jim Romeo Mali R. Schantz-Feld Steve Stackhouse Karen Thuermer

DESIGN/PRODUCTION Art & Design Patricia Zedalis Production Manager Jessica Whitebook Production Assistant Talea Gormican EXECUTIVE Publisher Dennis J. Shea

dshea@areadevelopment.com Sydney Russell, Publisher 1965-1986 ADVERTISING SALES William Bakewicz (ext. 202)

billbake@areadevelopment.com Valerie Krpata (ext. 218)

valerie@areadevelopment.com ONLINE SERVICES Digital Media Manager Justin Shea (ext. 220)

jshea@areadevelopment.com Business Development Matthew Shea (ext. 231)

mshea@fastfacility.com Web Designer Carmela Emerson

BUSINESS SERVICES Reader Service Barbara Olsen (ext. 225)

olsen@areadevelopment.com Circulation Gertrude Staudt

circ@areadevelopment.com CONFERENCE SERVICES Program Manager Annie Gregson (212) 579-4469

annie@areadevelopment.com EXECUTIVE OFFICES Halcyon Business Publications, Inc. President Dennis J. Shea

Editor

Finance Mary Paulsen

finance@areadevelopment.com All correspondence to: Area Development Magazine 400 Post Avenue, Westbury, NY 11590

2014 EDITORIAL ADVISORY BOARD Tim Feemster Managing Principal, Foremost Quality Logistics Larry Gigerich Managing Director, Ginovus Robert Hess Executive Managing Director, Newmark Grubb Knight Frank Andy Mace Principal Consultant, Cushman & Wakefield Global Consulting, Supply Chain Solutions

AREA DEVELOPMENT

John Morris Leader of Industrial Services for the Americas, Cushman & Wakefield, Inc. Kathy Mussio Managing Partner, Atlas Insight Scott Redabaugh Managing Director, Jones Lang LaSalle Andrew Shapiro Managing Director, Biggins Lacy Shapiro & Co.

Noah Shlaes Managing Director, Newmark Grubb Knight Frank Thomas Stringer, Esq. Director, Business Advisory Services, Ryan & Company Dean J. Uminski Executive, Site Selection Consulting, Crowe Horwath LLP

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InFocusSolarLighting

IN FOCUS

2/26/14

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Solar Commercial Outdoor Lighting Benefits the Industrial Property Sector By Dibs Tailor, President and Chief Executive Officer, Sol Lighting

Divakar “Dibs” Tailor is a seasoned business executive with over three decades of experience working in the manufacturing sector. Over the course of his career, he has led numerous companies through competitive industry changes, in one case leading the consolidation, transformation and growth of the Remy International aftermarket division, a $1.3 billion automotive supplier into a market leadership position.

Many industrial property owners and occupiers are awaiting the moment of grid parity — the point at which the cost of solar energy is equivalent to that of traditional electricity — before installing a rooftop solar photovoltaic (PV) system. But what they may not realize is that there is one solar application that is cost-effective now in many industrial property applications: solar commercial outdoor lighting. These applications include those in which no electrical infrastructure exists or in which there is a reluctance to disturb the landscape or existing paving. In such situations the payback for installing a solar commercial outdoor lighting system can usually be achieved immediately by eliminating the costs of trenching, wiring, and other electrical and utility costs associated with the installation of a new grid-tied lighting system. Plus, with solar lighting, there is never an electric bill!

Solar outdoor commercial lighting may, in fact, be the most economical choice including for parking lots, roadways, shelters, pathways, perimeter security, storage areas, and temporary lighting. In addition to saving on electricity costs, solar outdoor commercial lighting also saves on maintenance costs. Unlike traditional commercial outdoor lighting, solar commercial outdoor lighting is virtually maintenance-free because the batteries require no water or other regular service. And, when properly integrated into a light fixture, or luminaire, the LED lights used in solar lighting have a lifespan of more than 12 years. Flexibility and quality

Also, solar LED lights allow for much more flexibility than traditional commercial outdoor lighting. In addition to on/off schedules, LEDs can be employed with dimmers to turn the lights down when a facility is not in use, and motion sensors to turn them off when no one is present. Such aggressive control strategies reduce photovoltaic and battery demand, making the systems even more cost-effective. Solar-powered LEDs also offer a better quality of light than traditional commercial outdoor lighting. And they offer another benefit that is becoming increasingly important with the increased incidence of extreme weather events and the increased stress on the electric grid — the ability to continue to shine during brownouts or power outages. Yet another consideration is the long life of solar commercial outdoor lighting systems.

Most of today’s solar modules will produce useful amounts of electricity for 30 years, and perhaps for as long as 50 years, meaning that solar lighting will continue to produce savings for many decades to come. For many industrial property owners and occupiers, however, the most important advantage is the public relations value of powering lights with a “green” source of energy. Because solar commercial outdoor lighting uses no fossil fuels and creates no CO2 emissions, it provides a visible statement of a company’s commitment to national energy security and to the protection of the environment. In conclusion, solar commercial outdoor lighting offers many advantages to owners and occupiers of industrial properties. Those involved in remodeling or new construction projects should consider solar for their commercial outdoor lighting needs.

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InTheKnow

2/26/14

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IN THE KNOW 2014 “INTELLIGENT COMMUNITIES” ANNOUNCED In late January, the Intelligent Community Forum announced the 2014 Top7 Intelligent Communities of the Year. The list includes three from Canada, two from the United States, and two from Taiwan. Study after study notes that cities all over the globe need solutions to a wide range of problems from transportation and the environment to economic growth and education. Intelligent Communities provide solutions. According to Lou Zacharilla, Intelligent Community Forum co-founder, “Each [city] made it to the The 2014 Top7 Intelligent Communities list by demonstrating how they have begun to fuse technology, culture, and collaboration for economic sustainability…They have set a new 1 Arlington County, Virginia, USA course for other cities to follow.” 2 Columbus, Ohio, USA Candidates for Intelligent Community designation are evaluated 3 Hsinchu City, Taiwan based on five indicators that provide the conceptual framework for 4 Kingston, Ontario, Canada understanding all of the factors that determine a community’s competitiveness and point to its success in the broadband economy: 5 New Taipei City, Taiwan • Broadband connectivity • Digital inclusion 6 Toronto, Ontario, Canada • Knowledge work force • Marketing and advocacy 7 Winnipeg, Manitoba, Canada • Innovation In addition, the Intelligent Community Awards Program is guided by this year’s theme, Community as Canvas, that looks at three specific aspects of culture: as art and craftwork with both economic and social value, as heritage that gives a place its identity, and as attitudes arising from that heritage that determine how people react to change.

INCREASING THE CAPACITY OF PUBLIC TRANSPORTATION INFRASTRUCTURE A recent report, entitled “The Role of Transit in Support of High Growth Business Clusters in the U.S,” examines how America’s fastest-growing, knowledge-intensive industries — such as biotechnology and information-technology — are creating demand for land and transportation capacity in cities where these industrial clusters are concentrated. The Boston-based Economic Development Research Group, Inc. (EDRG) prepared the report for the American Public Transportation Association (APTA). It discusses how the high-tech sector has transitioned to a greater emphasis on information technology services and biotech R&D services. This, in turn, has created the need for even tighter clustering in urban areas that have access to a highly skilled work force and proximity to leading research institutions. This clustering of high-tech, high-growth industries adds to U.S. productivity and strengthens the nation’s competitive advantage. Milken Institute’s “Best Performing Cities” report explains how high-tech is responsible for allowing certain cities to weather the recent recession better than others. Nonetheless, this high-tech clustering also increases travel demand and puts stress on the capacity of local public transportation infrastructure, according to the EDRG report. Specifically, the study examined high-tech business clus-

AREA DEVELOPMENT | 2014 Annual Directory

ters in Boston, Seattle, Chicago, Atlanta, San Francisco, and Denver, to identify the transportation policy issues and needs being created by their growth. The case studies showed how high-tech, high-growth business clusters across the nation are facing limitations on future highway capacity and generating the need for public transportation solutions to support their future employment growth. Both older highway-oriented tech clusters and newer, urbanredevelopment clusters are facing this problem of strained transportation capacity. According to the report, private-sector stakeholders as well as public agencies are aware of this problem and are already initiating and planning for future investment in public transportation to address these needs. According to EDRG President Glen Weisbrod, “While the study raises as many questions as it answers, it clearly points to the need for a national discussion — not just about the role of business cluster locations in supporting global economic competitiveness, but also about ‘real world’ needs for public transportation investment to help sustain their growth.” The research indicates that a failure to increase public transportation availability at high-tech business clusters will cost the United States billions of dollars in lost economic activity.

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InTheKnow

2/26/14

10:19 AM

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Track business relocations and expansions on Area Development Online.

Studies/Research/Papers on Area Development Online.

We track announcements of all significant investment and job-creation projects throughout the United States and Canada at www.AreaDevelopment.com/NewsItems.

We cull insightful corporate real estatefocused studies, research, and papers from credible industry sources at www.AreaDevelopment.com/Studies.

BUSINESS LOCATION TRACKER Swiss Auto Supplier To Expand in Indiana Tejas Tubular Products To Manufacture in Norfolk, Nebraska A primary supplier to oil and gas producers, Tejas Tubular Products, is constructing a 350,000-square-foot facility in Norfolk, Nebraska, that will bring some 200 jobs to Madison County.

Swiss-based Autoneum, a global technology leader in solutions for the auto industry, will expand its Jeffersonville, Indiana, operations center, creating approximately 220 new jobs by 2018.

Securaplane Technologies, a supplier of avionics products, has relocated its operations center to a new 55,000square-foot facility that will house 180 employees in Oro Valley, Arizona’s Innovation Park, north of Tucson.

Construction is under way on Germany-based GRAMMER Inc.’s U.S. headquarters and newest manufacturing center at the Tupelo Lee Industrial Park South in Lee County.

Molecular Technology Corporation Industries plans to move its manufacturing operation from China to an 18,000-square-foot facility in Suffolk County on Long Island, and add 40 people to its work force within the next four years.

ContactUS Invests $4 Million In Second Columbus, Ohio, Facility

Avionics Supplier Now Operating in Arizona’s Innovation Park

German Manufacturer Investing $30 Million, Creating 650 Jobs in Mississippi

MTC To Reshore Production From China To New York

A leader in business process outsourcing, ContactUS, will expand to a second facility in Columbus, adding 350 full-time jobs during the next three years.

Belgian Flooring Company to Expand in Georgia IVC US, the North American subsidiary of Belgium-based flooring company IVC Group, will expand its operations in Dalton, Whitfield County, Georgia, creating 200 new jobs and investing more than $80 million over the next five years.

Bristol-Myers Squibb Opens North American Capability Center In Tampa, Florida Bristol-Myers Squibb plans to create 579 new jobs in three years at its new center in Tampa, where it will generate $21.1 million in capital investment.

Go to www.AreaDevelopment.com/NewsItems to track business expansion & relocation announcements

MANUFACTURERS SURVEYED IN Q4 2013 OPTIMISTIC PwC’s Q4 2013 Manufacturing Barometer reveals that U.S. industrial manufacturers expect economic growth will continue in 2014. They express optimism about the U.S. economy, and more importantly, about the global economy as well, with Q4 2013 optimism (68 percent) reaching the highest level since the fourth quarter of 2010. A majority of the respondents expect positive revenue gains at their own companies; their plans for hiring remain steady; and international sales have regained momentum. “As we continue to see the global macroeconomic environment improve, we expect U.S. industrial manufacturing executives, bolstered by strong balance sheets, to more aggressively compete for businesses in international markets and increase capital expenditures,” said Bobby Bono, U.S. industrial manufacturing leader, PwC. Here are some survey findings: • 85 percent of survey respondents expect positive revenue growth for their own companies in 2014, with 13 percent forecasting double-digit gains • 60 percent of the Q4 2013 respondents plan new net hiring in 2014, but will do so at a more moderate pace. The most soughtafter employees will be skilled labor (42 percent), followed by professionals/technicians (30 percent) and production workers (28 percent). • 29 percent of respondents report increased international sales, up from 18 percent the prior quarter. Among the survey findings, legislation/regulatory pressures (47 percent) and concern about lack of demand (42 percent) are the most cited potential barriers to growth over the next 12 months.

AREA DEVELOPMENT | Q1/2014

FirstPersonStephenGray

FIRST PERSON

2/26/14

12:21 PM

STEPHEN GRAY

Page 10

CEO

How do you feel the federal government’s efforts over the last five years have helped or impeded the industrial construction industry? Gray: We had some tough times in 2008–2010, but we stayed the course. We held onto our resources that would allow us to take advantage of the market when the economy recovered, and had confidence that manufacturing would turn around. In 2010 it did, and 2011, 2012, and 2013 were our best years ever. As far as whether the government helped turn manufacturing around, let’s just say it didn’t hurt it. What helped us was the fact that while it may have seemed bad in the U.S., everywhere else in the world that has manufacturing was worse. Where are you seeing the greatest demand for new manufacturing plant construction coming from? Is any of it a result of the reshoring we’re hearing so much about? Gray: We’re certainly experiencing an uptick in the demand for new manufacturing plants, not only for the domestic manufacturing companies coming back to the U.S. due to reshoring, but there’s also big demand from foreign companies wanting to locate new manufacturing plants in the U.S. to reach North American customers. They look to the U.S. as the safest place to be — a great place to be if you want to grow your manufacturing business. Besides a customer base in the U.S., what other advantages for foreign companies do you see? Gray: We see a big energy advantage in the U.S. That’s probably in the top three reasons that foreign companies are coming here — an abundance of energy resources for the next 100 years. It takes a lot of energy resources to run a manufacturing plant, so when considering plant location, companies want to buy energy somewhere that has a lot of energy and where the costs are more predictable. When my customers look to the U.S., the reasons add up: cost-effective energy; close to

AREA DEVELOPMENT

GRAY CONSTRUCTION

the American consumer who will buy their product, which means good growth; and in the U.S. there’s a tremendous respect for capital. When you come here you don’t have to worry about a revolution. It’s a risk to go anywhere, but less of a risk in the U.S. Given this increase in manufacturing from both domestic and foreign companies, what steps do you think the government can take to help strengthen the U.S. manufacturing economy? Gray: We need government to maintain a focus on helping create a work force that will be able to serve manufacturing. Here’s an interesting number: during the recession we lost 2.3 million jobs. Manufacturing has gained back close to 550,000 jobs and currently provides close to 12 million jobs. We’re just about back to the same GDP level of productivity that we had in 2008, yet here we are in 2014 with fewer manufacturing employees than our prerecession levels. That should turn a lot of heads. What this tells us is that going forward we’ll do more with fewer people. The remaining employees and the new hires will have to have some unique skills, and think about manufacturing things differently. This is not Henry Ford’s assembly line. You mentioned the productivity of the American worker. Is that an attractive asset to companies in other countries looking to be closer to the North American market? Gray: Currently, about 70 percent of our manufacturing facility projects are with foreign investment. Productivity of our work force is another reason that foreign companies want to be in the U.S. We’re the most efficient manufacturing environment of anywhere in the world, not including textiles. The U.S. worker is very productive. Management, along with the involvement of labor, is constantly trying to figure out more efficient ways to get products out the door. How does that influence the types of manufacturing facilities that Gray Construction builds? Gray: Any type of successful manufacturing business has to involve the people on the line who are the source of creative thinking.

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FirstPersonStephenGray

2/26/14

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We’re seeing that those customers we build for are working on efficiency of design and how the manufacturing process will flow through the facility. Most of our planning meetings involve people from the manufacturing production line who understand the plant flow and who will help plan the facility. What’s the most active region in the U.S. for new manufacturing facilities and why? Gray: If you’re working with site selection consultants, they’ll have the Southeast at the top of the list. Obviously, other things weigh in like customer location, but the Southeast will be in the running 99 percent of the time. Outside the Southeast, Texas is active — we currently have a project in Houston. In the Midwest, Indiana is very strong. The move to being a right-to-work state really helped. Opportunities popped up almost immediately after that. What do you believe is the most important factor that companies look for in deciding on the perfect location for a new manufacturing plant?

Gray: First on the list is finding a good base of skilled workers. They are willing to spend money on good workplace skills, and training is important. These companies will often partner with a community college in the area to train workers in the types of skills the company needs. Often they’re training the work force while we’re building the plant. After that, they want an infrastructure-ready site. This is key to help them get up and running, and getting their products to market faster.

THE ASSIGNMENT Five years ago, Area Development interviewed Jim Gray, then CEO of Gray Construction, a Lexington, Kentucky-headquartered national industrial construction firm specializing in designing and building manufacturing plants for some of the largest global manufacturers. Jim Gray is now mayor of Lexington, and Stephen Gray is the company’s CEO. Area Development thought it would be interesting to get some comments from Stephen on manufacturing’s contribution to economic growth.

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AREA DEVELOPMENT | Q1/2014 11AM 5/3/13 11:08

FrontLineShaleRegions

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FRONT LINE

Shale Regions Face the Challenges of Rapid Growth By Lisa Buddecke

conomic growth is welcome in any region. But rapid economic growth can also present a host of challenges. Those states with recently discovered oil- and natural gas-rich deposits are experiencing demands on everything from infrastructure and real estate, to employment and industry services. Shared opportunities include shared challenges. North Dakota’s Bakken Shale region is one of those areas contending with explosive growth. “In just the past three years, our region has more than doubled,” says Greg Johnson, owner/CEO of North Dakota Port Services. “Logistics has become our number-one challenge. And building infrastructure with long-term viability and value is also challenging. With national and international investors bringing in significant capital investment, we have had to make tremendous adjustments to address the many changes required to accommodate this amazing economic development opportunity, while always keeping in mind the needs of our residents,” Johnson says. In order to support this rapid growth, the City of Minot has had to address the availability and quality of infrastructure, the need for housing for thousands of new employees, as well as the need for support services/professionals such as teachers, lawyers, bankers, and food service workers, to name a few.

Addressing the Challenges Energy companies investing in Minot’s Bakken Shale region want to get up and running quickly on production and distribution. The North Dakota Port Services (NDPS) concept of building an intermodal transport hub with rail and easy freeway access began nearly eight years ago. Today, this strategically located 3,200-acre development in Minot links the Bakken oilfield with areas within a 250-mile reach, including eastern Montana, northern South Dakota, northwestern Minnesota, and southern Manitoba and southeastern Saskatchewan in Canada. With 45 miles of track, shovel-ready sites, and full city infrastructure services, the big challenge of serving this industry has been addressed. But addressing the housing and support services needs of workers recruited to fill the employment opportunities in the Bakken region continues to test local municipalities. According to Bruce Rutherford, international managing director at Jones Lang LaSalle, while hotels and apartments

AREA DEVELOPMENT

Drilling in the Bakken Shale

are under construction here, the high rent can be afforded only by highly paid energy employees, leaving other residents (including firefighters and police officers) without affordable housing options. According to Rutherford’s May 8, 2013 report in The American Oil & Gas Reporter, oil and gas companies are turning to real estate service providers to help address the problem, bringing in developers to build the needed apartments, houses, stores, restaurants, and schools. These emerging projects are expected to reduce the amount of temporary housing, and bring women and families into the community. He also reports that institutional investors’ long-term risks are offset by rapid investment returns, with real estate investments in this region generally paying off faster and delivering double to triple the returns on similar investments in other locations. By enjoying the benefits newfound energy sources bring to the area, while finding solutions to issues that test their communities, regions like Minot are addressing the challenges of rapid economic growth head on. Efforts to develop oil and gas resources must continue to take into account the needs of community development and quality of life.

FOR FREE SITE INFORMATION, CALL

800-735-2732, EXT. 225, OR VISIT US ONLINE AT WWW.AREADEVELOPMENT.COM

FrontLineKeystone

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FRONT LINE

Major New Developments for Keystone Pipeline

n January 2014, the controversial Keystone pipeline began moving crude oil from the huge storage hub in Cushing, Oklahoma, to the Gulf Coast. The pivotal event was the completion of the Gulf Coast pipeline, the leg between Cushing, Oklahoma, and Port Arthur, Texas. This pipeline runs 487 miles and has the capacity to ship up to 830,000 barrels of oil per day. For the first time there is now a direct link for Canadian crude oil to the Gulf refineries. The original Keystone pipeline (Phase 1 of the project) originates from Hardisty, Alberta, through Regina, Saskatchewan, and into Manitoba before crossing the border into North Dakota then through South Dakota and into the oil terminals in Steele City, Nebraska. From there the Canadian crude oil originally went to Patoka and Wood River, Illinois. A spokesman for TransCanada Corp. reported “some 550 million barrels of oil have been shipped via pipeline into Patoka and Wood River since the pipeline became operational in 2010.”

