Foreign Direct Investment

Foreign Direct Investment—Selecting a U.S. Location

The continental United States covers almost three million square miles of variety in geography, weather, cultural norms, labor postures, governmental reach, energy costs, educational systems, tax structures and many other factors. Deciding to locate to the U.S. market requires full understanding of the implications, advantages and challenges of regions, states and even cities and towns within states. A structured, phased approach is needed to establish the right criteria and select the ideal location.

Companies often begin their journey to the U.S. with the idea that they are simply placing a factory on a site that will mirror their experience at home. Achieving desired production rates, quality and cost targets are achievable, but the formula for how these goals are met requires focused exploration.

For companies contemplating locating a facility in the U.S., each of the following factors must be considered and their relative importance (weight) established.

Workforce

Workforce may be the most critical factor in the site selection process today. The availability of sufficient numbers of qualified individuals cannot be assumed in any market in the U.S. In the current competitive environment, every potential location is somewhat challenged and many face wage pressures. The two key factors are market demographics (numbers of potential employees in terms of skills, education and experience that will staff the facility initially) and the availability of training programs for entry-level and advanced skill requirements for staffing the facility over the long-term.

Project Design

U.S. design and construction methods can vary from other international locations. It is important to establish accurate capital costs prior to project commitment. Selecting planning, design, procurement and construction resources early in the process that understand how to accurately translate technology and building requirements to U.S. standards can lower cost and schedule risk considerably. Having the right facility layout in mind early, will ensure you look for the correct property in terms of size and infrastructure versus getting further in the process and having to adjust based on changes to design.

Infrastructure

The transportation infrastructure of the U.S. includes a national system of highways (interstates) and a large network of commercial and private airports along with a far-reaching rail system, particularly for freight. An extensive network of deep water ports for imports and exports covers the coasts of both the Atlantic and Pacific oceans and the Gulf of Mexico. Additionally, ensuring adequate capacity for required utilities such as electric, natural gas, water, wastewater, and telecommunications services are important considerations.

Logistics

Logistical operating costs can be a large factor in whether a location is suitable for a new facility. It is important for the company to identify where raw materials will originate and locations of key customers. Access to highways, rail, ports, and airports may be critical project drivers depending on the project. Choosing a poor location in terms of logistics will have a long-term effect on the success of the project.

Property and Building

Typically, the site selection process involves reviewing multiple regions or counties to determine the best options based on the various project criteria. Available land or existing buildings become part of that evaluation. Making the best selection is critical to having long term success at a new location. When acquiring land, site development and infrastructure costs, availability and capacity of utilities, transportation infrastructure, zoning and permitting requirements are all analyzed. In the case of reviewing an existing building, costs to modify to meet its intended purpose, meet International Building Codes (IBC) and or local specific codes, fire protection requirements mandated by code and U.S. Insurance underwriters, permitting requirements, ability to expand and potential issues in construction are all considered.

Energy

While overall energy prices in the U.S. are considerably lower than Europe, costs vary widely depending on the region within the U.S. Providers may be private or public, they may be local or regional or part of a larger network. It is possible to choose providers in some locations while other areas offer only one option. Rates are typically set based on volume and long-term contracts and can be negotiated in most areas. Energy costs based on planned requirements should be established during the selection process.

Taxes and Regulations

Taxes vary widely across jurisdictions in the U.S. (state, county, city, town). A new company needs to understand which taxes are applicable for the project and the associated rates. Tax rates include income, property, franchise, and sales taxes along with import duties and other fees. Some tax relief may be negotiated as part of incentive negotiations.

Quality of Life

Foreign direct investment is an important source of capital investment in many U.S. states. According to Select USA, foreign direct investment exceeded $6 trillion in cumulative investment by the end of 2017. Employment by foreign firms approaches 10% of total employment in some states. Foreign direct investment is welcomed by states and the understanding of the needs of foreign nationals relocating with new investment are more widely understood than in previous decades. It remains important to understand how individual communities work with foreign direct investment to understand and accommodate cultural, educational and other customs.

Incentives

Companies without a full understanding of the criteria that drive the site selection process often think incentives are the key to selecting a location. To use an American expression, incentives are “the icing on the cake.” Underneath the icing is the foundation of the cake, the right mix of ingredients to create the desired result. To increase their appeal as an economic location, states, counties and municipalities offer incentives when the project meets certain requirements to qualify. Incentives can manifest as tax deductions, tax credits, loans, investment allowances, payment of site infrastructure or the provision of property. Incentives can also come in other forms such as cost avoidance with training programs or expedited permitting. Although not the lone deciding factor concerning site selection, incentives can have a significant impact on project cost.

The Next Step

Often, we see international manufacturers invest insufficient time on the project planning and conceptual design phases of their project. They assume they can operate and produce their products without modification from existing location(s). Depending on the actual operations, the materials used, code requirements, building features, and manufacturing environment can cause surprises down the road. Rushing to look at potential sites without understanding the true site and manufacturing impacts and requirements can cause extended schedules and unnecessary surprises that increase the cost to build or operate. This step is not a lengthy or costly effort, and in most cases, can be completed within 1-2 weeks given the opportunity to understand the manufacturing goals and requirements for the new venture.

Selecting an experienced partner to provide planning, design analysis and scope management can reduce potential risk and optimize plant start-up and ongoing operation. The site selection process and the management of technology transfer to U.S. standards should complement each other and provide checks and balances that assure the best outcome.