Figure 1: Motor Vehicle Parts; Manufacturing Establishments by County — 2010. (Source: U.S. Bureau of Labor Statistics.)
By Mark Williams
From the May/June 2013 issue
This year and 2014 are expected to be positive years for growth of the automotive supplier base in the Central and Southern U.S. Demand for automobiles is increasing to pre-recession levels with annual vehicle production projections for 2013 reaching just over 15 million units. Automotive Original Equipment Manufacturer (OEM) production increases and the prospect of further establishment of new OEM facilities in already supplier rich geographic corridors are expected to drive significant expansions and green field locations for OEM suppliers. Anticipating increased supplier site locations, it is important for supplier executives to implement site searches that consider key location factors that generate locations optimizing operational and financial success.
GROWTH OF THE CENTRAL SOUTHERN AUTO CORRIDORS
The last 30 years have brought significant locations of automotive facilities in the central and southern U.S. resulting in a concentration of OEMs and their suppliers in the region as shown in Figure 1 (above, right) and 2 (below). A critical feature of the growth of OEMs during this period has been the major influx and expansion of “foreign transplants” to the central and southern US including Honda, Nissan and Toyota, Subaru, Hyundai, Kia, BMW, Mercedes and VW. Before Nissan’s location of an automobile manufacturing facility in Smyrna, Tennessee in 1983, there were no automotive manufacturing facilities south of Kentucky. Currently, BMW is the only foreign transplant to set up operations east of the Appalachian Mountains.
Figure 2: Vehicles Sold, 2004 — March 2013. (Source: Bureau of Economic Analysis.)
Automotive suppliers have located proximate to existing and newly located OEMs to bolster logistics advantages, business climate advantages and other synergies. Figure 1, which shows the 2010 density of motor vehicle parts manufacturing establishments by county, shows a distinct concentration of firms in the central and southern US.
In terms of total OEM and supplier job concentrations, Michigan, Indiana, and Ohio, respectively have the highest concentration of automotive related employees. Table 1 lists the top ten state concentrations of automotive employees, as well as the number of supplier companies and jobs.
Table 1: Recently Announced OEM Expansions.
The Recession of 2008-2010 was particularly difficult for both OEMs and their suppliers. During the 2008-2009 period, annual U.S. light and heavy duty vehicle sales plummeted at an annual rate exceeding 20 percent; total vehicle sales dropped to roughly 10.5 units in 2009 as shown in Figure 2. In concert with the recession-fueled decline of vehicle sales, automotive supplier production capacity and employment also dropped rapidly during the Recession. The reduction in supplier capacity during the recession left a production capacity deficit when the automotive recovery began in 2010. The tire industry provides an excellent example of this void and the need to quickly fill it with the onset of recovery. During the Recession, the tire making industry reduced capacity significantly but, since the third quarter of 2011, Bridgestone, Continental, and Michelin have all announced significant expansions and new tire projects while other passenger tire makers are reportedly considering site location projects.
OEMS, SUPPLIERS TO EXPAND
As the recovery continues, the average age of vehicles has increased to an all-time high of 13 years; numerous existing OEMs have announced additional production at their facilities. This projected OEM growth continues to be focused in the central and southern corridor and is expected to result in the creation of approximately 5,900 new jobs. It is also rumored that Tata and Nissan may also be considering the location of new production facilities. All of these indications of expanded OEM production point to increased site location activity for suppliers.
Given overall recovery, the clear intent of OEMs to expand existing facilities and likely build new facilities; OEM suppliers are considering new and expanded locations with increasing frequency. Suppliers will also consider the most basic elements of site location as the attempt to find new locations that optimize operational efficiency and financial return.
As suppliers gear up for expanded production footprints, it is important that they consider the following key elements of site location analysis:
1) Site Characteristics
Site utilization for automotive suppliers from a feasibility, cost, and developmental risk perspective is typically driven by confirmation that the following location criteria are satisfied:
Size, shape, topography and room for future expansion; site buffer should provide protection from residential and commercial neighbors. Industrial parks often provide good locations for multiple users with similar buffer and utility requirements.
Elevation and risk of flooding.
Geotechnical status including bearing capacity and verification of seismic risk and water table elevation.
Environmental status typically verifying wetlands, if present, will not inhibit construction footprints and that ground contamination from previous users or other sources does not exist; the absence of endangered species and archeological remnants should be verified.
Site access confirming acceptable ingress and egress for employees, inbound raw materials and outbound finished product.
2) Proximity to OEMs, Suppliers
Given the current concentration of automotive original equipment makers (OEMs) and series of recent announcements of new car manufacturing capacity shown in Table 1, a key site selection factor for automotive suppliers is proximity to their upstream customer. This is the OEM for Tier 1 automotive suppliers. A common location strategy is to locate proximate to multiple customers along interstate access.
3) Availability of Utilities
Availability of reliable and reasonably priced utilities is important for supplier locations. Special consideration should be given to verifying utility capacities (water, sewer, gas, electricity and telecommunications) that meet near-term and expansion requirements. Many facilities may also require redundant sources of utilities.
4) Labor Draw
Automotive suppliers are becoming increasingly capital-intensive, applying more capital investment per employee hired. The availability of a workforce capable of performing in this increasingly capital-intensive and technology-driven environment is critical to success. Employees must possess a positive work ethic and a focus on quality, safety and productivity. Labor draw typically does not recognize political jurisdiction boundaries.
5) Disaster Risk
Risk of hurricane, earthquake and tornados; other potential natural and man-made risks such as proximity to high-speed rail lines should be analyzed.
6) Business Climate
Key elements of a positive business climate include:
Support of manufacturers by local citizens and the political and business community
A business and political community that does not support labor union activity
Acceptance of foreign firms and local support for cultural and educational activities
Proximity of educational institutions that support manufacturers that compete on a global basis
7) Start-up and Operational Costs
Critical to projecting profitability and accurate rates of return is a thorough understanding of all project costs. Example costs include land acquisition; site preparation; geotechnical or environmental remediation; utilities; drainage and transportation infrastructure; permitting and tap fees; construction costs.
8) Value of Incentives
Incentives are an important and often complicated topic for automotive supplier executives. State, local and utility incentive packages are often complex and it is critical to conduct a professional analysis to verify which incentives offered have value and which may not. It is also important to understand the costs associated with incentives; typical analysis tools include Net Present Value (NPV) and Internal Rate of Return (IRR).
ANALYSIS AND RATING OF AUTOMOTIVE SUPPLIER SITES
Critical to an informed site selection decision is the rating of key site location factors in a manner that highlights the relative strengths and weaknesses of each site. Figure 3 (below) shows a hypothetical spider diagram typical of that used by the author to generate relative ratings of two short-listed sites. For this example, Site A has a total score of 69 and Site B has a total score of 59; key relative strengths of Site A include labor draw and startup and operational costs.
Figure 3: Hypothetical Auto Manufacturer Short-Listed Site Location Comparison.
With continued projected growth of U.S. motor vehicle production, significant site location opportunities exist for OEM and supplier expansions, and new locations, in the central and southern US that optimize operational and financial goals.
Site location analysis is a complex process that requires consideration of key site location factors and development of rating systems to compare sites and generate input data to be considered by automotive supplier site search teams. Although specific site location factors vary based on the specific needs of a project, key factors typically include site attributes, site access, supplier and customer logistics, business climate, costs and incentives.
Mark Williams is President of Strategic Development Group, Inc. (SDG) a professional firm that specializes in providing site location and negotiation services.
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