Phase Two The second phase of the Keystone pipeline was the completion of the 300-mile leg from Steele City to Cushing, Oklahoma. Finally, in late January of this year, the Gulf Coast Pipeline Project went operational and Canadian crude oil moved from Cushing to Nederland, Texas. Even without approval of the controversial Keystone XL phase, which would transport oil on a far shorter route from Hardisty through Montana, South Dakota, and into Steele City, Canadian crude oil is now flowing through the pipeline from Canada to the Gulf. TransCanada expects the Gulf Coast pipeline to transport 700,000 barrels of oil per day. The Gulf Coast line forms the southern leg of TransCanada’s controversial Keystone XL project, which has been waiting for five years for approval from the Obama administration. “We are now actually connected all the way to the Gulf Coast,” said TransCanada Corp. CEO Russ Girling. “The shippers (on the Keystone line) have the ability to not only

AREA DEVELOPMENT

Courtesy TransCanada

By James T. Berger

deliver at Cushing, they can deliver right through to the Gulf Coast. “

Other Developments In addition to the opening of the Gulf Coast pipeline, there have been major developments with regard to Keystone XL. In early February, the State Department released its latest report on the proposed XL pipeline. The report found that the pipeline’s construction would create as many as 3,900 jobs over two years. The additional spending on construction material would push the job gain up to 4,200 — counting jobs building the pipeline. More importantly, the report found that the construction of the pipeline would not harm the environment. This final environmental review by the U.S. State Department further found that the Keystone XL pipeline would not greatly increase carbon emissions because the oil sands in Alberta would be developed anyway. And, according to an article in Forbes (2/6/14), “Environmental risks from hypothetical future pipeline spills need to be weighed relative to what is likely to happen if the oil travels by an alternative pipeline across Canada or by train south into the U.S.” It’s noted that there have been six accidents in the past year involving trains carrying oil. The study is important because President Obama has said he would not approve Keystone XL if it would exacerbate carbon pollution. Now, according to Bloomberg, “The pipeline’s fate comes down to the broader questions about whether the project is in the U.S. national interest, weighing matters such as energy needs and diplomatic relations.”

FOR FREE SITE INFORMATION, CALL

800-735-2732, EXT. 225, OR VISIT US ONLINE AT WWW.AREADEVELOPMENT.COM

OptimizingEconomicGrowth

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ENERGY/LABOR

Optimizing Economic Growth in Shale Zone Communities The ability to access oil and natural gas reserves found in the nation’s shale regions has presented new opportunities for economic growth along with a host of infrastructure and real estate challenges. By Bruce Rutherford, International Director and Global Energy Practice Leader, Jones Lang LaSalle

ast oil and gas reservoirs found in domestic shale plays have created rapid economic growth in communities from small towns to major cities in North Dakota, Texas, Pennsylvania, Ohio, West Virginia, Montana, and Colorado. These communities face skyrocketing growth — a welcome challenge, especially as the country as a whole continues to grow at a tepid rate. That said, to reap the benefits of this economic opportunity, real challenges in infrastructure and real estate must be addressed. The good news: there are solutions to community growth pains manifested by “man camps” and lack of roads, and municipalities now have the benefit of looking beyond their own experience and learning from recent experience of other cities and communities.

The Economic Opportunity The opportunity posed by our new ability to access oil and natural gas reserves through horizontal drilling is enormous. According to industry reports from I.H.S. Global Insight, the domestic energy industry is expected to create more than 3.5 million American jobs by 2035, including 700,000 in the next two years. Energy companies are likely to invest more than $100 billion in the next few years in Texas alone — home to the Eagle Ford and Permian Basin shales. In 2011, the boom created more than 38,000 jobs in South Texas and poured more than $500 million into

U.S. Energy Employment Growth in Hub Markets Market

% Growth: 2003 vs. 2013

North Dakota

382.0%

Colorado

74.8%

Texas

63.2%

Pennsylvania

43.4%

Total U.S. Employment Growth

4.0%

Source: JLL’s 2013 Energy Outlook report

local and state coffers, according to a report by the University of Texas at San Antonio, as published in the USA Today article, “Oil! New Texas Boom Spawns Riches, Headaches.”

The Challenges and Solutions Despite a seemingly “win-win” situation for energy companies and local economies, the domestic oil boom has created major infrastructure challenges for these states. The shale’s epicenters are often located in small communities that have undergone population surges from the hundreds to the thou-

sands in a few short years. As a result, there is a significant lack of infrastructure, from buildings that house employees to roads and utilities that support operations. When it comes to real estate, the demand for both commercial and residential buildings has driven energy companies to improvise with temporary solutions such as “man-camps” (explained below) and trailer offices that are not conducive to long-term productivity. As a result, local municipalities are looking for more optimal real estate solutions to support energy AREA DEVELOPMENT | Q1/Winter 2014

OptimizingEconomicGrowth

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companies’ supply chains by developing infrastructure and working with developers in these communities to build additional housing, retail and office space, and industrial facilities. • Infrastructure — While communities are funding new infrastructure projects, these large-scale installations often require longer time spans for government approvals than energy company land leases can accommodate. Municipalities handle the issue in different ways, often asking energy companies to fund and manage the infrastructure projects, and working with third-party experts to identify, manage, and execute the construction to accommodate basic needs such as electric, water, and roads. For example, electrical power is one of the most immediate infrastructure issues in the Eagle Ford zone so discussions are under way with the state of Texas and local utility firms to identify existing power lines and the best way to expand on the current lack of capacity. Building sites are being driven both by access to electrical infrastructure as well as by the limited road infrastructure that can carry the load capacities needed by energy companies transporting heavy equipment, pipes bound for “laydown” yards, and underground drilling production components. Third-party service providers are helping energy companies, which are not experts in land use and real estate development, to address the need to ramp up quickly by analyzing tax records, government incentive programs, and real estate development opportunities so that these energy companies can meet their production speed-to-market goals. • Industrial/Production Facilities — When conducting land-use studies, municipalities must also take into account the large proportion of space required for production facilities. These facilities are highly specialized and differ significantly from properties required by other industries. For example, “down hole” companies need facilities in which to store their monitoring equipment — both the extensive computer rooms and the actual equipment that goes into the well. Many of the industrial facilities must store vehicles and drilling equip-

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Page 16

ment indoors, particularly in the harsh climate of the Bakken Shale, and the size of that equipment can require ceiling heights up to 60 feet — triple that of a traditional warehouse. The facilities must also meet critical health, safety, security, and environmental regulatory requirements to ensure that the activities onsite are safe for the employees and the environment. This demand for industrial

ENERGY COMPANIES ARE COMMITTING TO SIGNIFICANT REAL ESTATE DEVELOPMENTS BY PRELEASING APARTMENTS, OFFICES, AND INDUSTRIAL SPACE, THUS ALLEVIATING RISK.

space is impacting shale zones in an uneven way. For example, in the Pittsburgh area, the challenge is somewhat muted because there is existing, if outdated, infrastructure and real estate that can be repurposed; e.g., in one town, a former elementary school has become an operations center. • Housing — As energy company employees often outnumber a community’s permanent population by several times, housing is the most visible real estate challenge in shale plays — and often the most problematic. Worker demographics are overwhelmingly male, and as there are limited options for housing, most workers are unable to bring their families to the production site. This has resulted in the establishment of “man camps,” i.e., temporary housing that is taking place in trailers packed with single men earning high salaries, yet living in dorm-like conditions. For example, take Williston, North Dakota — the community at the epicenter of the Bakken Shale. Currently, there are more than 20,000 individuals housed in temporary man camps. While hotels and apartments are under construction, the current rents are $3,000 per month for a two-bedroom apartment, and can only be afforded by the highly paid energy FOR FREE SITE INFORMATION, CALL

employees, leaving other residents, including fire fighters and police officers, without affordable housing. For a big picture perspective, JLL estimates that the energy sector’s impact on U.S. apartment demand likely contributed to nearly 25 percent of total unit absorption since 2002, an overall demand of approximately 165,000 units. The housing shortage is also creating demand for the limited number of hotel rooms available near production sites. Therefore, for visiting energy company executives or managers onsite for limited periods of time, the expense of visiting production sites has risen significantly. The lack of supply has resulted in skyrocketing hotel room rates. On a recent stay, for instance, a hotel room near Epping, North Dakota (permanent population: 109), required a threeday minimum stay at $267 per night. Oil and gas companies are turning to real estate service providers to help address the problem, bringing in real estate developers to build the apartments, houses, stores, restaurants, and schools. These emerging projects are expected to reduce the amount of temporary housing and bring women and children into the communities. • Retail — Much like housing, there are simply too few stores and restaurants to effectively serve the growing energy communities. Even during the recession, retail vacancy in Houston dropped 1.6 percent since its 2008 peak. Much like housing, as investors and retailers themselves become more comfortable with the long-term potential of these communities, stores and restaurants will begin to open at a more rapid pace. Municipalities generally welcome retail, particularly as an immediate source of tax revenue that can often be used to solve some of the other challenges such as the need for more roads and schools. • Offices — In many of the small towns serving production sites, there is little suitable office space available. Extraordinary technological infrastructure is necessary to combat technical challenges in the field. Now picture that requirement operating out of temporary trailers. Most oil companies want to lease space, rather than purchase, when addressing these needs

800-735-2732, EXT. 225, OR VISIT US ONLINE AT WWW.AREADEVELOPMENT.COM

OptimizingEconomicGrowth

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for the longer-term. Right now, many are integrating their office requirements into build-to-suit industrial facilities, but theyâ&#x20AC;&#x2122;d rather not tie up capital to support real estate. Nevertheless, energy companies are now building office properties themselves, given that real estate is a major factor in speed-to-market. According to the JLL 2013 Energy Outlook report, U.S. energy markets have contributed disproportionately to the office recovery â&#x20AC;&#x201D; representing 22 percent of recently increased office space occupancy in these markets. For example, an analysis of energy leasing transactions revealed that energy tenants in Denverâ&#x20AC;&#x2122;s central business district â&#x20AC;&#x201D; a large city close to the Bakken Shale â&#x20AC;&#x201D; paid an average of 9.7 percent above landlordsâ&#x20AC;&#x2122; initial office space rental rates. Energy companies have also driven a revival in the real estate market in the Pittsburgh area. One new office campus hosts the regional headquarters for Shell, CNX Gas, and Exxon. Several million square feet of addition-

Page 17

al space has been leased since 2009 and is directly attributable to the energy industry, including a significant expansion by support services such as law firms.

Reaping Rewards Through Collaboration There has to be a collaborative effort between energy companies, local municipalities, and real estate developers to optimize economic growth in shale zones. Energy companies are beginning to work with third-party consultants specializing in public/private partnerships to address not only infrastructure challenges, such as roads and utilities, but also broader community issues, such as schools and other services to support employeesâ&#x20AC;&#x2122; families. While real estate investors and developers have oftentimes been hesitant in building permanent housing due to uncertainty in the production cycle and a viable exit strategy, energy companies are committing to significant real estate developments by preleasing apartments, offices, and indus-

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AREA DEVELOPMENT | Q1/Winter 2014PM 17 09/12/13 9:54

CoverStory

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COVER STORY

MANUFACTURING IN

AMERICA: BIGGER BETTER &

BOLDER

By Mark Crawford

AMERICAN MANUFACTURING IS ON THE UPSWING, WITH ADVANCES IN INNOVATION AND PRODUCTIVITY BUOYED BY DECREASED ENERGY AND TRANSPORTATION COSTS, AND NEW EFFORTS TO INCREASE WORK FORCE SKILLS.

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Manufacturing is the key driver in the American economy — and it’s back.

N 2012 U.S. MANUFACTURERS

contributed $1.87 trillion to the national economy, or about 12 percent of the country’s GDP. According to the Institute for Supply Management’s (ISM) December 2013 semiannual economic forecast, the manufacturing sector is optimistic about growth in 2014. Capital expenditures are expected to increase by 8 percent and hiring by 2.4 percent — key indicators of manufacturer confidence. There have been other positive signs: • Manufacturing grew in December 2013 at the second-fastest pace in more than two years. • ISM’s factory index averaged 51.5 in the first six months of 2013 and 56.3 in the second six months (values over 50 indicate an expansion). • ISM’s inventory index decreased to the lowest level since July 2013. • Consumer confidence is the highest it has been in six years. • Europe’s economy is emerging from its long recession. Currently, American manufacturers employ about 12 million people. Over the past three years, more than 554,000 manufacturing jobs have been added, even as these companies become leaner, more productive, and more competitive. “Three big reasons for this transformation are the recession, lower energy costs driven largely by natural gas, and rising labor costs in China,” comments Mitchell Higashi, chief economist for GE Healthcare in Milwaukee, Wisconsin. “ISM data show the manufacturing sector closed out 2013 with seven straight months of expansion.” Manufacturing purchasing and supply executives also expect to see continued growth. “They are optimistic about their overall business prospects for 2014," says Bradley Holcomb, chair of the ISM Manufacturing Business Survey Committee. "Our forecast calls for a continuation of growth in 2014, building on the momentum from the second half of 2013. Respondents also expect raw materials pricing pressures in 2014 to be low and their margins to improve."

A WELCOME REVERSAL “Reshoring” is a real phenomenon — U.S. companies are coming back from low-cost countries and hiring American workers. According to figures provided by the

Reshoring Initiative, from 2003 to 2013 offshoring jobs dropped by 70 percent, whereas new reshoring jobs grew by +1,500 percent! “About 150 companies became reshorers in 2013,” says Harry Moser, founder of the Reshoring Initiative. “Since January 2010 about 100,000 U.S. jobs have been created by companies that brought their operations back to this country.” “The U.S. lost manufacturing jobs over the last two decades due to globalization,” says Kurt Bauer, president of Wisconsin Manufacturers & Commerce in Madison. “Emerging economies in Asia had cheaper labor and fewer regulations, which made offshore production a necessity to stay competitive. However, labor costs are now rising in nations like China.” Other key factors bringing back U.S. production are abundant and lower-cost energy, lower transportation costs, and better protection against counterfeiting, piracy, and theft of trade secrets. John H. Boyd, principal with the Boyd Company, a site selection firm in Princeton, N.J., predicts a significant number of production, final assembly, and quality control jobs will return to the U.S. over the next decade, driven also by “the expanded compliance arenas coming under review by government agencies like the FDA and FAA for new interactive, wireless technologies, including the high-growth, med-tech IT sector.” “Quality concerns are a big reason highervalue and more technical products are looking to come back to the U.S. or nearby in Mexico,” agrees Larry Gigerich, managing director for Ginovus, a location consulting firm based in Indianapolis. “The lack of intellectual property protection in some locations has become a large problem. There is also more momentum for reshoring in the areas of customer care/technical support and financial services.” An overall improving business climate in the U.S. — especially regarding positive labor-management relations — is also a big motivator. “Right-to-work states will have a competitive advantage for many of these reshoring projects,” adds Boyd. “Indiana and Michigan’s historic move to right-to-work status represents a telling adjustment to this well-established trend.” AREA DEVELOPMENT | Q1/2014

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TIGHTENING THE SUPPLY CHAIN The supply chain has everything to do with the profitability of manufacturing operations. It allows a company to be lean and efficient, which translates into better productivity and competitiveness. Better control of their supply chains is another big reason companies are coming back to the U.S. “Supply chain management includes sourcing, operations/manufacturing, inventory management, logistics, and customer service,” indicates Douglas Fisher, director of the Center for Supply Chain Management at Marquette University in Milwaukee. “Companies are returning to the U.S. because they are tired of dealing with long, inflexible supply chains. For example, it might take months when sourcing from China. Related realities include dealing with large inventories, slow response times to market changes, and more severe impacts from disruptions like port strikes or natural disasters.” Companies are also streamlining their supply chains, cutting out vendors that don’t deliver their absolutely best effort, every time. “Companies that survived the Great Recession have a much shorter tolerance for mistakes or inconsistent performance,” says Drew Greenblatt, president of Marlin Steel Wire Products in Baltimore, Maryland. “Companies also don’t want to tie up cash or space for inventory. Therefore, supply chain partners must be more efficient and flexible in the services they provide.” ISM indicates that supply chain managers in 2014 will be focusing on improvements such as strategic sourcing/supply base rationalization, process and information systems, supplier relationship management, inventory management and control, and improved cross-functional planning. With shipping representing the single-largest cost factor in the supply

AREA DEVELOPMENT

chain, and rising fuel and trucking costs a big concern, Boyd suggests that manufacturers should consider “locating production facilities as close to intermodal rail ramps as possible, thus providing opportunities to reduce dependence on over-the-road transport and achieve a greater utilization of lower-cost rail.”

REGIONAL LEADERS San Antonio, El Paso, Atlanta, Charlotte, Indianapolis, Mobile, Oklahoma City, Louisville, Memphis, and Nashville are among those locations enjoying a manufacturing surge, according to Gigerich. “Business climate, location, economic development incentives, infrastructure, and human capital quality/costs are all driving growth in these areas,” he adds. Boeing's decision to manufacture the 777X in the Puget Sound has made the state of Washington a key location for U.S. composite manufacturing. BMW is already producing composite parts for its new generation of more fuel-efficient vehicles in Moses Lake. “The use of lightweight, strong composites is also rapidly expanding into other manufacturing sectors like motor vehicles, appliances, consumer electronics, and recreational products,” says Boyd. Industries that consume natural gas as a feedstock or energy source — especially chemicals and plastics manufacturers — are locating in states like Pennsylvania, Ohio, and West Virginia where hydraulic fracturing has generated vast natural gas supplies. For example, because of the inexpensive supply of regionally produced natural gas around Pittsburgh, this manufacturing city is experiencing a surge in chemical production. “Low-cost energy supplies coming on stream in states like Pennsylvania are enabling states in the Northeast to effectively compete with energy-rich Gulf Coast states like Louisiana for new chemical and plastics

FOR FREE SITE INFORMATION, CALL

industry investment,” says Boyd. Aerospace manufacturing is also looking good, thanks to the FAA’s NextGen and UAV (drone) programs — both multibillion-dollar programs. NextGen will convert the country’s airtraffic control system from radar-based to satellite-based. For the UAV program, the FAA recently awarded special test-site status to Alaska, Nevada, North Dakota, Texas, New York, and Virginia. Boyd indicates that Florida, Arizona, Alabama, and New Mexico are also well positioned to attract new drone investment, especially in the electronics, avionics, and metal products sectors.

MOVING FORWARD Manufacturing companies made significant capital investments during the recession to lower operating costs and prepare for the economic recovery. “Many companies invested in automation to increase operational efficiency,” says Gigerich. “This allowed them to be more productive, while lowering or maintaining headcount.” Greenblatt indicates that Marlin Steel Wire Products recently invested $3.5 million in new equipment and robotic technology. “Robots make better-quality parts,” he says. “The robots are inside the cage, doing the nasty, carpal-tunnel work. This allows our employees to do safer, more challenging work.” Robots and automation can therefore provide critical relief to workers, who were often pushed to the limit during the Great Recession. By improving the comfort and safety of the workplace, companies can retain their most skilled and creative employees. This is a huge concern, considering the fact that the lack of qualified workers, i.e., the “skills gap,” is the greatest threat to U.S. manufacturing today. “U.S. manufacturers coming out of the Great Recession had become very lean

800-735-2732, EXT. 225, OR VISIT US ONLINE AT WWW.AREADEVELOPMENT.COM

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Page 21

and efficient, which resulted in higher productivity,” says Bauer of Wisconsin Manufacturers & Commerce. “Even though manufacturers have used automation to be competitive, they still need skilled and motivated people.” According to research from the Society of Human Resource Management, most manufacturers are hiring, but 67 percent of those companies looking for full-time employees can’t find individuals with the skills they need. “Research conducted by the National Association of Manufacturers (NAM) seconds this reality,” states Adam Beckerman, partner in charge of the Manufacturing and Distribution Group for Habif, Arogeti and Wynne in Atlanta. “NAM discovered that 600,000 jobs go unfilled in the industry because of a lack of necessary skills, despite the country’s current unemployment rate.” The skills gap isn’t expected to close any time soon, Beckerman points out. NAM’s research indicated that 56 percent of respondents expect the shortage to

grow even worse in the next three to five years. “To turn this trend around, states and communities need to rally behind vocational schools and encourage students to look into trade skills,” advises Beckerman. In Pennsylvania, for example, Governor Tom Corbett established the Pennsylvania Targeted Industry Program to provide financial aid grants to meet work force needs. So far, grants have been given to over 1,200 students enrolled in certification programs in high-demand industries such as energy, advanced materials, diversified manufacturing, and agriculture and food production. The state has also partnered with the Manufacturers Resource Center, a nationally recognized leader in manufacturing assistance, to launch a “Skill Up” initiative to help change the image of manufacturing and encourage careers in modern manufacturing. To maintain global competitiveness as a manufacturer, Higashi recommends finding new and innovative ways to gen-

erate productivity and efficiency, as well as investing when opportunity arises. For example, GE Aviation recently broke ground on a new 170,000-square-foot facility in Asheville, N.C., that will be the first in the world to mass-produce engine components made of advanced ceramicmatrix composite materials. Because this is the first time these components are being mass-produced anywhere in the world, an advanced training program was developed in partnership with AshevilleBuncombe Technical Community College (ABTCC). Developing a talented work force is critical for any expansion into a new market. “Competency always trumps cost,” says Higashi. “While factors like wage rates and foreign exchange rates can change over time, high-paying manufacturing jobs tend to follow a skilled, creative work force. Our success in Asheville is a great example of how innovation, supported by strong teaching institutions and local governments, can translate into good-paying manufacturing jobs.”

Momentum. Companies of all sizes and industries continue to choose the Tulsa region for its resiliency, its growth opportunities, talented workforce, and affordable business costs. Tulsa ranked as a top metro area in more than 20 publications in 2012 and 2013 for its economy, real estate and quality of life—and people all over the world are taking notice. For more information, go to: growmetrotulsa.com.

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AREA DEVELOPMENT | Q1/2014

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SITE SELECTION

Quality of Place and Its Role in Location Decisions As companies compete for talent, “place” is an asset that can be honed, improved, and marketed to potential employees. By Matthew Tarleton, Vice President and Principal; and Evan Robertson, Senior Project Associate; Market Street Services

s we travel the country working with communities large and small, urban and rural, from the Deep South to the Pacific Northwest, one thing is clear: our client communities, and their resident businesses, are increasingly concerned about developing, retaining, and attracting the talent necessary to produce a sustainable work force. This statement should surprise no one. Nearly all the executives (95.1 percent) surveyed by Area Development in its 28th annual Corporate Survey rated availability of skilled labor as “very important” or “important” in their site selection factors. This factor is now considered more important than highway accessibility (93.5 percent) and labor costs (90.8 percent). In today’s highly competitive environment for talent, a compelling quality of place — a community’s attractiveness to existing and future residents and workers — is a competitive advantage. Motivated by executives’ increasing concern over their businesses’ future growth prospects in an ever-tightening labor market, companies are choosing locations attractive to tomorrow’s skilled, mobile work force. And many workers — especially recent graduates and young professionals — are selecting a place to live before securing employment.

An Example Sonoma County, located in the northern part of the San Francisco Bay Area, is widely known as the heart of California’s wine country. The county and its various municipalities have frequently appeared on a variety of publications’ “best

places to live” rankings. The factors that have contributed to these rankings — collectively, the community’s quality of place — have supported a number of recent corporate relocations. Home to nearly half a million people and a highly educated work force, Sonoma’s companies have turned the area’s high quality of place into competitive advantage when it comes to talent attraction and retention. Douglas Clark, CEO of Sonomabased cloud computer firm Métier, describes the company’s relocation decision: “As a cloud-based technology company, we can locate our operations anywhere. Rather than offshoring, we chose to inshore. Inshoring requires that you locate in a desirable location that attracts top talent. We selected Healdsburg as our global headquarters because the com-

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munity offers the quality of life and cultural offerings that attract exceptional professionals.” Companies like Métier have made the connection between place and competitive advantage: attracting a skilled work force is intricately linked to the community’s physical and social characteristics. Sonoma not only attracts talent, but retains it within the county as well. It is home to a host of innovative companies that have leveraged the talent brought to the region by companies like Agilent and General Dynamics. Richard Schroeder, CEO of LithiumStart and former general manager of General Dynamics’ Sonomabased Healdsburg operations facility, relocated to Sonoma County without full-time employment specifically for the quality of life and lower cost of living. After joining Versatron, a small startup in Sonoma, Schroeder sold the business to General Dynamics and grew the division to over 200 people. Finding the right talent for such a specialized market required looking outside the area. Many of the top engineers at General Dynamics were recruited and relocated from competitors around the country, including Buffalo, Cleveland, and the San Francisco Bay area. “There are a lot of smart and talented people here who are building exciting companies,” says Schroeder. “Attracting the talent to grow them requires looking outside the area. But once they get a taste of this quality of life, it’s hard to think of living anywhere else. I remember recruiting a husband and wife from Buffalo. A long weekend interview and visit in late January sealed the deal pretty easily.” The inherent point in Schroeder’s statement: quality of place and the availability of skilled labor are expressly linked. Though provision of necessary and sufficient infrastructure is unquestionably important, place is more than highways, telecommunications capacity, and land. It transcends a pleasant climate, low crime rates, and quality public schools. Place is the physical and social fabric the binds residents together — it is the focal point of community. It instills a sense of belonging and provokes attachment.

Community Attachment The Soul of the Community Survey — a partnership between the James L. Knight Foundation and Gallup — found a positive correlation between community attachment and local GDP growth in its 2010 survey of 26 participating communities. Communities with the strongest attachment enjoyed local GDP growth of 6.9 percent, while those reporting the lowest attachment levels grew by just 0.3 percent. From their surveys, Gallup identified three primary factors that determine a resident’s sense of attachment: social offerings, openness, and aesthetics. A community’s social connectedness, its “welcomeness,” and the attractiveness of the built environment were highly correlated with attachment. The Knight Foundation discusses these three attributes in its survey: “What attaches residents to their communities doesn’t change much from place to place. While one might expect the drivers of attachment would be different in Miami from those in Macon, Ga., in fact the main drivers of attachment differ little across communities. Whether you live in San Jose, Calif., or State College, Pa., the things that connect you to your community are generally the same. When examining each factor in the study and its relationship to attachment, the same items rise to the top, year after year.” Community attachment binds people to a community. It is why residents stuck around Pittsburgh long after the steel mills shuttered their plants. And it is central to the city’s rebirth. Community attachment engenders “sticky” environments attractive to current and prospective talent. In the highly competitive environment for skilled labor, quality of place and the attachment it creates will increasingly drive individuals’ location decisions. Companies looking for skilled talent must be aware of and responsive to the types of communities that soughtafter workers wish to reside in.

No “One Size Fits All” Quality of place, and the community to which a company is rooted, is an extension of a business’s human resource department. Both are responsible for retaining and attract-

ing talent from around the nation and world; their functions are symbiotic. Place is an asset that can be honed, improved, and marketed to potential employees. Locating in a “sticky” community can assist in attracting and retaining talent, though identifying them can be a challenge. Individuals’ definitions of what comprises dynamic quality of place can also differ. Although many strive to achieve it, there is no “one size fits all” community. Therefore, finding a community that aligns with a company’s culture and that of its people requires research just like any other site location factor. It requires a comprehensive community assessment. It requires talking to people, understanding their emotions. On site selection trips, decisionmakers typically spend time with community leaders that influence quality of place. They may be mayors, economic development practitioners, leaders of chambers of commerce, or executives of nonprofit organizations heavily engaged in enhancing the area’s sense of place and community culture. Time is precious on these trips, but the manner in which you engage these leaders before making a location decision can provide greater insight into the community’s future public investment decisions, as well as offer a glimpse into the community’s proactive, or potentially regressive, approach to place-making and fostering local investment. Dedicating public resources to cultural amenities, downtown improvements, bike trails and parks, and many other place-enhancing resources are the types of initiatives that can positively align with a company’s talent attraction and retention efforts. Ask the local influencers about these attributes. Then find time to break away and ask residents and existing businesses about these attributes. Bypass the steakhouse and resist the schedule that takes you to the community’s premier fine dining establishment. If possible, find time to explore the community on your own. Where are the young people? Where are they eating?

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LOGISTICS

Ports Jockey for Panama Canal “Pole Position” East and Gulf Coast ports are gearing up to accommodate the supersized containerships that will be able to traverse the expanded Panama Canal — and the delayed expansion process has given them the advantage of time to get ready.

Courtesy Georgia Department of Economic Development

By Tim Feemster, Managing Principal, Foremost Quality Logistics

The Port of Savannah, Georgia, is home to the largest single-terminal container facility of its kind in North America and is the fourth-largest container-handling facility in the United States, encompassing more than 1,200 acres and moving millions of tons of containerized cargo annually.

he old saying goes: “location, location, location.” For the Panama Canal, which connects the Atlantic and Pacific oceans, location is not the issue. Perhaps the saying should be revised to “money, timing, and even more money.” One of the world’s greatest engineering and construction feats, the Panama Canal, opened for business in 1914. Today an estimated 5 to 6 percent of world cargo volume traverses the 50-mile waterway. One hundred years later, one of the world’s largest construction projects — a $5.25 billion expansion project at the same location — is nearing completion, but cost overruns to the tune of $1.6 billion have added a new and somewhat complicated dimension to the story. The expansion project, which today is about 75 percent complete, will double the canal’s capacity with a third traffic lane and a more environmentally friendly set of locks, as well as the widening and deepening of new and existing channels so that it will easily accommodate most of the world’s largest containerships, which carry 12,000 to 13,000 twenty-foot-equivalent units, or TEUs.

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Those ships are up to 235 feet longer and 54 feet wider than the current class of so-called Panamax vessels. Expansion makes the dream of allwater routes between U.S. East and Gulf Coast ports and Asia’s major ports an economically feasible and scalable reality. Approved by a national referendum in 2006, the expansion project began in 2008 and was originally supposed to be completed this year to coincide with the canal’s 100-year anniversary. That set off a major scramble on the East and Gulf coasts to get ports ready — namely to deepen channels and build infrastructure, including inland infrastructure, to accommodate the giant ships using the newly enlarged canal. But timing is everything, and the timing at the moment is not so hot. The 2014 completion date was already adjusted to mid-2015 (apparently due to a problem with cement quality); that was before word of the massive cost overrun problem became public at the end of last year. The United for the Canal construction group (GUPC), led by Spain’s Sacyr Vallehermoso, threatened in January to halt the biggest part of the expansion project if the financial dispute was not resolved. Cooler heads have since prevailed, for the moment. The threat is still out there, however, and while further delays could occur due to the cost overrun issue, the plan to finish the project next year is on

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Port of Houston Authority Americaâ&#x20AC;&#x2122;s Distribution Center

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Courtesy South Carolina Ports Authority

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The Port of Charleston is one of the largest container terminals on the U.S. East Coast, handling commerce valued at $63 billion on an annual basis.

track. Panamanian Finance Minister Frank De Lima has asserted the project will be completed in 2015 no matter what, “with or without” the GUPC consortium, which also includes Impreglio of Italy, Belgium’s Jan de Nul, and Constructora Urbana of Panama.

Roundup of Activity Meanwhile, the stakes are high for U.S. ports that have invested billions in dredging, raising bridges, and renovating dock infrastructure to lure the huge ships that will use the expanded canal. Here is a roundup of port activity as of the end of 2013 — some completed, some still in progress. Keep in mind that ports receiving the largest of the ships must have channels and water depths alongside berths that are 50 feet deep to accommodate those “post-Panamax” vessels, which — fully laden — require 47.6 feet of draft

without tidal restrictions. • New York/New Jersey: The Port of New York/New Jersey, the pre-eminent East Coast port, is one of four major East Coast ports that either already have, or will have, the needed water depth to handle the mega-ships by the time the expanded Panama Canal opens. Of equal importance for this region’s canal plans is the Bayonne Bridge, which spans the Kill Van Kull Channel. The deck of the bridge must be raised because it is too low for the larger post-Panamax ships, thus limiting access to four of the port’s five container terminals. In May 2013, the U.S. Coast Guard approved the port’s planned project to raise the deck of the Bayonne Bridge by 64 feet, at an estimated cost of $1.3 billion. The project is scheduled for completion by 2017, with navigational obstructions

Port of Houston —

A Leader in Maritime Shipping and Logistics The Port of Houston Authority owns a total of eight public cargo-handling terminals located along the 52-mile-long Houston Ship Channel. With six general cargo facilities and two container terminals, the cargo-handling capabilities at the docks of the Port Authority make Houston the Gulf Coast leader in maritime shipping and logistics. The Port of Houston handles approximately 70 percent of the containers moving via Gulf Coast ports, and is the leading break-bulk and project cargo port in North America. For more information on the capabilities of each terminal, visit www.portofhouston.com.

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removed in time for the Panama Canal expansion opening by 2015. • Virginia: The Port of Virginia at Hampton Roads has a strategic position and infrastructure, including inland rail connections, which makes it perhaps the most “canal-ready” of East Coast ports. Channel depth is already at 50 feet at Hampton Roads, and there are plans to go to 55 feet at Norfolk. It has room for terminal expansion and is served by the Norfolk Southern and CSX railroads with no bridge or tunnel impediments that exist at other major ports. Hampton Roads has the potential to have inland trade connections far toward the West, according to Sara E. Russell, a maritime trade scholar at Old Dominion University. The port handled a record 2.2 million TEUs last year, its highest total since 2007. Rail cargo comprised 34 percent of the port’s total container traffic, and the port added two new services, the G6 CEC Suez service and the Zim ZCP Asia-Panama Canal service. Its intermodal volume also increased due to growth on Norfolk Southern’s Heartland Corridor. • Maryland: The Port of Baltimore’s channel is 50 feet deep and its primary container terminal, Seagirt, has a modest amount of land available for expansion. But more problematic is intermodal throughput: Baltimore’s two main terminals have on-dock rail transfer facilities, but access by double-stack intermodal trains to and from those facilities is impeded by mainline infrastructure factors that could prevent service to the Midwest absent a major relocation of Seagirt’s intermodal facility. • Georgia: Savannah is the secondlargest gateway on the East Coast for Asian imports. The Georgia Port Authority’s proposed deepening project (expected to cost $662 million) for the Savannah River has recently been designated for a fast-track permit review. With navigation channels of 47 feet, shipping lines deploying postPanamax vessels in their Far East-U.S. East Coast services could make calls at the Port of Savannah during periods

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when tides are favorable and ships are not fully laden. • South Carolina: The Port of Charleston requires the least amount of dredging to deepen its channel to a 50-foot depth. The South Carolina legislature has committed $300 million to dredging for Charleston. The goal today is to dredge the channel to 52 feet to allow ships even bigger than can move through the expanded canal to call on Charleston direct from Europe or via the Suez from Asia/India. There was a plan for Charleston and Savannah to team up as a common port, but that idea for this level of capacity increase is currently on hold. • Florida: The deepening of the PortMiami’s channel from 42 feet to 50 feet is scheduled to be completed this year. PortMiami recently took delivery of post-Panamax cranes, which are large enough to unload the wider ships. The Florida Department of

West Coast ports are not going to sit idly by and allow the allwater canal routes to lop off huge chunks of their market share without a fight.

Transportation is also working on construction of a $550 million tunnel for trucks to transport cargo directly from the Miami port to Interstate 95. Studies for the deepening of the Jacksonville harbor from its existing authorized depth of 40 feet to a navigable channel of up to 50 feet, and accompanying reviews and approvals of a new intermodal container facility at the Port of Jacksonville, are under expedited review.

Blessing in Disguise? Moving goods by water is generally cheaper than moving them by land because of the economies of scale of shipping so many containers on the new generation of mega-ships. That suggests all-water routes will offer even lower-cost shipping from Asia to the East Coast and Midwest through the canal than exists today. But it is not that simple, because containers loaded on the West Coast, which has built up its container yards and has long-established highway and rail infrastruc-

The Tennessee-Tombigbee Waterway

Where Currents Create Currency

The Tennessee-Tombigbee Waterway provides industry with flexible shipping options and advantages that make good business sense. • Access to more than 16,000 miles of navigable U.S. waterways • Shortest distance between Mid-America and the Gulf of Mexico • Available certified industrial development sites • Business friendly environment with regional economic development assistance • Connections to Foreign Trade Zones • Dock facilities, highway, air and rail access • Most eco-friendly mode of transportation

Tennessee-Tombigbee Waterway Development Authority 888/Tenn-Tom • www.tenntom.org • ttw@tenntom.org AREA0220.indd 1

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Tennessee-Tombigbee Waterway Moves Business Along

Opened in 1985, the Tennessee-Tombigbee Waterway runs through a four-state (AL, KY, MS, TN), 54-county region that provides a myriad of benefits including abundant natural resources, a trained labor force, lower energy costs, a full range of competitive transportation services, and an enviable quality of life. More than 40,000 acres of prime waterfront property and some 40 sites are ready for business with affordable development costs and minimal environmental restrictions. Companies using the waterway to transport raw materials and bulk and finished products can lower their costs and reach an expanded market. (Shown here is the KCS Railroad bridge on the Tenn-Tom Waterway at the Columbus-Lowndes County, Mississippi, port.)

tures, have the advantage of speed to market, which can make a huge difference to owners of beneficial, highvalue and/or perishable cargo. Also, West Coast ports and railroads are not going to sit idly by and allow the all-water canal route to lop off huge chunks of their market share without a fight. Estimates that an expanded canal will divert significant percentages from West Coast intermodal market share are probably more

Sponsors: Bruce Windham, Administrator or Agnes Zaiontz, Business Manager Tennessee-Tombigbee Waterway Development Authority 318 Seventh Street North Columbus, MS 39701 662-328-3286 Fax: 662-328-0363 ttw@tenntom.org www.tenntom.org

John Moseley, General Manager – Trade Development Port of Houston Authority 111 East Loop North Houston, TX 77029 713-670-2583 Fax: 713-670-2564 jmoseley@poha.com www.portofhouston.com

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wishful thinking than reality. Plus, the pressure is on East Coast ports beyond 2015, because without a significant increase in container terminal capacity, the number and geographic configuration of Far East allwater services that can be effectively operated to the East and Gulf coasts “could become constrained over the long term (beyond 2025),” according to Department of Transportation’s Panama Canal Expansion Study. Both New York/New Jersey and the Virginia ports experienced drayage delays in January as they try to recover from closures during the holidays and the extremely cold weather. Handicapping the winners in the canal expansion sweepstakes is tricky. The top four, in no particular order, might turn out to be Charleston, which can already handle Post Panamax ships at high tide; PortMiami, which is “all-in” on expanding rapidly and is the first deepwater port north of the Panama Canal; the Port of New York/New Jersey, which has a dominant market position, population, and size; and the ports of Virginia, because of their port depth, mid-Atlantic location, and established terminal and intermodal infrastructures. There will be port-of-call winners and losers for Post-Panamax size ships. While the expansion may not become the huge boon that many port officials anticipate, it’s a good thing to invest in new, modern cargo infrastructure, and the delay to 2015 could be a blessing in disguise: ports can finish their projects and put their marketing strategies into top gear. FOR FREE SITE INFORMATION, CALL

Quality of Place Continued from page 23 Can you even find them? If so, talk to them. Should you choose that community, they will be your future work force. You must be confident that they are attached to the place. While conversation and interaction with people is critical to understanding a community’s quality of place, a number of potential metrics exist to assess the community as well. Quantifiable measures range from the obvious — net migration, educational attainment and age of in-migrants, growth rates in the community’s young professional population (aged 25 to 34), student outcomes from public schools, and per capita crime rates, to name just a few — to the obscure — Walkscore (an online tool that assesses a community’s walkability), per capita charitable giving, volunteer hours per capita, and voter participation rates. All speak to quality of place and potential for attachment. In today’s highly competitive environment for top talent, executives must approach each location decision and each community in a comprehensive manner. A location decision is not solely about cost; it requires an allencompassing glimpse into the prospective community. Business competitiveness is critically linked to human capital and a community’s ability to sustain a qualified knowledge and skill base. The increasingly prevalent reality of today’s economic development landscape is that top talent has the freedom and wherewithal to pick and choose from a long list of potential live/work locations. Skilled workers are not attracted by economic opportunity alone. They desire a holistic package in a community, one that merits a holistic evaluation by the prospective employee and the prospective employer. They want economic opportunity together with a great location to live their lives, support them through their struggles, and inspire them with new ideas. A little fun doesn’t hurt either. This is life, after all. And it doesn’t occur in a vacuum; it occurs in a place.

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he economic tide finally appears to

U.S. consumer confidence also

results of our Corporate Survey as

have turned. Real GDP growth

rebounded in December, said The

increased at an annual rate of 3.2 per-

Conference Board, registering 78.1

cent in the fourth quarter of 2013, i.e.,

(1985=100). On the last day of the

from the third to fourth quarter, accord-

year, Lynn Franco, director of Economic

ing to the Bureau of Economic Analysis.

Indicators at The Conference Board,

And, economists were predicting 2.6

noted, “Consumers are in better spirits

to our 28th annual Corporate Survey.

percent to 2.7 percent overall GDP

today than when the year began.”

Of those, the majority (39 percent) are

recorded in Q4 2013.

The Corporate Survey Respondents All told, 240 individuals responded

In order to find out if the corporate

with manufacturing companies, and

the year seeing stronger growth than

executives who read Area Development

about a fifth represent the financial

the first — even climbing to 3 percent

magazine also have more confidence in

services/insurance/real estate sector

again by year’s end, according to an

the U.S. economy, we asked them

(Figure 1). More than 40 percent are

analysis from Kiplinger.

about their location and expansion

also the owners or chief executives of

plans and site selection priorities for the

their firms, and 18 percent manage

ing front was also very encouraging.

year ahead. Our survey was conducted

their companies’ real estate assets

The Institute for Supply Management’s

in the fall of 2013. By the time we went

(Figure 2).

PMI ™ (Purchasing Managers Index)

to press on this issue in February 2014,

registered 57 percent in December

continued severe winter weather was

respondents make their firms’ final

2013, the second highest reading of

having a dampening effect on the

location decisions, while 36 percent

the year. Of 18 manufacturing indus-

economy. Nevertheless, these are the

give a preliminary recommendation

growth in 2014, with the second half of

Year-end news on the manufactur-

It follows that 45 percent of the

tries tracked by the ISM, 13 reported

(Figure 3). Sixty percent claim that the

growth in 2013’s final month. And

primary player in their companies’ loca-

December’s manufacturing

tion decisions is executive manage-

Employment Index of 56.9 was the

ment, but 18 percent say their compa-

highest since June 2011.

nies’ real estate departments are significantly involved (Figure 4).

The Labor Department reported that

Interestingly, the same percentage

December 2013 overall job gains of 74,000 were less than previously

say their firms operate just one domes-

expected. Commenting on the report,

tic facility as five or more domestic facil-

Capital Economics Chief U.S. Economist

ities — 37 percent in each case. When

Paul Ashworth noted that he suspects

it comes to foreign facilities, 39 percent

the weakness was due in part to

of the respondents say they operate

unseasonably harsh weather in

just one, while 43 percent indicate their

December. However, unemployment

companies operate five or more

reached a five-year low of 6.7 percent.

(Figure 5).

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Nearly half of the respondents (47 percent) report their companies

or more workers (Figure 6). The majority (60 percent) experi-

employ fewer than 100 people, but

enced no change in the number of

nearly a third (31 percent) employ 500

their companies’ facilities over the 12month period prior to the survey. However, 31 percent did increase their number of facilities (Figure 7) — up from 29 percent who made that claim when taking the 27th annual Corporate Survey. More than half say this was in response to increased sales/production, and 40 percent say new facilities were added to give their companies better access to new or existing markets (Figure 8). Of the just 8 percent of the respondents who claim to have decreased their number of facilities over the past 12 months, nearly half (46 percent) report they did so in order to lower operating and/or labor costs (Figure 9). On another positive note, when asked about the effect of the slow economic recovery on their facility plans, 20 percent of the respondents to our 28th annual Corporate Survey say they still plan to open new facilities and 30 percent say they will increase hiring (Figure 10) — up from 20 percent who made that claim in response to the same question in 2012. Only 10 percent say the slow recovery would cause their companies to close or consolidate facilities — down from 15 percent in 2012. In fact, 40 percent of the respon-

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dents expect the economy to achieve a more continuous growth track this year (Figure 11). In 2012, 56 percent of the corporate respondents were projecting the economy would not improve for at least one to two years.

Projections for New Facilities/Expansion/ Relocation When asked specifically about their timeline for opening new facilities, 45 percent of the respondents say they expect to open new facilities within a year or two (Figure 12) â&#x20AC;&#x201D; up from 39 percent who had short-range new facility plans in 2012. However, when it comes to the number of new U.S. facilities to be opened, this yearâ&#x20AC;&#x2122;s Corporate Survey respondents are proceeding more cautiously: More than half expect to open just one new domestic facility, about a quarter will open two, and another 24 percent will open between three and five or more (Figure 13). In 2012, 39 percent of the respondents expected to open just one domestic facility and 35 percent had plans for three to five or more. The overall locations slated for new U.S. facilities, however, have not changed significantly. Once again the South (Alabama, Florida, Georgia, Louisiana, Mississippi) is the regional favorite, projected to garner 16 percent of the new domestic facilities, followed

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by the Midwest (Illinois, Indiana,

Atlantic region (Delaware, Maryland,

South Atlantic (North Carolina, South

Michigan, Ohio, Wisconsin) at 14 per-

New Jersey, New York, Pennsylvania) —

Carolina, Virginia, West Virginia) and the

cent (Figure 14). There is a slight

13 percent of the domestic new facility

Southwest (Arizona, New Mexico,

uptick in projects planned for the Mid-

projects will go there, followed by the

Oklahoma, Texas), with each region expected to garner 11 percent of the total projects. Manufacturing and warehouse/distribution facilities represent about a quarter each of the new domestic projects (Figure 15). Nevertheless, two thirds of the Corporate Survey respondents say these facilities will be small in terms of their employment numbers with fewer than 50 workers (Figure 16), and fully 70 percent say they will represent an investment of less than $10 million (Figure 17). About half of the respondents to the 28th annual Corporate Survey also plan to open just one new foreign facility, while another quarter plan to open two (Figure 18). There has been an interesting change in where the responding corporate executives will place these new foreign facilities. One fifth of the new foreign facilities are slated for South America and 16 percent for Western Europe (Figure 19) — up from 12 percent for each region as planned by 2012’s Corporate Survey respondents. Importantly, plans for Asia have been halved — just 14 percent of the new foreign facilities are currently planned for this region by the survey respondents, down from 28 percent planned for Asia by 2012’s respondents

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to our Corporate Survey. Specifically,

Survey respondents. This is no surprise

China will garner 41 percent of the new

considering the fact of China’s rising

facilities planned for Asia (Figure 20) —

labor costs, which have made other

down from 64 percent projected to go

Asian destinations more desirable. Case

to that nation by 2012’s Corporate

in point: New facilities planned for Vietnam comprise 14 percent of total Asian facilities planned by this year’s survey respondents, up from just 5 percent in 2012. Plans for new facilities in India remain steady at 17 percent of the total. One third of the planned new foreign facilities will house manufacturing opera-

tions and about a fifth will be warehouse/distribution centers (Figure 21). Interestingly, 30 percent of the new foreign facilities will house data center, back office, or shared services operations, as compared with just 19 percent comprising those categories on the domestic side. Also, the Corporate Survey respondents expect to create

more jobs at their foreign facilities than at their planned new domestic ones —

100 80 60 40 20 0

35 percent say their new foreign facilities will create more than 100 jobs (Figure 22), while only a fifth of the survey respondents projected that number of new jobs at their planned new U.S. facilities. The Corporate Survey respondents also plan to spend more money on their new foreign facilities than on their domestic ones — 17 percent say they will invest more than 0

$100 million on new foreign facilities (Figure 23); only 8 percent will spend

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that amount on their planned new U.S. facilities. What is preventing the respondents’ firms from investing more money in U.S. facilities? Nearly two-thirds cite the United States’ economic instability, i.e., inability to resolve budgetary issues; more than half are concerned about the impact of new healthcare regulations (Affordable Care Act) on their businesses; and 46 percent blame their lack of spending on excessive government regulation (Figure 30). In fact, these concerns were also cited in the 0

Q4 2013 National Association of Manufacturers (NAM)/IndustryWeek Survey of Manufacturers: 77.2 percent of those respondents cited rising healthcare/insurance costs as a current business challenge; and 76.1 percent cited unfavorable business climate, including taxes, regulations, and government uncertainties. The short-term expansion plans of the respondents to our 28th annual Corporate Survey are more robust than the expansion plans of 2012’s survey respondents — 23 percent say they will expand a facility at their present location within one year (Figure 24). In 2012, only 16 percent of the corporate respondents said they had one-year expansion plans. However, expansion plans two to three years out are down from 31 percent in 2012 to just 19 per-

cent for 2013’s respondents.

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Additionally, 60 percent say their

respondents have one- to two-year

and about a quarter cite excessive gov-

expansions will create fewer than 20

relocation plans for a domestic facility

ernment regulations as well as labor

jobs (Figure 25), while only 49 per-

(Figure 26). Of those with relocation

availability as their reasons (Figure 27).

cent made that claim in 2012.

plans, 48 percent say high taxes are

Similar to the 2012 results, 21 percent of the 2013 Corporate Survey

Nevertheless, only 7 percent expect

their reason for relocating, 30 percent

to relocate a domestic facility offshore.

are doing so to bring down labor costs,

And, although the news is full of reports of U.S. manufacturers reshoring operations, just 3 percent of this yearâ&#x20AC;&#x2122;s Corporate Survey respondents claim they will actually locate a foreign operation back to the United States (Figure 28). An interesting oped piece in The New York Times

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(1/25/14) speaks to the fact that this

charged with making the decisions take

re-shoring trend creating a manufactur-

numerous site selection and quality-of-

ing “renaissance” represents only a

life factors into consideration. As in

trickle of jobs coming back to the U.S.

years past, we asked the Corporate

In response to our survey, the small

Survey takers to rate these factors as

percentage re-shoring cite rising foreign

either “very important,” “important,”

labor costs, problems finding qualified

“minor consideration,” or “of no impor-

and/or English-speaking labor, and

tance.” The ratings in terms of percent-

costs of transporting supplies/products

ages are shown in Figure 31. We then

as their primary reasons for doing so

add the “very important” and “impor-

(Figure 29).

tant” ratings so that we can rank the factors in order of importance, as

Factors in the Location Decision When planning for new facilities, expansion, and/or relocation, those

100 80 60 40 20 0

shown in Figure 32. The quality-of-life factors are ranked separately from the site selection factors. Historically, highway accessibility and labor costs have ranked as the top factors in our Corporate Survey respondents’ location decisions. However, this year, those factors were outranked by availability of skilled labor, which is considered “very important” or “important” by 95.1 percent of the respondents and is in 1st position. Manufacturers’ and other firms’ need for skilled labor is becoming increasingly pronounced and has been well documented. An aging worker demographic, along with a lack of interest in manufacturing careers among young people, has put the issue at the top of site selectors’ priorities. A new study from ThomasNet.com says this is “a ticking biological clock” for the manufacturing

100 80 60 40 20 0

sector. This is confirmed by the fact that

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more than 70 percent of the survey

Additionally, half of the Corporate

manufacturers of products that are

respondents say high unemployment

Survey respondents say they are very

costly to transport, such as heavy met-

rates are not making it easier for them

or somewhat dependent on contract

als and industrial machinery, might

to find the labor they need. More than

workers, though most (85 percent) say

consider reshoring to lower their trans-

70 percent also say the unemployed

contract labor accounts for less than 25

portation and energy costs and might,

are primarily lacking advanced skills, e.g.,

percent of their work force (figures 35

in fact, be looking at states where right-

machine tool programming, advanced

and 36).

to-work laws have kept hourly wages

welding, etc. (figures 33 and 34).

Of course, highway accessibility and

relatively low.

labor costs are still paramount in the

The right-to-work state factor was, in

location decision; these factors are

fact, tied for 11th place in the rankings

ranked 2nd and 3rd, respectively, con-

this year, considered “very important”

sidered “very important” or “important” by 93.5 percent and 90.8 percent of the survey respondents. The nation’s aging infrastructure is, in fact, on everyone’s mind. Bipartisan legislation was just introduced in Congress by Senator Roy Blunt (R-MO) and Senator Michael Bennet (D-CO) to establish a $50 billion American Infrastructure Fund to 0

promote infrastructure improvements and create jobs as part of the Partnership to Build America Act. And labor costs are always a primary factor in location decisions. According

to PricewaterhouseCoopers, by 2016, U.S. manufacturing hourly wages are forecast to be $35.61. And although labor costs in China are rising faster than those in the United States, for labor-intensive manufacturing industries, the cost differential in absolute terms is not likely to result in reshoring, says Robert McCutcheon, PwC Partner and U.S. Industrial

70 80

Products Sector Leader. He adds that

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In one day, 14,000 Pennsylvania manufacturers can reach 6 of the 10 largest U.S. Markets and 60% of Canada’s population.

With more than 2,000 century companies, we’ve long been home to some of the world’s strongest industries, including a strong manufacturing heritage. Pennsylvania has the infrastructure and keystone location you need to move raw materials in quickly, for just-in-time delivery and then move ﬁnished products to market with the same ease. And to keep your manufacturing business moving, we’re investing an additional $7.4 billion into our transportation system over the next ﬁve years.

newPA.com/advance Tom Corbett, Governor

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or “important” by 80.6 percent of the Corporate Survey respondents. Two states in the heavily unionized Midwest, Michigan and Indiana, have recently pass right-to-work legislation in an effort to compete for industry investment and jobs. Among the top-10 site selection factors, one of two showing a five-position jump in the rankings is state and local incentives; this factor went from 13th in 2012 to 8th place in 2013’s Corporate Survey rankings, increasing 10.8 percentage points and now considered “very important” or “important” by 81.9 percent of the respondents. When primary considerations of labor and accessibility are satisfied, corporate executives look to incentives to keep costs in check. In response to a related question about types of incentives, more than 70 percent of the survey respondents say they consider tax incentives most important when making a location decision (Figure 41), and two thirds say incentives are very or somewhat important to a project moving forward in a particular location (Figure 42). However, slightly fewer than half say they have actually received and utilized incentives in the past. Of those that have, about half only received a quarter or less of the incentives initially estimated value (Figure 43). It should be noted that energy avail-

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ability and costs dropped from 6th to 10th position in the rankings, although this factor is still considered “very important” or “important” by more than 80 percent of the Corporate Survey respondents. When asked separately about the impact of energy costs on operations or distribution networks, surprisingly, about two thirds of the respondents say these costs are having no effect (Figure 37). The declining cost of U.S. energy appears to be having a noticeable and positive influence. In fact, half of our survey respondents say new unconventional sources of energy, i.e., shale-derived natural gas through fracking, will continue to drive down the cost of energy. However, 80 percent say this will not impact their location decisions (Figure 38) and they are continuing to make energy-saving modifications to existing facilities (Figure 40). Another site selection factor showing a five-position jump in the rankings, as well as the greatest percentage increase in importance overall, is available land. This factor jumped from 18th to 13th position but, more importantly, it increased an astounding 21.3 percentage points and is now considered “very important” or “important” by 80.3 percent of the Corporate Survey respondents. Although communities do need available land to attract and grow businesses, especially those requiring large plots with room for expansion, this factor is usually contingent on the specific project and generally comes into play only after other site selection priorities have been met. However, a deeper analysis of the importance of available land may be gleaned from a 2012 study of available land in the Portland, Oregon, metro area conducted by the Value of Jobs Coalition, a partnership of city and regional leaders, along with the Oregon chapter of NAIOP. According to the study results, “A consistent inventory of sites is a key requirement for meeting market demand, either by expanding local employers or attracting new employers.” And

S18

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although not all firms require large

largest increase, for a combined “very

sites, according to the study, “Nationally

important” or “important” rating of 60.5

or globally scaled firms that can have a

percent.

significant impact on regional economic growth…do require large parcels.” In a related question, we asked our

Availability of long-term financing showed the third-highest percentage increase in importance, jumping 11.7

Corporate Survey takers about the

percentage points and considered “very

importance of the existence of a shov-

important” or “important” by nearly

el-ready or pre-certified site in the loca-

three quarters of the survey respon-

tion process. More than 60 percent

dents, but just moving up one spot to

deem this an important consideration

16th in the rankings. Businesses con-

(Figure 48). Consequently, if a com-

sidering new facility or expansion proj-

munity does not have an available site

ects need access to long-term financing

with proper infrastructure and utilities in

in order to proceed with their projects

place, it may be passed over by those

without tying up their available

looking to build a new facility.

resources.

It is interesting to examine some of

Although the railroad service factor

the other factors that have shown large

is usually ranked near the bottom of

increases or decreases in their impor-

the list of site selection factors, this

tance ratings. The factor showing the

year it shows the largest decrease in

second-largest increase in importance

the importance ratings — minus 14.2

— gaining 12.8 percentage points — is

percentage points and only considered

proximity to suppliers. Although this

“very important” or “important” by 29.4

factor maintained its 19th position in

percent of the Corporate Survey

the rankings, it is now considered “very

respondents. Since shipping goods by

important” or “important” by more than

rail is more fuel-efficient than shipping

two thirds of the Corporate Survey

over the road, the only explanation that

respondents. Keeping shipping costs

can be offered for the decrease in

down and distances short when sourc-

importance of this factor is the makeup

ing materials is increasingly important

of the respondent pool, i.e., 51 percent

to a company’s competitiveness. A

in the non-manufacturing and non-

related factor, raw materials availability

warehouse/distribution sectors.

jumped three spots in the rankings to

Quality-of-life factors are ranked sep-

20th position and grew 10.8 percent-

arately from the other site selection fac-

age points, representing the fourth

tors. Nevertheless, only one quality-of-

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life factor would be rated among the top-10 factors overall — low crime rate, with a combined “very important” or “important” rating of 80.9 percent. This is historically the top-ranked quality-oflife factor, despite the fact that the U.S. crime rate has dropped over the last two decades. Although rankings of the nine quality-of-life factors don’t change dramatically from year to year, eight of the nine quality-of-life factors have actually seen their combined importance ratings increase. As the economy improves, there might be more focus on life outside the workplace. Additionally, the highly skilled workers need by today’s advanced technology firms are more mobile and look for desirable places to live, as well as work (see article on “quality of place” in this issue). With that in mind, the quality-of-life factor showing the largest percentage increase in importance — up 13.5 percentage points with a combined “very important” or “important” rating of 66.4 percent — is recreational opportunities. Also increasing nearly 10 percentage points are healthcare facilities and ratings of public schools. The increased importance of these two factors is no surprise considering the aging demographic of the current work force, as well as the pressing need for a qualified up-and-coming labor pool. Related to quality of life is a loca-

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tionâ&#x20AC;&#x2122;s weather patterns or climate.

this year, brings weather concerns to

in the location decision, with more

Recent devastating hurricanes and

the forefront. Nearly half of the

than 40 percent saying these factors

other weather-related disasters, as well

Corporate Survey respondents say

are very or somewhat important

as the bitter cold sweeping the nation

they consider weather-related factors

(Figure 50).

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Sources of Information and Project Timelines More than 80 percent of the Corporate Survey respondents say they utilize site magazines like Area Development for information upon which to base their location decisions. About half also use general business and financial publications as a site selection resource. While 62 percent of the respondents search the Internet for site and facility planning information, 83 percent claim social media, e.g., Twitter, LinkedIn, etc., is not utilized in this capacity. Three quarters search online for data on specific locations; more than 60 percent are looking for listings of available sites and buildings, such as those found on FastFacility, for example; and more than half search for contact information at economic development organizations, as well as for industry-related news on websites like AreaDevelopment.com. Forty-two percent of the survey respondents say they start the information-gathering process from three months to a year out, with nearly 60 percent making contact with the locations of interest from a month to three months later. An overwhelming majority (89 percent) put between one and five locations on their â&#x20AC;&#x153;short list,â&#x20AC;? and 0

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100

about half will visit up to five of those finalist locations before making their

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site selection decision, while a third

dents actually say this shortage is pre-

will just visit one or two. Generally,

venting them from spending more of

most location decisions are made

their earnings on investment in U.S.

within three months to a year of initial

facilities — up from 19 percent who

contact, say more than 80 percent of

cited that factor in 2012 in response to

the respondents.

this question. And, the percentage

Nearly 60 percent of those respond-

blaming their reluctance to spend on

ing to our 28th annual Corporate

the new healthcare regulations under

Survey say they do not use outside

the Affordable Care Act jumped from

consultants when making a location decision. Of those that do, 60 percent ask the consultants to perform location studies/comparative analyses and/or the real estate transaction. About 40 percent of those utilizing consultants’ services do so for incentives negotiations and management as well as in the construction process.

In Sum The results of the 28th Annual Corporate Survey do show a modest improvement in short-range new facility and expansion plans. With 70 percent of the survey respondents expecting the economy to achieve a more continuous growth track by this year or next, more of them are rolling out plans for new facilities or expansions sooner rather than later, according to the survey results. There’s also been a realignment of site selection priorities, with the need for skilled labor being the most critical concern. A quarter of this year’s respon-

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39 percent to 52 percent now that the

ers because of the ACA. Companies

ACA went into effect.

only plan to increase full-time employ-

The latest Duke University/CFO Magazine Global Business Outlook Survey, concluded in December,

ment by 1.4 percent in 2014, according to that survey. “I doubt advocates of this legislation

reveals that nearly half of U.S. compa-

would have foretold the negative

nies are reluctant to hire full-time work-

impact on employment,” said Campbell

S26

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R. Harvey, a professor of Finance at Duke Fuqua School of Business and a founding director of the survey. “The impact on the real economy is startling. Nearly one third of firms may either terminate employees or hire fewer people in the future as a direct result of ACA.” Despite these concerns, 52 percent of the CFO magazine survey respondents say economic conditions for their firms will be better this year than last, with a projected 7.3 percent increase in

capital spending. After the 18-month long Great Recession, which officially ended in June 2009; economic growth in fits and starts since then; and just modest increases in employment; it’s hard to say when we will see more of an upward economic trajectory. Yet, if economic optimists are correct and growth tops 3 percent this year, it would be the first time it has done so for a full calendar year since 2005. If this happens, we can expect to see next year’s Corporate Survey takers continue to bump up their investments in new facilities, expansions, and hiring. We can also expect more investment in work force development — a subject that Area Development will cover in greater detail in a special publication to be produced this spring as we continue to address the needs of our corporate readers.

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CONSULTANTS SURVEY

s in years past, Area Development

The responding consultants’ clients

say they work with firms that employ

asked the consultants who work with

are of varying sizes in terms of employ-

corporate clients to tell us about their

ment numbers. About a third say they

clients’ facilities plans and priorities in

work with companies having fewer than

Consultants Survey (86 percent) say

making a location decision. Fewer

100 employees, but 40 percent also

executive management at their client

1,000 or more people (Chart C). The majority of respondents to our

than half (43 percent) of those

companies is significantly involved in

responding to our 2013 Corporate

the site selection process. Sixty percent

Survey say they use the services of

also say their clients’ real estate depart-

consultants so let’s find out which

ments are heavily involved, and nearly

companies the consultants are serv-

as many work with other client opera-

ing and how the Consultants Survey

tions or business unit management

responses align with the Corporate

(Chart D).

Survey responses.

The Consultants Survey Respondents Slightly more than half of those

Half of the respondents say that most of the clients who ask them to perform a location search have already gathered preliminary data and narrowed down the geographic area in

responding to our 10th annual

which they wish to locate. Only 25 per-

Consultants Survey say they work with

cent say their clients expect them to

durable goods manufacturers as well

make the location decision on their

as distribution/logistics/warehousing

behalf (Chart E).

firms. Nearly 40 percent also claim to

When asked about the effects of the

work with nondurable goods manufac-

slow economic recovery on their clients’

turers, and more than 20 percent have

facility plans, the respondents to our

also been engaged in location and

Consultants Survey are very optimistic —

expansion projects for the financial

more than half say their clients still plan

services/insurance/real estate; data

to open new facilities/expand (Chart

processing, software, and computer-

F), as compared to just 20 percent of

related services; and life sciences and

the Corporate Survey respondents who

energy industries (Chart A).

gave that answer. Additionally, the

About three quarters of the respond-

responding consultants are slightly more

ing consultants say they provide their

confident the economy will achieve a

clients with location studies/compara-

more continuous growth track this year

tive analyses as well as help with the

than the respondents to our Corporate

site selection decision. Their other pri-

Survey: 48 percent of the consultants

mary role is incentives negotiation and

say so (Chart G), whereas just 40 per-

management, as per 69 percent of the

cent of the corporate respondents

respondents (Chart B).

believe this will happen.

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Clients’ Projections for New Facilities/ Expansion/Relocation A quarter of the respondents to our

tion facilities (Chart K). Fully two thirds of the respondents to our Consultants Survey say their clients plan to open just one foreign

10th annual Consultants Survey say

facility, with only 4 percent saying their

their clients who plan to open facilities

clients will open five or more (Chart L).

expect to do so within one year, while

For comparison’s sake, half of the

60 percent say their clients have two-

Corporate Survey respondents say they

year plans (Chart H). The majority (62

plan on opening just one foreign facility,

percent) say their clients will open just

while 12 percent will open five or more.

one new domestic facility (Chart I).

The greatest percentages of the proj-

Of the total new domestic projects

ects being worked on by the responding

with which the responding consultants are involved, 17 percent are slated for the South (Alabama, Florida, Georgia, Louisiana, Mississippi) and 14 percent for the Midwest (Illinois, Indiana, Michigan, Ohio, Wisconsin) (Chart J). These are about the same percentages cited by our Corporate Survey respondents. However, the consultants are working on greater percentages of projects than those planned by the corporate respondents for the South Atlantic (North Carolina, South Carolina, Virginia, West Virginia) — 14 percent of the consultants vs. 11 percent of the corporate respondents — and for the Southwest (Arizona, New Mexico, Oklahoma, Texas) — 15 percent of the consultants vs. 11 percent of the corporate respondents. Nearly 30 percent of the new domestic facility projects assisted by the responding consultants represent manufacturing plants, and just less than a quarter are warehouse/distribu-

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Numbers don’t lie. Iowa has one of the nation’s lowest costs of doing business. We’re a right-to-work state with a cost of living that’s below the national average. Ours is an environment built for businesses to prosper. It’s why our advanced manufacturing exports are up 179%. Why the growth of our bioscience companies has far outpaced the nation. Why we’re home to over 94,000 of the nation’s most savvy finance and insurance pros. Why our diverse economy is third in the nation in job growth. Dig more into the numbers at iowaeconomicdevelopment.com. With numbers like these, no wonder we’re “Iowa Nice”. iowaeconomicdevelopment.com

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CONSULTANTS SURVEY consultants are in Mexico (19 percent),

are being planned in order to lower a

Asia (18 percent), and Canada (16 per-

companyâ&#x20AC;&#x2122;s tax burden.

cent) (Chart M). The Corporate Survey

Nearly a fifth of the consultants

respondents are planning fewer of their

claim to be seeing an increase in the

total foreign facility projects for these

number of companies establishing for-

regions and more for South America,

eign facilities as opposed to domestic

with 20 percent planned by the Corporate Survey respondents but representing only 11 percent of the projects with which the consultants are involved. When it comes to Asia, 35 percent of those Asian projects assisted by the consultants will go to China, 18 percent to India, and 15 percent to Malaysia (Chart N), more than twice the percentage the corporate respondents plan for Malaysia. The responding consultants say about 40 percent of their new foreign facilities will house manufacturing operations and 15 percent will be warehouse/distribution facilities (Chart O). Nearly 60 percent of those responding to our Consultants Survey claim that their clients who have expansion plans will execute them within two years (Chart P). And about half say their clients who plan to relocate facilities also have plans two years out (Chart Q). About two thirds of the responding consultants say those clients who are planning to relocate are seeking to lower their labor costs and also need to be in closer proximity to suppliers and/or markets served (Chart R). About half of the consultants, and a similar percentage of those responding to our Corporate Survey, say relocations

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ones (Chart S). And while only 3 percent of the Corporate Survey respondents say they expect to locate a foreign operation back to the U.S., one third of the consultants say their clients have re-shored operations. About half these consultants say this is a result of rising foreign labor costs and costs of transporting supplies/products as well as product quality issues (Chart T). Why aren’t the consultants’ clients spending more of their earnings on U.S. facilities? More than 60 percent say it’s because of economic instability in the United States; more than half cite high corporate taxes; and about two fifths are concerned about excessive government regulations, including the impact of new healthcare regulations under the Affordable Care Act (Chart U). Our Corporate Survey respondents voice similar concerns.

Factors Influencing Clients’ Location Decisions We also asked those taking our Consultants Survey to rate the site selection and quality-of-life factors that come into play in their clients’ location and expansion decisions as either “very important,” “important,” “minor consideration,” or “of no importance.” These ratings are shown in Chart V. We then added the “very important” and “important” ratings in order to rank the factors in order of overall importance, as shown in Chart W.

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Interestingly, the same two factors are ranked 1st and 2nd by the Corporate Survey and the Consultants Survey respondents — availability of skilled labor and highway accessibility. Availability of skilled labor is ranked as the most important site selection factor by the consultants with a combined 98.3 percent importance rating. This has become the primary concern of the consultants’ clients. And more than three quarters of the responding consultants also say higher unemployment rates are not making it easier for their clients to find the labor they need, with more than two thirds saying the unemployed are primarily lacking advanced skills (Chart X). Additionally, because of this, three quarters of the consultants also say their clients have become very or somewhat dependent on contract workers (Chart Y), although 81 percent claim this contingent labor force comprises less than 25 percent of their clients’ work forces at any given time (Chart Z). The consultants’ 2nd ranked factor — highway accessibility — is considered “very important” or “important” by 97.4 percent of the respondents. Again, the respondents to both surveys agree that this factor is a priority when deciding where to site or expand a facility in order to get supplies in, products out, and employees and visitors to the workplace. In fact, 92.9 percent of the respondents to the Consultants Survey consider proximity to major markets as “very important” or “important,” placing this factor in a tie for 5th. The consultants generally rank state and local incentives as more important than do the Corporate Survey respondents, and this year is no exception: 93.8 percent of the respondents to our Consultants Survey rate this factor as “very important” or “important,” placing it 3rd in the rankings. This comes as no surprise since about 70 percent of the respondents say they provide incentives negotiation and management services to their clients. A related factor, tax exemptions placed 7th with a 91.9 percent combined importance rating. In a related question about types of incentives, nearly 70 percent of the responding consultants say cash grants and tax incentives, including credits and exemptions, are the two most important types (Chart EE).

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The factor showing the largest jump

In 2011, Mark Sweeney, Principal of

in the consultants’ rankings — eight

McCallum Sweeney Consulting, provided

positions to 4th place — is available

some insight into the role of a state’s

land, which also has the largest per-

right-to-work status in the site selection

centage increase in the Corporate

process, in testimony to the Missouri

Survey. The responding consultants give available land a 93 percent combined importance rating. This appears to be a determining factor when consultants assist with build-to-suit projects — especially those requiring large parcels of land such as new state-of-the art distribution centers to support the growing e-commerce sector. Moreover, 78 percent of those responding to our Consultants Survey say the existence of a shovel-ready or pre-certified site is very or somewhat important in their clients’ site searches (Chart JJ). Although labor costs are bumped down and tied for 5th position in the Consultants Survey rankings, they are still considered “very important” or “important” by 92.9 percent of the respondents. It’s believed that labor costs are lower in a right-to-work state so it stands to reason that this factor shows the second-highest jump in the rankings — up from 20th position last year to 13th in this year’s Consultants Survey. It also has the greatest overall increase in importance among the site selection factors — up 10.1 percentage points and now considered “very important” or “important” by 86 percent of the responding consultants.

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CONSULTANTS SURVEY State Senate. “Companies believe this

consultants say they are seeing commu-

gives them greater work force flexibility,

nities offering incentives specifically for

thereby allowing them to compete more

“green” initiatives (Chart GG).

effectively and in a more timely manner," Sweeney explained. “Manufacturing

dents to our Corporate Survey claim to

clients express an interest in considering

consider weather-related factors in their

[locations] only in right-to-work states,”

location decisions, three quarters of the

Sweeney added, although his firm rec-

respondents to our Consultants Survey

ommends that right-to-work state be

say their clients do consider these fac-

just “another scoring criteria” and not a

tors, with more than 60 percent saying

“pass-fail” decision.

weather-related factors are very or

The respondents to our Consultants Survey rank energy availability and

It’s important to note that 18 of the 26 site selection factors are rated high-

tors, with a combined 88.6 percent

er in importance by the consultants

importance rating. A third of the respon-

than any of the nine quality-of-life fac-

dents say energy costs are primarily

tors. That being said, when ranking the

affecting their clients facility operations

quality-of-life factors, the consultants

and a fifth claim they are primarily

place colleges and universities in area

affecting their clients’ supply/distribution

in 1st place — with an 82.5 percent

network decisions (Chart AA).

combined importance rating. With

Nevertheless, more than 60 percent say

availability of skilled labor being the

they believe new unconventional

primary site selection concern, it fol-

sources of energy will drive down their

lows there is a need for the work force

clients’ energy costs, with more than

to acquire new and advanced skills at

half also believing this will affect their

institutions of higher learning.

Three quarters of the respondents to

Low crime rate, which is always ranked 1st by our Corporate Survey

our Consultants Survey also say sustain-

respondents, is ranked 2nd in the

able development is more important to

Consultants Survey with 78 percent of

their clients now than in the past. In

the respondents considering this factor

response to this, more than 80 percent

“very important” or “important.”

claim their clients are making energy-

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somewhat important (Chart LL).

costs 8th among the site selection fac-

clients’ location decisions (Chart BB).

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And while only half of the respon-

The quality-of-life factor showing the

saving modifications to their facilities

largest increase in importance (21.6 per-

(Chart CC). A like percentage of respon-

centage points) is housing costs. Housing

dents to the Corporate Survey made this

availability also shows the second-largest

claim as well. And half the responding

increase in its importance rating — up

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10.9 percentage points to achieve a

able sites and buildings on sites like

respondents say their clients have five to

68.4 percent rating. These results may

FastFacility, and for industry related news

10 locations on that list. About 60 per-

seem surprising considering the precipi-

on websites like AreaDevelopment.com.

cent say their clients visit up to five loca-

tous housing price declines and market

More than 70 percent of those

tions before making the final decision,

glut of the recent past. However, the

responding to our Consultants Survey say

with around the same percentage claim-

increased importance given to these

their clients put between one and five

ing a location decision is generally

two quality-of-life factors may be in

locations on their “short list” when seeking

reached about six months to a year after

anticipation of a turnaround in the

a new site; however, a quarter of the

a client engages their services. ••

housing situation, with lower inventories and price increases in many markets.

Consultants’ Information Sources and Project Timelines Just like the Corporate Survey respondents, the majority of Consultants Survey respondents (78 percent) use site magazines like Area Development for information when helping their clients make location and expansion decisions. Three quarters of the consultants also utilize economic data aggregators, while two thirds also depend on financial publications. More than half of the responding consultants claim to maintain their own site selection database. Nearly all of them (93 percent) have searched the Internet for site and facility planning information (only about 60 percent of those responding to the Corporate Survey claim to do that). When searching online, 90 percent of the consultants are looking for data on specific locations and contact information for economic development agencies. About 70 percent are also looking for listings of avail-

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SURVEY SPONSORS FLORIDA Crystal Sircy, Senior VP Enterprise Florida 800 N. Magnolia Ave., Ste. 1100 Orlando, FL 32803 1-877-YES-Florida Fax: 407-956-5599 csircy@enterpriseflorida.com www.perfectbusinessclimate.com ILLINOIS Michael S. Kearney Director, Economic Development Ameren P.O. Box 66149 MC 350 St. Louis, MO 63166-6149 800-981-9409 Fax: 314-206-0182 mkearney@ameren.com www.Ameren.com/EcDev Harold Gutzwiller Hoosier Energy P.O. Box 908 Bloomington, IN 47402 812-876-0294 or 812-360-4796 Fax: 812-876-5030 hgutzwiller@HEPN.com www.HoosierSites.com INDIANA Harold Gutzwiller Hoosier Energy P.O. Box 908 Bloomington, IN 47402 812-876-0294 or 812-360-4796 Fax: 812-876-5030 hgutzwiller@HEPN.com www.HoosierSites.com IOWA Debi V. Durham, Director Iowa Economic Development Authority 200 E. Grand Ave. Des Moines, IA 50309 515-725-3000 515-725-3010 business@iowa.gov http://www.iowaeconomic development.com/

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KANSAS Kansas Department of Commerce Barbara Hake, CEcD Business Recruitment Manager Kansas Department of Commerce 22201 W. Innovation Drive, Suite 180D Olathe, KS 66061 913-307-7379 Cell: 913-375-5835 KansasCommerce.com/KBIZ bhake@kansascommerce.com KENTUCKY Mandy Lambert, Acting Commissioner, Business Development Kentucky Cabinet for Economic Development Old Capitol Annex 300 West Broadway Frankfort, KY 40601 502-564-7140 Econdev@ky.gov www.ThinkKentucky.com MISSOURI Michael S. Kearney Director, Economic Development Ameren P.O. Box 66149 MC 350 St. Louis, MO 63166-6149 800-981-9409 Fax: 314-206-0182 mkearney@ameren.com www.Ameren.com/EcDev NEW MEXICO David Lopez, President/CEO Mesilla Valley Economic Development Alliance 277 E. Amador, Ste. 304 Las Cruces, NM 88001 575-525-2852 or 800-523-6833 Fax: 575-523-5707 davin@mveda.com www.mveda.com OKLAHOMA Ted Allison, CEcD Director of Economic Development MidAmerica Industrial Park P.O. Box 945 Pryor Creek, OK 74362-0945 918-825-3500 or 888-627-3500 tedallison@maip.com www.maip.com FOR FREE SITE INFORMATION, CALL

PENNSYLVANIA Steven Kratz, Director of Communications Pennsylvania Department of Community and Economic Development 400 North Street, 4th Floor Harrisburg, PA 17120-0225 866-466-3972 www.newPA.com/business TENNESSEE Douglas Lawyer, Vice President Economic Development Knoxville Oak Ridge Innovation Valley 17 Market Square #201 Knoxville, TN 37902 865-637-4550 Fax: 865-523-2071 dlawyer@knoxville chamber.com www.knoxvilleoakridge.com W. Allen Borden Assistant Commissioner, Business Development Division Tennessee Department of Economic and Community Development 312 Rosa L. Parks Avenue Nashville, TN 37243-0405 615-532-1294 615-741-7306 allen.borden@tn.gov http://tnecd.com/ http://tn.gov/ecd/ WISCONSIN Brenda Hicks-Sorensen, Vice President of Economic & Community Development Wisconsin Economic Development Corporation 201 West Washington Avenue P.O. Box 1687 Madison, WI 53701 1-855-IN-WIBIZ (855-4694249) 608-210-6838 Brenda.Hicks-Sorensen@wedc.org http://inwisconsin.com/ Select.inwisconsin.com

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THE SOUTHLAND By Mark Crawford

The southern states have embraced the transition from traditional to

knowledgebased economies and work hard to attract new projects and the highpaying jobs that come with them.

Anchored by traditional industries like manufacturing, agriculture, timber, textiles, and chemicals, the southeastern United States continues to drive the American economy. Over the last few decades the South has diversified into higher-tech sectors like advanced manufacturing, information and communication technology, and energy-related technologies. Every southern state has embraced this transition from traditional to knowledge-based economies and works hard to attract capital investment, new projects, and the high-paying jobs that come with them.

B U S I N E S S - F R I E N D LY A N D LOW-COST The commitment has paid off — companies have been coming to the South for decades, attracted by the friendly business climate and overall low business costs. “Business costs in the South — especially land, energy, and labor — are among the most affordable in the U.S.,” says site consultant Mark Sweeney, senior principal for McCallum Sweeney Consulting in Greenville, South Carolina. “Transportation and energy infrastructure are generally strong. Favorable government policies also play a role in a company’s final site decision — southern states tend to have attractive tax structures, good incentives, and generally cooperative (rather than adversarial) regulatory agencies.” Because of the long history of manufactur-

ing in the South, its work force tends to have the experience and skills most manufacturers are looking for. These can also be customized through top-ranked, zero- to low-cost training programs that are run by state work force development offices. Most southern states have low rates of unionization, which translate into a lower-cost and more stable labor force — a big attraction to both domestic and foreign firms. The South also has a well-developed transportation infrastructure consisting of modern ports, railroads, airports, the Mississippi River, and interstates and highways, with connections to bustling, high-tech intermodal terminals. Many southern cities are only a one-day drive from about two thirds of the American population, making them ideal locations for manufacturers and distributors. The southern states continue to maintain and upgrade this vital infrastructure — South Carolina, for example, is investing $2 billion in its transportation system, including deepening harbors, adding port capacity, and building a new intermodal rail yard. Some of the best-performing states are in the South, driven by manufacturing and energy. For example, Kentucky is shattering its export records, with a 14.2 percent increase in exports during the first 11 months of 2013 — the second-highest percentage increase among the 50 states for that time period (in comparison, overall U.S. export growth was only 2.3 percent). Last year was Louisiana’s best year for business

Delivers a Solid

Performance AREA DEVELOPMENT | Q1/2014

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Courtesy Georgia Department of Economic Development

means new products will be born development in the last six years, here, which will lead to further with projects totaling about 27,000 growth of this industry in our jobs and $26.4 billion in capital state,” says Greg Canfield, investment. Tennessee is another Alabama’s Secretary of hot performer — its real GDP grew Commerce. by 5.8 percent from 2010 to 2012, In Mississippi, Yokohama Tire putting it in the top five states for Corporation will build a $300 that time period. The state also cremillion commercial truck tire ated 143,400 net new jobs from plant in West Point. Kentucky’s January 2011 to November 2013 (a auto industry is booming — its growth rate of 5.46 percent). auto production is third-highest Oil and gas recovered from in the country, with vehicle and “unconventional” shale deposits is parts exports totaling $5.1 billion. boosting the energy sector. Large Georgia’s Toyo Tire North amounts of natural gas at affordable Automotive industry supplier voestalpine Metal Forming will build its first manufacturing facility in the Southeast America Manufacturing recently costs are stimulating industrial near Cartersville, Georgia. announced it would expand, creinvestments by oil refineries and ating 650 new jobs and investing petrochemical facilities. For example, $371 million over the next four years. “This is our fourth two recently announced natural gas projects in Louisiana were expansion and will help us meet the demand for our prodamong the largest investments in North America. Combined, ucts by North American dealers and consumers,” says comCheniere Energy’s liquefied natural gas export facility in pany president Jim Hawk. Cameron Parish and Sasol’s integrated ethane cracker and gas-to-liquid project in Westlake could represent more than $20 billion in capital investment and nearly 2,000 jobs. Aviation and Aerospace With all this economic activity, overall unemployment in Aviation and aerospace R&D has deep roots in the South, the South is among the lowest in the nation. As the economy led by the Kennedy Space Center in Florida and NASA’s continues to recover, job growth in manufacturing in the Marshall Space Flight Center in Huntsville, Alabama. Boeing southern states continues to outgain other manufacturing recently announced it would build a technology research cenregions, like the Midwest and the Great Lakes. More compater in Huntsville, creating up to 400 jobs. Other major players nies are announcing new locations and expansions, includin Alabama are Lockheed Martin, Airbus, and Raytheon. In ing the construction of new corporate headquarters in big Florida, Embraer will manufacture its Legacy 450 and 500 aircities like Atlanta, Charlotte, and Nashville. Companies are craft at the Melbourne International Airport, creating 600 jobs. also putting down roots in smaller communities — for examMississippi and Louisiana are also well known for their ple, Rain CII Carbon, a manufacturer of calcined petroleum aviation industries. Raytheon Space and Airborne Systems coke, will relocate its headquarters from greater Houston to plans to expand its Mississippi operation to include a $100 Covington, Louisiana, to be closer to its operations. million, 20,000-square-foot addition in Forest. Facilities in Louisiana include AAR Corporation’s aircraft maintenance and repair operation in Lake Charles, Bell Helicopter’s KEY SOUTHERN INDUSTRIES assembly plant in Lafayette, and Lockheed Martin’s LNG The South’s manufacturing base is as solid as the products tank manufacturing operation at NASA’s Michoud it makes, including steel beams, cars and trucks, robots, airAssembly Facility in New Orleans. craft, and rocket engines. As a result, job numbers are up. GE Aviation recently announced it would build a $125 Georgia recorded a 10 percent increase in job creation during million, ceramic matrix composite (CMC) manufacturing its most recent fiscal year — many of those jobs are in manuplant in Asheville, North Carolina. These CMC components, facturing. South Carolina recruited more than 15,000 new jobs designed to withstand extreme heat, will be used in the core in 2013. To meet increased manufacturing needs and provide of engines. “Asheville will be our first factory involved in customized training, Workforce Florida will provide $2 million the mass production of CMC components,” says David in customized training grants dedicated to manufacturing. Joyce, president/CEO of GE Aviation. “This new facility will be on the ground floor of a new technology that will change Automotive aviation.” Manufacturing in the South, of course, is anchored by the revved-up automotive industry. In 2013 Alabama’s three auto assembly plants — Honda, Hyundai, and MercedesInformation and Communications Benz — combined to break the previous year’s production Technology record by 4 percent. This kind of success is attracting more Some of the country’s most vibrant ICT clusters are in supply-chain vendors to the area such as REHAU, a German Raleigh Durham-Chapel Hill, North Carolina, and Atlanta, company that is opening its first U.S. technical research cenGeorgia. For example, Allscripts, a leading developer of ter in the town of Cullman. electronic health records, will expand its operations in North “Having a high-tech company like REHAU choose Carolina, investing $2.8 million and creating 350 new jobs. Alabama for a U.S.-based research and development facility In Georgia, a new AT&T Foundry® facility will accelerate

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research and development. Located in Atlanta adjacent to Georgia Tech, the AT&T research team will develop home security and automation technologies. Google established itself in South Carolina with the construction of a data center complex in Mount Holly. Plans are now under way for $600 million expansion, bringing Googleâ&#x20AC;&#x2122;s total investment in South Carolina to $1.2 billion. Another ICT giant, IBM, will construct a $55 million, 800-job technology center in Baton Rouge, Louisiana. Since the announcement, computer science enrollment among freshmen at LSUâ&#x20AC;&#x2122;s College of Engineering jumped 60 percent. Floridaâ&#x20AC;&#x2122;s core ICT strengths include digital media, simulation and training, and health IT. iSirona, a company that specializes in medical device connectivity and integration, will undertake a $2.25 million expansion of its operations in Panama City, Florida, creating 300 new jobs. The company was ranked â&#x20AC;&#x153;One of Americaâ&#x20AC;&#x2122;s Most Promising Companiesâ&#x20AC;? in 2013 by Forbes magazine and the fifth-fastest-growing private company in U.S. healthcare in 2012 by Inc. magazine.

Agribusiness Agribusiness is a driving force in the national and global economy, and for reducing hunger throughout the world. Food research and food processing are major employers in the South. For example, during the last decade, companies in Virginiaâ&#x20AC;&#x2122;s food and beverage sector have invested over $1.8 billion and created more than 6,100 new jobs. The food

processing industry accounts for 14 percent of total manufacturing employment in Virginia, making it the stateâ&#x20AC;&#x2122;s second-largest manufacturing sector. Major companies include Hampton Farms, the leading roaster of in-shell peanuts in the country, which will invest $5.5 million to establish a peanut-butter production plant in Southampton County. Research Triangle Park (RTP) in North Carolina has long been a leader in agricultural research and biotechnology. Three of the top five crop-science companies are headquartered at RTP â&#x20AC;&#x201D; BASF Crop Protection, Bayer CropScience, and Syngenta Biotechnology. Bayer CropScience will undertake a $33 million renovation of its North American headquarters, which will eventually employ 700 people working on the latest developments in sustainable agricultural processes. Syngenta Biotechnology will also expand its crop protection and seed development operations at RTP, investing $94 million and creating 150 new jobs by the end of 2018. â&#x20AC;&#x153;This is an extraordinary time of growth for agriculture in North Carolina and we are proud to be part of the regionâ&#x20AC;&#x2122;s growing agricultural technology cluster,â&#x20AC;? states Michiel van Lookeren Campagne, president of Syngenta Biotechnology.

Life Sciences Research Triangle Park is also home to scores of biotechnology and life sciences companies. The regionâ&#x20AC;&#x2122;s universities are a steady source of highly qualified scientists and engineers, as well as established venture capital firms that

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invest millions in RTP-based companies every year. RTP tenants include ChemoGenics BioPharma, Dharma Laboratories, ENVIGEN Pharmaceuticals, GlaxoSmithKline, and Symmetry Biosciences, as well as many others at the North Carolina Biotechnology Center. Georgia also has a strong life sciences sector. Anchored by the Centers for Disease Control and Prevention in Atlanta, the state’s life sciences industry consists of more than 400 life sciences companies and 225 health IT companies. R&D specialties include health informatics, hematology and immunology, and medical devices. Leading companies include Baxter, GE Healthcare, Philips Healthcare, and Greenway Medical Technologies. Other states are hard at work developing life science sectors. Kentucky, for example, is developing Nucleus Innovation Park, a $2 billion project in downtown Louisville. The park will support startup companies in the biotech and life sciences fields. In northern Kentucky, the College of Informatics at Northern Kentucky University has launched UpTech, a business accelerator program that supports more than 50 early-stage informatics companies — the first of its kind in the nation.

from Maryland to Charlotte, North Carolina. “Areva has taken the lead in the U.S. nuclear sector by investing millions to create domestic industrial capacity, which provides a tremendous boost to American energy infrastructure and the U.S. economy,” says CEO Michael W. Rencheck. “North Carolina is a great place to do business because of its quality of life, extensive business infrastructure, investments in work force development, and commitment to forming partnerships with industry.”

FOREIGN DIRECT INVESTMENT “One of more powerful aspects of the South’s success over the last 50 years is the targeted effort at FDI, especially

SELECT GEORGIA AND ENERGIZE YOUR MARKETS.

Energy The South does it all when it comes to energy — coal, oil and gas, nuclear, and alternative fuels. Louisiana has long been a leading U.S. oil and gas producer. The state is the second-highest crude oil producer (including offshore production) and third-highest natural gas producer in the nation. Louisiana also has a robust and diverse agricultural base that can produce feedstock for alternative fuels. For example, Green Circle Bio Energy plans to build a $115 million wood pellet manufacturing facility in the George County Industrial Park, which will produce wood pellets for European markets as a renewable alternative to coal. West Virginia is experiencing a natural gas boom, thanks to the Marcellus Shale, a deep rock formation that is believed to contain more than 50 trillion cubic-feet of recoverable natural gas. Unlocking these vast reserves will likely stimulate both the chemical and manufacturing industries. West Virginia is also developing coal-biomass-to-liquids (CBTL) projects as a cleaner alternative to imported petroleum. On the nuclear scene, AREVA, the largest technical resource for the nation’s nuclear energy sector, will relocate its North American headquarters

We help make it easy for companies to grow and thrive in Georgia. Our project managers, engineers, research experts and marketing professionals work closely with the Georgia Department of Economic Development, as well as other state and local partners, to ensure your company’s successful expansion or relocation to our state. To see how, visit SelectGeorgia.com.

ECONDEVGA@SOUTHERNCO.COM

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in manufacturing,” says consultant Mark Sweeney. In the annual IBM-Plant Location International Global Location Trends report released in December 2013, South Carolina ranked first in the nation for per-capita employment by foreign-owned firms investing in the U.S. last year. Since January 2011, the state has recruited $6.7 billion in capital investment from foreign-owned companies, resulting in more than 15,600 jobs. For projects announced in South Carolina between 2011 and 2013, FDI represented 39 percent of new jobs and 61 percent of capital investment. “South Carolina’s strategy for attracting foreign direct investment has been a successful one for the past several decades, netting companies like BMW, Michelin, Honda, and others,” says Secretary of Commerce Bobby Hitt. “While German companies have long been the top investors

SOUTHLAND SPONSORS ALABAMA Bruce Windham, Administrator or Agnes Zaiontz, Business Manager Tennessee-Tombigbee Waterway Development Authority 318 Seventh Street North Columbus, MS 39701 662-328-3286 Fax: 662-328-0363 ttw@tenntom.org www.tenntom.org FLORIDA Crystal Sircy, Senior VP Enterprise Florida 800 N. Magnolia Ave., Ste. 1100 Orlando, FL 32803 1-877-YES-Florida Fax: 407-956-5599 csircy@enterpriseflorida.com www.perfectbusiness climate.com Peggy Doty, Executive Assistant & Project Coordinator Greater Fort Lauderdale Alliance 110 East Broward Blvd, Suite 1990 Fort Lauderdale, FL 33301 954-627-0134 pdoty@ gflalliance.org www.lesstaxing.com GEORGIA Jonathan Sangster, General Manager, Economic Development Georgia Power 75 Fifth Street NW, Ste. 175 Atlanta, GA 30308 404-506-7502 Fax: 404-506-1474 econdevga@southernco.com www.SelectGeorgia.com

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in our state, we’re seeing increased interest in South Carolina by Chinese, Japanese, and Indian companies.” The long history of foreign direct investment in the South has been led by automobile manufacturing. Kentucky is developing very strong ties with firms such as Kayser Automotive, iwis Engine Systems, Dr. Schneider Automotive Systems, Mubea, Webasto Roof Systems, ZF Steering Systems, and others. Tennessee is another FDI leader in the South, with a total investment of $27 billion by nearly 900 foreign-owned companies that employ 114,000 workers in their Tennessee operations. Japan, Germany, Canada, and the UK are the state’s leading contributors to FDI. New projects continue to be impressive — in October 2013, Korean-owned Hankook Tire announced plans for an $800 million factory in Clarksville.

KENTUCKY Mandy Lambert, Acting Commissioner, Business Development Kentucky Cabinet for Economic Development Old Capitol Annex 300 West Broadway Frankfort, KY 40601 502-564-7140 Econdev@ky.gov www.ThinkKentucky.com

W. Allen Borden Assistant Commissioner, Business Development Division Tennessee Department of Economic and Community Development 312 Rosa L. Parks Avenue Nashville, TN 37243-0405 615-532-1294 615-741-7306 allen.borden@tn.gov http://tnecd.com/ http://tn.gov/ecd/

Kenneth Robinson, President and CEO Muhlenberg Alliance for Progress (MAP) 50 Career Way Central City, KY 42330 270-338-4102 Fax: 270-338-4106 ken@mafp.us www.mafp.us

NORTH CAROLINA Brenda Daniels Manager, Economic Development ElectriCities of North Carolina, Inc. 1427 Meadow Wood Blvd. Raleigh, NC 27604 1-800-768-7697 ext. 6363 Cell: 919-218-7027 www.electricities.com bdaniels@electricities.org

Bruce Windham, Administrator or Agnes Zaiontz, Business Manager Tennessee-Tombigbee Waterway Development Authority 318 Seventh Street North Columbus, MS 39701 662-328-3286 Fax: 662-328-0363 ttw@tenntom.org www.tenntom.org MISSISSIPPI Marlo Dorsey Chief Marketing Officer Mississippi Development Authority P.O. Box 849 Jackson, MS 39205 601-359-3962 mdorsey@mississippi.org www.mississippi.org

SOUTH CAROLINA Richard K. Blackwell, SCCED Executive Director Oconee Economic Alliance 528 Bypass 123, Suite G Seneca, SC 29678 U.S.A. 864-638-4210 or 864-364-5552 Cell: 864-784-5736 rblackwell@OconeeSC.com www.InvestOconeeSC.com TENNESSEE Douglas Lawyer, Vice President Economic Development Knoxville Oak Ridge Innovation Valley 17 Market Square Knoxville, TN 37902 865-637-4550 Fax: 865-523-2071 dlawyer@ knoxvillechamber.com www.knoxvillechamber.com www.knoxvilleoakridge.com

FOR FREE SITE INFORMATION, CALL

For more information on these sponsors, including social media links, visit their websites.

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FDI is responsible for more than 2,500 establishments in Florida accounting for 236,000 jobs. Big attractions for foreign companies include strong air and seaport infrastructure and a well-trained multicultural work force. Unipharma, a Venezuelan pharmaceutical company, recently announced it would establish its headquarters in Tamarac. The company cited Broward County’s easy access to foreign markets, growing life sciences cluster, and focus on contract manufacturing: “Our new facility will not only provide jobs for the local community, but also support Florida’s growing life science industry,” says Unipharma CEO Reinaldo Santa Marta.

meeting in Birmingham. More than 65 Japanese firms have invested more than $4.4 billion in Alabama — and not just in big cities like Huntsville. In Jasper, Japanese firms HTNA (carpet, interior trim) and Nitto Denko Automotive (automotive supplier) will employ nearly 300 people combined once HTNA’s recently announced expansion is completed. “These two Japanese companies have had a great impact on our economy, both directly and indirectly,” says David Knight, executive director of the Walker County Development Authority. “Anytime you have companies that employ hundreds of people and invest tens of millions of dollars, it can’t help but be a positive

FUTURE GROWTH By most indicators, the South’s economy will continue to be a solid performer in 2014. Companies that survived the Great Recession have become lean and have more cash to spend. Banks are making commercial loans again, the housing market has stabilized, and consumer confidence is fairly high. “Manufacturing production rose 2.6 percent in 2013, slowing from the 3.5 percent and 3.2 percent growth rate experienced in 2011 and 2012, respectively,” indicates Chad Moutray, chief economist for the National Association of Manufacturers. “The lower 2013 figure stemmed largely from weaknesses in the first half of the year, with manufacturing output rising an annualized 4.2 percent in the second half. As such, the sector ended the year on a strong note, with a pickup in demand and cautious optimism for 2014. ” According to Moutray, the strongest manufacturing sectors are motor vehicles and parts, electrical equipment and appliances, primary metals, food, beverage and tobacco products, apparel, petroleum and coal products, and chemicals — all key economic drivers in the South’s economy. Foreign countries are also starting to emerge from the global recession. As a result, foreign companies are also feeling more secure about making investments in the United States, where states are showing they are highly competitive in going after capital investment. The southern states remain proactive in marketing themselves to companies across the world. Not only do they carry out periodic trade missions, but they also are committed to creating long-term relationships with key countries like Japan. Alabama, for example, is an active member of the Southeastern U.S./Japan Association, which will hold its 2015 AREA DEVELOPMENT | Q1/2014 AREA0225.indd 1

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ASSET MANAGEMENT

Strong Performance Propels Industrial Sector into 2014 Following the best year since 2005, real estate is poised for continued progress. By John Morris, Leader, Industrial Services for the Americas, Cushman & Wakefield

rowing demand for goods from consumers and businesses — and an apparently permanent shift in how people buy and how goods are shipped — has propelled the U.S. industrial real estate sector into its most positive position since before the Great Recession. Manufacturing production and shipments are increasing at a healthy pace, as are imports and exports. Demand for industrial real estate product nationwide has responded accordingly, resulting in a good year for the industry in 2013.

Some Fundamentals In fact, last year, the U.S. industrial real estate market marked its strongest performance since 2005, with 328.5 million square feet in leasing activity and 117.2 million square feet of positive absorption. • Leasing activity rose 6.2 percent year over year. Greater Los Angeles continued to lead the nation, with 35.8 million square feet in activity, followed by

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Chicago with 30.9 million square feet. Seventeen of the 37 markets tracked by Cushman & Wakefield reported increased activity in 2013. Fourteen of these markets posted double-digit annual increases. Northern New Jersey posted an impressive 40 percent increase, while the Pennsylvania I81/I-78 corridor recorded a 30 percent year-over-year increase. • Additionally, net demand is up 23 percent from the year prior, with only one out of 37 markets tracked recording negative absorption. Dallas/Fort Worth led the nation with 15.1 million square feet of occupancy gains in 2013, followed by California’s Inland Empire with 12.6 million square feet. As a result, the U.S. vacancy rate is tightening rapidly. Overall vacancy fell to 7.5 percent in the fourth quarter, down 80 basis points from the year prior and 330 basis points lower than its recent peak in the first quarter of 2010. The overall vacancy rate has now declined for 13 consecutive quarters. In the warehouse sector, specifically, vacancy has reached its lowest rate in five years, declining for 15 consecutive quarters. Vacancy rates are expected to fall steadily over the next several years, even as new building product is added to the market. We are also seeing upward pressure on rents. The average direct asking rate rose to $5.92 per square foot in the fourth quarter of 2013, marking a 4.2 percent year-over-year increase. Rents are still 13 percent below their peak level achieved in 2008, but they have been inching up slowly since second quarter 2011. The reason for the slow FOR FREE SITE INFORMATION, CALL

pick up to date can be partially attributed to the fact that as the recovery continues to favor newer high-quality product, the price gap between Class A and Class B/C space has been widening. We expect the rate of rent increases to gain momentum in 2014, with steady appreciation to follow. Ultimately, these positive fundamentals have sparked a new wave of development. As 2013 came to a close, 79.4 million square feet of new industrial space was under construction, up 87 percent compared to year-end 2012. New development is particularly strong in the Inland Empire, Chicago, Dallas/Fort Worth, Houston, Central New Jersey, and the Pennsylvania I81/I-78 distribution corridor. Each of these markets has four million square feet or more under construction. Demand for big-box space is also growing in secondary major distribution and population hubs such as Indianapolis, Memphis, Phoenix, and Houston. Approximately 380 million square feet of new supply is projected to be added to the U.S. industrial base from 2014 to 2017 (about 18 percent less than what was added from 2005 to 2008).

Redefining the Term “Ideal Location” E-commerce continues to drive demand for these modern logistics facilities. With online sales anticipated to reach $370 billion by 2017, up from $231 billion in 2013, the industrial real estate market will be a main beneficiary. While location has long been the most significant success factor in retail distribution, e-commerce is redefining

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the meaning of “ideal location” for a fulfillment center. The evolution of ecommerce from a two- to three-day delivery window toward a same-day fulfillment model is driving the new design requirements and the clustering of big-box sites near population centers. The rise of urbanization and further regionalization to support online shopping will increasingly influence real estate decision-makers and markets. Traditional brick-and-mortar companies also are playing a key role in the industrial development pipeline. To accommodate the evolving landscape, they are setting up dual operations backed by mega-distribution facilities that support both online and in-store inventory. In response to this powerful demand driver, we are seeing a significant amount of new development projects that are catering to efulfillment — for both e-commerceonly retailers and multi-channel retailers. Virtually all of the demand in this sector is for build-to-suit or ownerbuilt facilities due to the highly specialized fulfillment and distribution requirements of e-commerce and omnichannel retailing. Amazon is leading the change, rapidly building new state-of-the-art distribution facilities that often are one million square feet or greater. Amazon currently has fulfillment centers in 15 states and plans to expand into more states soon. In order to compete, traditional retailers like Wal-Mart, Target, and others are occupying mega-facilities that support expansion of their ecommerce business. Home Depot’s new 1.6-million-square-foot facility at the CenterPoint Intermodal Center in Chicago and 1.1 million-square-foot facility in Atlanta are prime examples. As retail foot traffic drops and as retail development, overall, struggles, it does appear that a change is here to stay. Stores are no longer the stockroom but rather the showroom and services touch point, and the backward movements of inventory, i.e., back to the warehouse, continue to bode well for industrial real estate services.

Changes in the Supply Chain Industrial site selection is also being driven by changes in the supply chain,

as ports get ready for the opening of the widened Panama Canal. After the canal expansion is completed in 2015, many of the products traditionally transported to the West Coast may be left on vessels to make the journey all the way to East Coast ports. With an eye to the increased volume and demand, new distribution hubs are being developed nearby to serve U.S. ports: Cranbury/ Robbinsville in central New Jersey, just south of Port Newark-Elizabeth; York in central Pennsylvania, a short drive

“

We are seeing a significant amount of new development projects catering to e-fulfillment.

north from the Port of Baltimore; and Pooler, Georgia, near the Port of Savannah. The Panama Canal expansion could also be a game changer for South Florida industrial real estate since the Port of Miami will be able to handle the post-Panamax ships — a huge advantage that will drive demand for modern, institutionalquality buildings able to handle the newest containers and trucks. Cities that are especially well positioned to attract new distribution projects are those that link to the global economy through ports and airports. The major inland ports of Chicago, Dallas/Fort Worth, Southern California’s Inland Empire, and Atlanta have benefited the most from increased international container volume. This has allowed them to experience the largest increase in demand for industrial space. Collectively, more than 107 million square feet of new supply are expected to be delivered in these four markets in the next four years.

With escalating fuel and trucking costs, we also are seeing an increased emphasis on railways and leveraging intermodal distribution centers. As transportation costs rise, more shippers are looking to locate their distribution centers closer to their end markets and to reduce long-haul trucking costs by using intermodal rail. Although the major hubs are leading the way in absorption and construction, activity is trickling down to smaller markets, including Kansas City, Missouri. Kansas City is second only to Chicago nationally in terms of the number of freight trains passing through and tops the nation when it comes to freight tonnage traffic.

Looking Ahead From an economic standpoint, we anticipate continued progress in 2014. After more than four years of steady but sub-standard growth with real GDP, the U.S. economy is poised to accelerate this year and next. The uncertainty caused by the fiscal debate in Washington, D.C., is fading, and the impact of the tax increases and spending cuts enacted in 2013 are diminishing. As confidence improves, a number of private-sector developments will drive industrial growth, including: • The continuing revival of the housing sector —which will boost construction as well as sectors such as furniture, appliances, utilities, and financial services • Activation of pent-up demand by consumers — as durable goods wear out, households will be more willing to spend to replace them • Rising demand for exports, as Europe and Asia grow more rapidly • A shift in business attitudes and the greater willingness to take risk — which is expected to lead to stronger employment growth and increased investments in people and equipment Considering that demand for industrial space has been consistently strong through the economic resurgence thus far, it should remain so as the recovery becomes more robust. For this reason, we expect the economic environment for the industrial sector in the near term to be the best we have seen in years. AREA DEVELOPMENT | Q1/2014

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TAXES & INCENTIVES

The Impact of Taxes & Incentives on Data Center Locations Many states and communities are using incentives to lure data centers and establish clusters of these facilities, which, in turn, stand to benefit from tax breaks and cash grants for necessary infrastructure improvements. By Chris Schastok, Vice President, and John Lenio, Economist & Managing Director, Economic Incentives Group (EIG); and Patrick Lynch, Managing Director, Data Center Solutions Group (DCSG); CBRE

ata center site selection has grown in sophistication over the years as companies are in constant search of reliable, dependable, and cost-effective solutions. Whether an enterprise user or a tenant in a colocation facility, most companies choose communities based on four primary drivers: 1. Power — cost per kWh, carbon footprint, fuel mix, and infrastructure 2. Telecom — fiber providers, latency 3. Geography — proximity to headquarters or airport locations, population size, labor force, water 4. Climate — Environmental risk (i.e., hurricanes, tornadoes, earthquakes, etc.), free cooling After solving for these primary drivers, communities will remain on the short list based on real estate availability and cost. This holds true for existing colocation facilities or greenfield sites for new construction. When the box is checked for real estate, taxes and incentives end up swaying the business case or leveling the playing field for communities on a data center’s short list. Taxes and incentives are the only tools a state or community has control over in order to win data center facilities. With this in mind, 17 states have customized incentive programs for the data center industry. Typically, the larger the project investment, the more important role incentives tend to play in the overall site evaluation.

A Quick Primer on Data Center Taxes

Source: CBRE Economic Incentives Group

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When developing a Total Cost of Occupancy (TCO) model, one-time and recurring taxes will have a significant impact on long-term costs for a data center. The capital-intensive nature of a data center will trigger relatively high sales taxes and property taxes. Property taxes are typically payable for both real estate and personal property (or equipment). Sales (or use) taxes are incurred on a onetime basis for purchases of building materials, mechanical and electrical equipment, IT equipment, and, in some cases, software. Sales taxes on building materials are due based on the location of purchase, whereas sales taxes on equipment are due based on the location of delivery. For example, $10 million of IT equipment delivered to a data center in Columbus, Ohio, would incur about $700,000 in sales taxes. Real estate taxes are payable on an annual basis for the data center FOR FREE SITE INFORMATION, CALL

800-735-2732, EXT. 225, OR VISIT US ONLINE AT WWW.AREADEVELOPMENT.COM

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structure. Real estate taxes are a function of building value and the local effective tax rate. For example, a data center valued at $30 million in suburban Kansas City, Kansas, would see real estate taxes total about $4.6 million over five years (or $930,000 annually). Personal property taxes are payable on IT equipment, furniture, or other equipment that is not bolted to the real estate and can be removed. These taxes are paid each year based on original purchase price, depreciation, and the local effective tax rate. For example, $200 million in IT equipment in suburban Dallas, Texas, would yield about $17 million over a five-year period. It should be noted that personal property taxes would be due for each cycle of equipment purchases. That is, purchases in 2013 would incur personal property taxes from 2013–2017, and purchases in 2017 would have taxes due between 2017 and 2021.

DID YOU KNOW There are 5 STATES that automatically do not charge SALES TAX for any type of purchase — Alaska, Oregon, New Hampshire, Montana, and Delaware.

Data Center Incentives Since 2005, about 17 states have passed legislation to provide customized incentives for data centers. These states provide full or partial exemption of sales taxes for various investment types. The exemptions commonly cover computer (or IT) equipment across the board. Construction, mechanical and electrical equipment, cooling systems, power infrastructure, electricity, and backup fuel are covered to varying degrees by this group of states.

years. The minimum for enterprise users depends on the county where the data center is located. There is no minimum jobs target.

New Activity in 2012 and 2013

The past two years saw activity in the following eight states that either created new incentives programs or tweaked existing programs to lure data centers. • Georgia’s data center incentive program was passed in 2005. The program provided a 100 percent exemption of sales taxes on computer equipment as long as a $15 million investment was made each year. During 2012, the exemption was expanded to cover sales taxes on construction materials. • Virginia’s incentive program for data centers was created in 2008 and amended during 2012. The program allows for a 100 percent exemption of sales taxes on computer equipment as well as mechanical and electrical equipment. The minimum thresholds include $150 million in capital investment and 50 new jobs. The 2012 amendments allow for tenants and owners to be qualified data center users. This means that tenants of a colocation facility would be allowed to earn the incentive. • In 2009, South Carolina created a data center incentive. This program provided a 100 percent exemption of sales

Minimum Thresholds — State incentive benefits for data centers are not necessarily automatic and have certain hurdles or minimum thresholds, which are related to capital investment, direct jobs, payroll or salary, and time period. Following are a few examples: • Nebraska provides an enhanced level of incentives for data centers with a minimum of $200 million in capital investment and 30 direct jobs. The investment minimum can include construction, equipment, and capitalized software. The minimum jobs are direct or “badged” employees. Contractors are generally not allowed in the calculation. It should be noted the jobs and capital investment targets must be achieved within seven years in order for a company to earn the incentives benefits. The state has an alternative level of incentives with a lower investment threshold of $37 million. • North Carolina requires a minimum of $250 million for Internet data centers and $150 million to $225 million for enterprise data centers within five AREA DEVELOPMENT | Q1/2014 AREA0232.indd 1

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taxes on computer equipment. In 2012, the state made three enhancements including (1) reducing minimum jobs to 25 from 100; (2) lowering capital investment to $50 million from $300 million; and (3) allowing exemption of sales taxes on electricity. • A new data center incentive program was created in Alabama during 2012. This program could potentially provide a 100 percent exemption of sales on computer equipment, mechanical and electrical equipment, cooling systems, and power infrastructure. The minimum thresholds include 20 new jobs and $200 million of capital investment. • The Nebraska Advantage program was enhanced to include a large data center option (or tier). The large data center tier requires a minimum of 30 new jobs and $200 million of capital investment. If these minimums are attained, the program allows for 100 percent refund of sales taxes on equipment, construction, and capitalized software. Other benefits include a limited refund of employee personal income taxes, 100 percent refund of real estate taxes paid to the locality, and 100 percent exemption of personal property. • The state of Arizona entered the data center competition during 2013. The program allows for a 100 percent exemption of sales taxes on computer equipment, mechanical and electrical equipment, and construction materials. The minimum thresholds include $50 million of capital investment or $25 million in smaller counties in the state. In addition, tenants or owners of colocation facilities are eligible for the data center incentive. Eligibility for colocation is based on a minimum investment of $250 million between 2007 and 2013. • A new data center incentive program was passed by the Texas legislature in 2013. The program provides a 100 percent exemption of sales taxes on computer equipment,

DID YOU KNOW

There are 11 STATES that automatically do not assess PROPERTY TAXES on equipment and furniture — Delaware, Illinois, Iowa, Kansas, Minnesota, New Jersey, New York, North Dakota,Ohio, Pennsylvania, and South Dakota.

Source: CBRE Economic Incentives Group

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mechanical and electrical equipment, cooling systems, power infrastructure, electricity, backup fuel, and software. The minimum thresholds include 20 new jobs and $200 million of capital investment. The sales tax exemption is limited to data center facilities that are 100,000 square feet or larger. Tenants of colocation facilities are eligible for the incentive program. • As of this writing, the state of Ohio is evaluating amendments to its data center incentive originally created in 2011. The amendments include (a) allowing tenants of colocation facilities to be eligible; (b) lowering payroll threshold to $1.5 million from $5 million; and (c) allowing minimum thresholds to be covered by tenants and owner of a colocation facility. Ohio’s data center incentive can be up to 100 percent of sales taxes on construction materials, computer equipment, mechanical and electrical equipment, cooling systems, and power infrastructure. In addition to the minimum payroll, eligible data center users are required to invest at least $100 million.

Final Thoughts

Over the past eight years, states have increasingly jumped onto the data center bandwagon. States and communities alike want to increase tax revenues, and policymakers are realizing that data centers can be a significant source of new revenue — sometimes even more so than typical economic development projects like headquarters, manufacturing, or distribution centers. While data centers do not directly create large employment opportunities, they do create a significant amount of high-end construction employment for a period that typically runs around 24 months. Additionally, these assets, once built, are a key component of a company’s overall operating environment and can create a long-term investment in a community. Lastly, data centers tend to group together, and it is likely that once a certain geography attracts a big-name user, others will follow (e.g., in Colorado Springs, Raleigh, Des Moines, etc). Data center owner/operators can see sales tax breaks from select states, property tax abatements covering the facility and equipment, and cash grants to offset public infrastructure improvements. As demand for colocation facilities has increased over the years, some states are starting to allow these facilities and tenants to benefit from incentives that otherwise were only available to enterprise users. Companies are using incentives to help lower the long-term total cost of occupancy, which only helps secure capital approval for projects. Developers are using incentives in certain markets to help lower the rent structure to compete with colocation facilities throughout the United States.

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Sustainability

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SITE SELECTION/SUSTAINABILITY

Sustainability: The “Invisible Hand” Shapes Next-Generation Location Selection Companies that view their location strategies through a “sustainability filter” are more likely to achieve competitive advantage and long-term stakeholder value. By Don Schjeldahl, The Don Schjeldahl Group

“

An invisible hand,” Adam Smith’s 18th century locution on the self-regulating behavior of the marketplace, still rings true. Smith could never have imagined the intricate formulations today’s markets have created, with one of these being sustainability as an underpinning of business location selection. Sustainability’s triple-bottom-line business operating philosophy, driven to the modern stage by the challenges of globalization, is a logical and evolutionary extension of the invisible hand.

Origins of Sustainability Sustainability as a business term has come into common use only within the last decade or so. Before that, sustainability was rooted in the environmental movement of the 1960s and later the United Nations Brundtland Commission, which in 1987 defined sustainable development as "development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” Sustainability’s mandate is to balance a three-legged stool of society, the environment, and the economy, translated for business as the triple-bottom-line. Sustainability as a business practice is driven by the interdependence of national economies through a rapid increase in cross-border movement of goods, services, technology, and capital — in a word, globalization. Globalization brings opportunity to virtually every doorstep, but also brings risk from a myriad of origins including resource scarcity, rapid market shift, political instability, disruptive technology, and environmental challenges (e.g., climate change). These, in turn, shape ever-changing societal expectations, public policies, regulatory frameworks, and competitor actions — the very things that challenge business decisions. Companies that anticipate and manage current and future economic, environmental, and social opportunities and risks, dealt rapid fire by globalization, will emerge more likely to achieve competitive advantage and long-term stakeholder value. In part, competitive advantage comes from getting more use from investments in real property and machinery and equipment.

B-Corporations by State

Corporate Sustainability Metrics

Passed Figure1

Under consideration

Companies that successfully translate social, environmental, and economic challenges to their advantage should expect to outperform their peers. Measuring corporate adaptation of sustainability has been elusive, however. As a business practice sustainability lacks uniform definition, though this is starting to change. AREA DEVELOPMENT | Q1/2014

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Comparison of DJSI and LargeMidCap Risk & Crisis Management 100

Operational Eco-Efficiency

Codes of Conduct/Compliance/ Corruption & Bribery

Climate Strategy

Labor Practice Indicators and Human Rights

25 0

Environmental Policy/ Management System Corporate Citizenship and Philanthropy DJSI World Diversified

Human Capital Development Stakeholder Engagement S&P Global LargeMidCap Index

Source: RobecoSam and S&P Dow Jones Indices

Figure 2

Confusion over the term is not surprising given the numerous ways in which the sustainability tag is hooked to business organizations. One definition accompanies Benefit Corporation designation, also called a B Corp. B Corps are a legal form adopted by forprofit companies that want to consider society and the environment in addition to profit in their decision-making process. B Corps have legal status and are administered in 19 states and the District of Columbia (Figure 1). B Corp designation expands the fiduciary duty of company directors to require them to consider non-financial as well as financial interests of shareholders. This gives company directors and officers legal protection to pursue a broader corporate mission. A similar designation is the Certified B Corporation. A Certified B Corp is a for-profit company that has met standards set by B Lab, a third party 501(c)3 nonprofit with headquarters in Wayne, Pa. B Lab’s mission is to “…serve a global movement of entrepreneurs using the power of business to solve social and environmental problems.” Certified B Corps are found in all 50 states and around the world. (Benefit Corps are not required to be

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certified.) At the start of 2014, more than 900 companies in 60 different industries had achieved certification, including companies like California outdoor apparel leader Patagonia, Vermont’s Ben & Jerry’s, as well as Colorado-based craft brewing giant New Belgium Brewing. Rob Michalak, Director of Social Mission for Ben & Jerry’s says, “Certified B Corporations codify what being a progressive, socially conscious business is all about. By becoming a Certified B Corp we are supporting the movement for business to play a leading role in providing social as well as economic benefits to society, and of course great products and services.”

Sustainability and the Invisible Hand Adam Smith knew well that individuals act in their own self-interest. At the same time Smith acknowledged that the actions of individuals to maximize their own gain in a free market ultimately benefit society, even if the individuals have no benevolent intentions. It stands to reason, therefore, that in a complex world, companies managed according to robust and wellrounded sustainability principles FOR FREE SITE INFORMATION, CALL

should realize higher shareholder value versus companies that manage solely on traditional practices that rely heavily on conventional financial analysis. And while recognition of sustainable business organizations by legal means or through certification is significant, it’s easy to view these as “sustainability lite.” Real proof of sustainability’s efficacy lies elsewhere. In capitalist society the marketplace is fertile proving ground for testing ideas. Over the last decade a number of investment services have done just that by focusing on the premise that a sustainable corporate model will produce successful businesses over the long term. Perhaps the best known of these services is the Dow Jones Sustainability Diversified™ Indices (DJSI Diversified), which measures company performance relative to traditional benchmarks. DJSI Diversified, which represents a collaboration between S&P Dow Jones and Switzerland-based RobecoSAM AG,

Communities positioned to support LEED Certification are by default more closely aligned with sustainable corporate organizations. LEED (Leadership in Energy and Environmental Design) is a program of the U.S. Green Building Council (USGBC) started in 1998. LEED provides metrics that advance convergence of business and community sustainability. LEED NC (new construction) and LEED CS (core and shell, i.e., existing building) have scoring criteria that encapsulate aspects of community organization and physical assets that feed the needs of sustainable business organizations. In LEED (NC) v3 2009, the latest version of the program, there are six scoring categories encompassing 65 variables, 110 possible points, and four certification levels. Approximately 30 of the 65 variables are connected to owner design decisions that are largely unlinked to community. The remaining 35 variables are either directly or indirectly supported by organizational and physical assets of the community.

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Selected Filter Elements for Selecting Sustainable Communities and Properties

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Community/Property Selection Filter Elements

Target Industry Strategy: The era of communities being all things to all companies is well in the past. The first filter element in a sustainable location search is to verify the community has an investment attraction strategy based on an honest appraisal of regional assets. If they have done this correctly and are targeting your industry, they will understand your requirements and be working to align local resources with your current and future needs. Everything on this list should tie back to the community attraction strategy. • Police and Fire Emergency Services: Appropriate staffing, equipment, facilities, training • Emergency Planning: Recognition of and planning for natural and manmade disasters • Utility Services: Reliable, abundant, and redundant utility services built on modern well-maintained infrastructure • Transportation: Reliable and redundant transportation access for employees, service providers, and supply chain • Regulation: Predictable and workable regulatory structure • Schedule: Globalization mandates speed. Corporations cannot afford to be slowed down by actions that can be anticipated. Community attributes must include: • Real estate — Certified ready-to-go sites and available buildings in areas of the community that are aligned with environmental and operational considerations • Permitting — Streamlined and responsive permitting process • Community — Consensus among community leaders on attraction targets and a commitment to expedite the development process

Supply Chain Management

Communities that support investment in the supply chain of targeted industries are more likely to be a good location for regionally sourced materials. This reduces the company’s operating costs and lowers greenhouse gas emissions, and supports local economic stability.

Operational Eco-Efficiency

Every corporate facility has a unique environmental footprint shaped by facility technology, age, and condition, and by community attributes. Sustainable companies prioritize environmental issues in order to better manage the impact of these issues on company performance. A properly vetted community will support a broad array of corporate environmental policies and management initiatives. Communities are more attractive to sustainable companies if they: • Support waste stream management through a comprehensive plan for recycling industrial waste with special attention to the waste streams of target industries • Support water resource management through codes and local practices that limit the use of potable water, natural surface, and subsurface water for irrigation through best practices for landscape design and maintenance, including plant species, irrigation efficiency, use of captured rainwater, and recycled wastewater • Support water use reduction by encouraging best practices including water efficiency within buildings to reduce the burden on municipal systems, use of recycled gray water, and water-efficient appliances • Support on-site renewable energy through building codes that allow installation of photovoltaic, wind, solar thermal, bio-fuel, and geothermal systems • Invest in a modern power grid that supports the latest technologies in energy management and on-site cogeneration

Human Capital Development

Sustainable organizations place high importance on nurturing human resources, often through a sophisticated process of skill mapping and work force development. Communities are more attractive if they are aligned with company human capital needs including: • Local resources supporting personal and organizational learning, including modern and well-funded work force training geared to targeted industries • Local work force characterized as being loyal to employers, with a strong work ethic measured both anecdotally and by metrics like voluntary and involuntary employee turnover • Community reputation for a diversified and harmonious work force at all skill levels • Professional and well-funded jobs-retention program actively engaged with local employers

Talent Attraction and Retention

Attraction and retention of talented people are now the most cited factors in corporate location decisions. Of course, a company’s ability to retain and attract talent depends, in part, on the attractiveness of the job and company. But community plays a role. Sustainable companies are best-served by communities that are attractive places to live and work. Sustainable communities should exhibit: • • • • •

Healthy downtown business districts Land use planning that encourages wise use of resources and supports overall community health and attractiveness Reuse of brownfield properties, sites, and buildings Clean and well-maintained public spaces, community-wide programs for landscaping Resources devoted to promoting healthy lifestyles including ample investment in park and recreation facilities, biking and walking trails, and sports facilities • Public transportation • Arts and entertainment community including festivals, artist groups, public art, and performing arts programs Corporate Citizenship and Philanthropy

Community Culture: Select communities that align with corporate giving policy. The right mix of nonprofits, foundations, and other local cultural assets will make local giving easier and reinforce the bonds that make for sustainable company/community relationship

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analyzes corporate sustainability profiles using a trademarked Corporate Sustainability Assessment (CSA) methodology. The methodology includes industry-specific questionnaires with as many as 120 questions focused on economic, environmental, and social factors. According to DJSI Diversified, “The questionnaires include factors that are relevant to a companies’ success but that are under-researched in conventional financial analysis.” The DJSI Diversified family covers

26 developed market and 20 emerging market countries for 24 separate industries. Several thousand companies are regularly assessed with a special focus on the latest industryspecific risks and opportunities. Among the recognizable names on the 2013 DJSI Index are Volkswagen, Siemens, Panasonic, Citigroup, Nestle, Abbott Laboratories, AkzoNobel, Alcatel-Lucent, and Air France-KLM. The analysis clearly shows that companies that follow

LABOR PAINS?

business practices recognized as triple-bottom-line-focused cast a different profile when compared to traditional companies (Figure 2).

Sustainable Location Selection As a business practice, sustainability is still seeking definition; this is no more evident than in the rules for selecting sustainable locations. Best practices for selecting sustainable locations are just now emerging. Under sustainability’s triple-bottom-line, rules for location selection arise from the palette of policies, procedures, and resources that constitute a business organization — broader than the palette from which conventional location criteria are derived. Many palette elements have location correlates. For example, the unencumbered operation of corporate facilities demands a reliable and predictable operating environment. For a corporation to manage against a risky and constantly morphing business landscape, corporate facilities, and the communities in which they operate, must work harmoniously. Corporate managers require a sustainability-filter through which location strategy and community/property alternatives pass prior to a final decision. Figure 3 presents filter elements that are part of a broad sustainability assessment of location.

Sustainable Communities Breed Success Globalization offers new opportunities for corporate growth and stability, but also brings increased risk for failure. Companies that successfully translate these challenges to their advantage can expect to outperform their peers in the future. Companies that measure performance along the triple bottom line — society, environment, economy — are destined to be better equipped for the journey. Companies following a sustainable business management strategy can expect their facilities to run more efficiently with less disruption over a longer period of time. Success, of course, requires that the locations selected for these facilities are chosen for their ability to meet sustainability’s more demanding requirements.

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By Steve Stackhouse

PUBLIC POWER COMMUNITIES: FUTURE-FOCUSED America’s public power communities are places where local governments and other public entities have taken charge to deliver services their communities need to prosper. t was the late 1800s. Electricity was capturing the attention of a lot of Americans, but for most people, large-scale transmission systems bringing power to businesses and homes were more a dream than a reality. Still, there were some forward-thinkers who knew that electric power was the way of the future and took steps to make it happen. Some of those forward-thinkers lived in the small community of Lafayette, Louisiana. They put a measure on the ballot in 1896, asking property owners to allow a municipal utility to build an electric system and a water system. When the ballots were counted, 100 percent of the voters gave a thumbs-up. Construction began the next year. “Lafayette had a 30-year head start, and that was very beneficial,” says Terry Huval, director of Lafayette Utilities System. Thanks in part to the fact that it had power three decades earlier than many neighboring communities, the city attracted a university and enjoyed healthy growth. A little more than a century later, history repeated itself in Lafayette, with a different technology. “In 2005, we had an election to get into the telecommunications business, providing fiber,” Huval says. “We wanted to provide fiber to the home — it was to provide the infrastructure of the future. By having fiber there, it gives you an advantage.” Lafayette is just one community, but it provides a great

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illustration of the forward-thinking mindset that led many American municipalities into the utility business. In some cases, local leaders got a glimpse of the future and worked to bring it to their communities ahead of the curve. In other cases, they found that the profit-driven business model that works so well in much of the American economy had left them behind when it comes to certain kinds of services. The fruits of these local efforts are America’s public power communities — places where local governments and other public entities have taken charge to deliver services their communities need to prosper. As the Lafayette example illustrates, “public power” may be just part of the services these municipal utilities provide. Many are also in the business of water and sewer service, some provide natural gas, and an increasing number are venturing into broadband communications — from highspeed Internet to telephone to cable television. The small community of Chanute, Kansas, is another example. About 9,100 people live there, and local leaders were concerned about poor access to advanced Internet services. A bit more than a decade ago, the city was rebuilding the broadband network it was using to control its power system, “and we overbuilt it because of the lack of broadband in our community,” says Larry Gates, director of utilities. “We really wanted to connect the anchor institutions in our community.” A few years later, Chanute was in the Internet business, offering gigabit fiber as well as Wi-Fi and WiMAX services, and anchor institutions were quick to take advantage of the technology. The local hospital now uses it for practicing telemedicine, Gates says, and the local community college has had such success ramping up online study opportunities that it now ranks among the nation’s five fastest-growing community colleges. A BOOST FOR BUSINESS Needless to say, governmental and educational users aren’t the only ones eager to plug into broadband. “Broadband is an essential element for industry,” says Joe

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King, city manager in Danville, Virginia. “We were finding a decade ago that telecommunication providers were doing a satisfactory job with basic needs, but if someone needed more than a T1, the utilities were not providing the services needed by companies. That’s why we stepped in.” The city’s broadband network is called nDanville, and it works hand-in-hand with private partners to bring advanced technology to businesses and residents alike. It’s very much an economic development matter, King says. “We are using broadband to help attract new business.” Publicly provided broadband is, in fact, an important element as Danville works to build a stronger local economy. As with lots of communities in that part of the country, Danville’s economy had for generations been driven by textiles, tobacco, and furniture manufacturing — industries that were shrinking dramatically. Through the years, the city lost some 12,000 jobs, and it

“PUBLIC POWER” MAY BE JUST PART OF THE SERVICES THESE MUNICIPAL UTILITIES PROVIDE.

needed to transition to a new and different economy. “Having the municipal government make broadband available has made it possible to attract companies that consider broadband to be essential to their business,” King says. A dramatic illustration of the transformation into the future is the Noblis Center for Applied High Performance Computing, which set up operations in Danville and plugged into nDanville as a secondary broadband link to its other locations. “That would never have been possible if we had not been able to provide the service to them,” King observes. The interest in Danville has been global, he adds, including companies from such places as Poland, Japan, and India. Affordable access to the most advanced broadband services can really make a difference for fledgling companies, King says, and his community is proving to be attractive to up-and-coming businesses. “We’re dealing

When it comes to successfully expanding or relocating your business,

Nebraska’s low energy costs, central geographic location, and high-quality, low-cost workforce SURYLGH VWUDWHJLF DGYDQWDJHV IRU \RXU EXVLQHVV 7R ÀQG RXW KRZ WR KDUQHVV 1HEUDVND·V power, contact the economic development professionals at Nebraska Public Power District.

econdev.nppd.com 800.282.6773, ext. 5534 econdev@nppd.com

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Public Power:

MESSAGE FROM THE APPA CHAIR

A RockSolid Business Partner Public power has been beneficial to economic development efforts across the U.S. for a long time. There are more than 2,000 public power utilities serving major metropolitan cities to small rural towns and villages across the country — most are members of the American Public Power Association (APPA). Each of these utilities takes enormous pride in serving its respective community. For businesses, that translates into electricity that is delivered with unmatched reliability and as economically as possible. I’ve had the pleasure of serving in the power industry for more than 40 years on both sides of the coin: at for-profit, investorowned organizations and, for the last decade, in the public power sector. And I can tell you this: The public power business model is as good as it gets. One aspect that makes public power special is local control. Each public power utility exists solely to serve the businesses and residents in its community. Each local business and resident has a voice in how its respective public power utility is operated. Each customer knows exactly whom to call if he has questions, concerns, or simply wants to keep in touch with his public power partners — after all, the public power utility is most likely located just down the street. That’s a far cry from being served by a somewhat faceless investor-owned utility most likely located in another city or perhaps even another state. I encourage businesses to be involved with their local public power utility — attend the meetings, drop in and simply say “hello,” and learn more about its economic development benefits as well as the challenges and issues of your local public power utility.

J. Gary Stauffer, 2013-14 Chair of American Public Power Association Executive Director, NMPP Energy

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with small entrepreneurs starting businesses that need broadband,” he says. “In the last five years we’ve attracted 15 new industries that are growing nicely.” These kinds of examples underscore one of the pluses of picking a location in a public power community: All of the players are on the same page, with interests in full alignment. The local utility is not just there to provide electricity or water or broadband — it has a powerful interest in the success of local businesses, because those with ultimate oversight of the utility also are responsible for growing the business base, creating jobs, and fostering prosperity in the community. The utility does not exist to turn a profit for itself, but instead has a strong desire to help its customers turn a profit, all the while building a healthier busiTHE PUBLIC ness environment and creating a better quality of life. POWER One of the companies that picked a Chanute location and COMPANY plugged into that community’s HAS A broadband network found that the technology met some of its POWERFUL needs better than what was available at one of its other locations, INTEREST IN in a large metropolitan area. So, THE SUCCESS Gates says, the company moved its computer servers to Chanute. OF LOCAL The utility’s future-focused mindBUSINESSES. set was beneficial for a local employer, and that became a positive for the community. That’s how things work in public power communities. IT’S AN ATTITUDE, TOO Companies looking for attractive locations certainly appreciate such benefits as state-of-the-art broadband, as these communities have found. But the efforts to establish that technology can yield some less tangible but equally important value, too. They say something about the character of public power communities and the decision-makers leading them. There’s a “can-do” attitude that many site selectors find appealing. Consider the example of the broadband push in Lafayette, Louisiana. It took a lot of perseverance to make it happen, because there were powerful forces aligned against the effort. Incumbent providers were not thrilled

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Chattanooga on their short lists of possible homes. The to see a municipality entering their line of business, and technology is attractive, advanced, and affordably priced; they fought the initiative in court. and the city’s pursuit of the technology set a tone that has “The fight we had to go through was a big thing. It took us appealed to business owners. The newspaper put the spotgoing to the state Supreme Court,” Huval recalls. “One comlight on Toni Gemayel, who heard about the Internet servpany was looking to locate here, and the owner of the comice and decided to move his software startup from Florida pany said he chose Lafayette because he thought a city progressive enough to move forward to put this infrastructure in place was the kind of city he wanted for his business.” Danville, Virginia, followed a differBLUEPRINT FOR SUCCESS: Economic Development Solutions in North Carolina ent business model that put it in partnership with private-sector providers. “We decided to create an open access system,” King says. The city makes the broadband connection to customer locations, but the Internet and telecom services carried on the network are provided by private companies. Gates has been fighting legislative battles, meanwhile, against proposed North Carolina’s Public Power communities are among state legislation that would potentialthe best places in the country to live and do business. ly outlaw the type of community ElectriCities’ seasoned, experienced Economic installation that Chanute has developed and wants to expand into resiDevelopment staff is dedicated to helping these dential areas. The bill emerged not communities continue to grow and prosper. From site long after Chanute’s City Commission selection to targeted recruiting to grant assistance and voted to work toward “fiber to the marketing, we’ve got all the tools and expertise home” access, and it sparked a furor that reached national technology you need to successfully develop your business. trade publications. The fate of that legislation is not yet clear, but Gates has warned, “It will kill Brenda Daniels our economic development efforts.” If Manager, Economic Development his fight is successful, though, it will 800.768.7697, ext. 6363 bdaniels@electricities.org offer one more example of the spirit www.electricities.com that public power communities bring to the task of providing services vital to citizens and businesses. That spirit recently caught the attention of The New York Times, which traveled to Chattanooga, Tennessee, to learn more about the municipal broadband initiative there. Chattanooga likes to call itself “Gig City,” in honor of its taxpayer-owned fiber network that was one of the first of its kind and scale. That development turned a lot of heads, and persuaded tech-savvy entrepreneurs and workers to put

Proven, comprehensive economic development solutions in North Carolina.

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to Chattanooga. “People here are thinking big,” he told The Times, and city leaders believe their technology has created at least a thousand jobs in the past three years. WHY PUBLIC POWER? The story of public power in Lafayette, Louisiana, illustrates why a lot of communities got into the power business years ago. Though there are some very large American cities that have municipal utilities, many public power communities are small, and because their needs were not being met by other providers, they took matters into their own hands. Their relative size is apparent when you consider that there are about 2,000 publicly owned utilities and just fewer than 200 investor-owned utilities, but more than two thirds of the nation’s customers are served by that relatively small number of investor-owned utilities. Another way to look at that statistic is to realize that the owners of public utilities — generally local govern-

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ments — are by definition close-to-home. The people in charge of the utilities, as well as everyone from line workers to account representatives, tend to live in or near the communities they’re serving, and that helps them be especially responsive to the needs of their customers. That proximity is also helpful when there are outages, as the workers who fix problems can be onsite promptly — the result is that public power communities tend to have high reliability statistics. One of the most important distinctions is the lack of a profit motive. There are no private investors who are expecting a share of the profit. In a public power community, rates can thus be held to a minimum, and any operating margin can be reinvested in the community. Don’t confuse small with unsophisticated, though. As these stories of broadband service suggest, even small communities are doing impressive things, technologically speaking. They’re also out in front when it comes to

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Chattanooga likes to call itself “Gig City,” in honor of its taxpayer-owned fiber network that was one of the first of its kind and scale.

sophisticated environmental issues. Consider Nebraska, a fully public power state where local utilities are served by the Nebraska Public Power District. NPPD has a goal that by 2020, at least 10 percent of the power it provides will be from renewable sources, and it’s getting there in a number of ways. It operates multiple wind farms, such as the 80-megawatt Elkhorn Ridge and Laredo Ridge farms. NPPD also notes that the public utilities in Nebraska have contracted to purchase more than 100 megawatts of hydropower from various sources.

Other states and regions have their own cooperative efforts that help municipal utilities thrive, provide attentive service, and offer attractive rates. ElectriCities, for example, serves public power utilities in North Carolina, South Carolina, and Virginia. It’s all about building economies of scale and allowing public power communities the best of all worlds — hometown flavor but collective access to technical expertise, economic development services, energy-efficiency offerings, and a wide range of other programs.**

SPONSORS NEBRASKA

NORTH CAROLINA

TEXAS

NEBRASKA PUBLIC POWER DISTRICT (NPPD)

ELECTRICITIES OF NORTH CAROLINA, INC.

NPPD is Nebraska’s largest electric utility, with a chartered territory including all or parts of 86 of Nebraska’s 93 counties. NPPD owns and operates 7,800 miles of overhead and underground power lines, and uses a diverse mix of generating facilities to meet customers’ needs. NPPD and public power utilities work with their local, regional, and state economic development organizations to position communities and regions for economic growth, to assist with the expansion and retention of existing industry, and to attract new businesses.

ElectriCities is a not-for-profit government service organization representing 70+ N.C. cities and universities that own electric distribution systems. A site selection professional can receive detailed reports from our extensive databases on dozens of N.C. sites, from mountains to coast, within 48 hours of a request. We’re your turnkey services partner.

SAN ANTONIO ECONOMIC DEVELOPMENT FOUNDATION

Rick Nelsen, CECD, ECONOMIC DEVELOPMENT MANAGER NEBRASKA PUBLIC POWER DISTRICT 1414 15th Street P.O. Box 499 Columbus, NE 68602-0499 402-563-5534; 800-282-6773 Fax: 402-563-5090 econdev@nppd.com www.econdev.nppd.com

Brenda Daniels, MANAGER, ECONOMIC DEVELOPMENT ELECTRICITIES OF NORTH CAROLINA, INC. 1427 Meadow Wood Blvd. Raleigh, NC 27604 1-800-768-7697 ext. 6363 Cell: 919-218-7027 bdaniels@electricities.org www.electricities.com

San Antonio has a “culture of business” that includes pro-business leadership, solid growth, abundant work force, land, and affordable energy that attracts diverse industries and job-producing investments to the city. Learn why 100 companies in six years have chosen to partner with SAEDF and San Antonio’s collaborative business community. Tom Long, EXECUTIVE VP OF BUSINESS RECRUITMENT SAN ANTONIO ECONOMIC DEVELOPMENT FOUNDATION 602 East Commerce St. San Antonio, TX 78205 210-226-1394 Fax: 210-223-3386 tlong@sanantonioedf.com edf@sanantonioedf.com www.sanantonioedf.com

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Vital. Useful. Updated Daily. The best information on site selection and facility planning available online • Current News: Real estate & industry news, and economic indicator reports updated throughout the day • Valuable Resources: Tax and incentive information, development contacts, and insightful surveys • Latest Studies, Research, White Papers: Aggregated from the top consultants, think tanks and institutions, and distilled into usable information • Reviewable Archives: Search the Area Development archives for content, opinion, and reports spanning the last five years from the top industry minds

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Providing What Others Don’t

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TAX/ASSET MANAGEMENT

Tax Technology: Creating a Strategic Asset A tax technology strategy will enable a company to align with the company’s business priorities, tax function strategy, and enterprise technology investments. By Todd Bixby, Tax Technology Leader; and Michael Burak, Industrial Products Tax Leader; PwC

hen it comes to effectively adopting and enabling tax technology initiatives, where do industrial manufacturing companies and other leading organizations stand? What strategies are businesses employing to help their tax departments not only derive the greatest benefit from available technology, but also actually transform the tax function to drive more value for the organization? To identify leading practices, baseline technology use, and general challenges in tax technology, PwC and the Manufacturers Alliance for Productivity and Innovation (MAPI) recently surveyed more than 280 companies with a nearly 36 percent response rate to learn: • How manufacturing and other companies assess their tax technology environment; • What approach tax executives are taking to decide which software to use within the tax department; and • How tax departments evaluate satisfaction with their chosen technology products. Survey respondents said they largely view technology as a key to enhancing quality and increasing efficiencies. Nearly 85 percent said improved technology and integration would increase their tax effectiveness. Surprisingly, though, most respondents — 77 percent — said they do not have a tax technology strategy in place. More than 75 percent said they do not have a dedicated tax technology role within their organization. Additionally, a majority of respondents indicated it was

a challenge to take advantage of current enterprise technology. Why the apparent disconnect? Why are so many companies hesitant to fully embrace tax technology initiatives? Manufacturing companies and other organizations mostly agree on the value of instituting a tax technology strategy, which outlines a company’s plans for implementing and utilizing technology to enable tax operations. A tax technology strategy helps the tax department outline a multiyear roadmap that articulates the projects that need to be undertaken in a prioritized and integrated fashion, along with the value propositions to drive alignment across the company. This allows a tax department to align with the IT budget process and any

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enterprise programs that might be under way and more effectively leverage enterprise investments in technology. For example, if a financial transformation project or ERP (enterprise resource planning) implementation is being executed, the tax department can take advantage of the functionality to improve the tax operation with very little additional investment. It also enables the tax function to better evaluate its existing tax processes to identify areas for improvement and align the best solutions to support those processes. Creating and executing a tax technology strategy requires focused resources, with support from key stakeholders, including those in tax, finance/accounting, and IT; a tax technology lead to coordinate data collection, reporting, and technology needs, and directly link with other organizations; and an internal sponsor of the initiative who will disseminate the strategy, win leadership support, and implement the resulting tax technology strategy. Once a strategy and roadmap has been developed, it becomes a living document that needs to be managed, updated, and assessed regularly to become a rolling view into the tax function, not unlike an IT strategy is reassessed periodically to adjust for shifting priorities.

icant time and resources to the routine task of gathering data to perform tax-specific functions and having highly experienced tax professionals doing data preparation work, instead of true tax and tax planning work. With the resurgence of financial transformation projects, including new implementations and upgrades of ERP systems, there is an opportunity for tax departments to leverage these investments to make improvements in the tax function. While 85 percent of respondents said they leverage an ERP solution, they report that it is frequently not being leveraged to the fullest extent for tax. Most companies said improving “tax-sensitive” data would improve the efficiency and effectiveness of the tax provision and compliance software. Consequently, data integration and tax-sensitizing data are viewed as areas that can make the greatest positive impact on tax, and the trend is to focus on tax data sensitization and integration across tax/finance functions. While dedicated tax technology tools remain the primary vehicles for provision and compliance, more than 62 percent of respondents said they continue to use spreadsheets as their provision tool. Better data and solution integration would drive improvements in provision and compliance efficiency, according to 85 percent of respondents. This finding further supports PwC’s experience that automating the data feed into a provision or compliance tool from a common data platform significantly reduces the data load process and related variances and errors. 2. Document management: How can a company more efficiently manage its files and minimize time spent managing data and documentation — a task that seems to take an inordinate amount of time within the tax function? One way companies are improving in this area is by establishing centralized document management solutions to store and manage critical tax documents, including work papers and deliverables. An overwhelming majority of respondents — more than 90 percent — reported their document management relies on shared drives and email. Most said implementing a document management system is a high priority in the tax roadmap, and more than half have a tax portal or plan to implement one that could be leveraged for document management. By taking such an approach, an organization can drive improved quality of information, by way of faster access and increased consistency. This strategy can result in improved quality of the data underlying tax work products, increased retention of institutional knowledge, easier lever-

Once developed, a tax technology strategy and roadmap becomes a living document that needs to be managed, updated, and assessed regularly.

Twenty percent of survey respondents said they experienced either a significant deficiency or a material weakness related to tax within the past three years and said enhanced technology or data would have helped them avoid a significant deficiency. In addition to having a tax technology strategy and roadmap, there are five technologies (most likely to appear in that roadmap) that would most positively impact the tax department’s work, based on the survey findings and PwC’s experience in tax and technology. They are: 1. Data integration and ERP: Until recently, most of the focus on tax technology has been on implementing tax point solutions such as compliance, provision, or indirect software. Unfortunately, this approach has continued to support an environment with disconnected or siloed solutions void of data or process integration. Additionally, complex spreadsheets are being used to do a tremendous amount of tax calculations and are the de facto standard for reporting. In the end, finance data and systems have not been tax sensitized for the needs of the tax department; thus, significant manual data gathering and reporting needs to be done to get the right level of data to support the tax function. These deficiencies drive tax departments to devote signif-

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Which technologies will most positively impact the tax function?

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age of nontraditional resource models (shared services, remote, etc.), and improved support of other tax functions, such as controversy. A reduction in collection and manipulation efforts can improve staff efficiency — freeing employees to perform higher-value, tax-specific tasks. 3. Workflow: The automation of tax processes — flexible workflows, notifications, electronic signoffs, and status tracking — is a chief component of effective process management. By documenting tax processes, identifying those needed to participate in each task, and instituting a standard approach to triggering and managing the handoffs, a company can more effectively carry out tax activities. Among the benefits of workflow are improved internal controls, a clear definition of how to perform critical tax processes, management of dependencies on non-tax stakeholders (accounting and third-party tax providers), minimized recurring rework, and increased collaboration and sharing of tax documents across tax and finance. More than 25 percent of respondents said they have workflow tools, but only 9 percent use those tools. That leaves tax departments much room for improvement when it comes to enhancing process and workflow management and potentially decreasing process execution time. Integrating workflow and document management solutions can create even more efficiencies. 4. Reporting and forecasting tools: Tax reporting and forecasting capabilities enable actionable dashboards and reports that help tax management identify critical trends and cycles that may trigger change in business process or identify new insights into tax strategy. This makes tax data a strategic information asset and allows tax to become a more integrated business partner within the organization. Despite this opportunity, only a small minority of survey respondents reported spending significant time on data analysis — likely due to greater focus on data gathering and segregated processes. Using reporting and forecasting tools in a common, integrated tax data environment, a company can improve

analytics and KPI (key performance indicator) analysis. It is able to measure specific tax items for filing and comparison purposes as well as measure the cross-functional value of the tax function. Additionally, it can produce more advanced analytics, such as demonstrating the cost saved by using an optimized transfer pricing strategy rather than maintaining the status quo. An organization can also improve its forecasting accuracy and usefulness by improving access to information and spending less time collecting and manipulating that information. Additionally, focus on increasing visible value can lead to greater staff satisfaction, which can in turn improve staff retention. 5. Data warehouse/data mart applications: Many companies still have disparate places where they store data and tax calculations. This can lead to inefficiencies within the tax function. Creating a solution to centralize all relevant tax data — a tax data warehouse or data mart, for example — is sometimes necessary to achieve the efficiencies noted earlier. Additionally, software, hardware, and other enterprise programs can often be leveraged to accommodate this need.

Options such as these allow for more efficient data sharing, and faster access and increased consistency, which can improve the quality of the data underlying tax work products.

In Sum Companies largely understand the importance of creating strategies around tax technology and pursuing related initiatives. However, many have not made appropriate investments in these five areas that can play an integral role in transforming tax into a strategic business partner within the organization. As such, tax leadership should engage with company leadership and commit to the next steps in the evolution of its tax function and lay out a three- to five-year tax technology roadmap that aligns the business priorities, the tax function strategy, and the enterprise technology investments. Michael Burak is a tax partner and serves as PwC’s U.S. and Global Industrial Products tax leader and Global Chemicals Industry tax leader. Todd Bixby, partner, is the tax technology leader within PwC’s Tax Reporting and Performance Improvement practice.

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