FACTORS YOU SHOULD CONSIDER WHEN RELOCATING A COMPANY HEADQUATERS OR A MANUFACTURING FACILITY

FACTORS YOU SHOULD CONSIDER WHEN RELOCATING A COMPANY HEADQUATERS OR A MANUFACTURING FACILITY

Relocating a Company

While there are numerous community factors executives consider when relocating a company headquarters or a large manufacturing facility in the United States, research shows that for a headquarters move, the main criteria are the talent pool, the proximity to customers, transportation and transit, and tax incentives. However, manufacturing facility relocation requires these considerations plus additional factors, which are adequate space and capacity, zoning and pollution regulations, and the cost of energy. Each of these factors is examined more closely below.

Methodology

To establish what executives look for in a community when relocating, we began our research with academic studies and consultation documents that would provide formally researched reasons that executives give for moving to a specific location. This strategy yielded several university studies from notable institutions like Wharton and George Mason, relocation guides from high profile consulting companies such as JLL and WDG Consulting, in-depth reports from reputable media publications like the New York Times and BisNow, and industry articles from HR Executive, Trade and Industry Development, and Area Development.
Using these sources, we discovered that some considerations for executives looking to relocate a company to a new community were consistently mentioned in all publications. Specifically, finding a community with the desired workforce is number one on nearly every executive’s radar. Moreover, proximity to customers, access to transportation and transit, and tax incentives are likewise mentioned multiple times across multiple publications.
Very few publications mentioned factors other than these four; however, most of these considerations were specific to headquarters relocations. We therefore searched further for what executives look for in a community when relocating a large manufacturing facility in the United States. There was significantly less information on this topic, but we were able to find a few additional criteria for manufacturing facility relocation from media outlets like the New York Times and Inc. that have impacted recent moves by large U.S.-based manufacturers. As these factors were not mentioned across numerous sources like the ones for headquarters relocations were, we do not know for sure that these are the top reasons manufacturing executives choose new communities; however, since they were important enough for major manufacturing companies to consider, we determined they would be insightful inclusions for our report.

Talent Pool

The single most important aspect of a community that executives look for when relocating a company headquarters or large manufacturing facility in the United States is the talent pool. As Wharton management professor Peter Capelli stated of the recent Amazon HQ2 search, “For most businesses, the issue of location choice now is driven by labor: Will we be able to attract the white collar skills we need?” Scott Homa, Senior Vice President and Director of U.S. Office Research at JLL agrees. He stated, “Proximity to skilled talent is the top consideration for most headquarters moves today.” This is mainly due to the fact that companies are fighting to attract highly-skilled millennials, who no longer place the job market as a top priority when deciding where to live. Instead, they are more interested in “a city’s lifestyle options.” Millennials want to live in urban areas where there is easy access to “light rail, trendy entertainment districts and pro sports stadiums.” As such, companies are now finding their way back to city centers from the “wide-open suburban office parks with free parking and proximity to leafy subdivisions where baby boomers wanted to live.”
Further proof of this trend can be found in the number of companies that have recently moved their headquarters from suburban or rural locations to city centers. According to JLL, as of January 2018, 30 Illinois corporations, including McDonald’s, had relocated their headquarters “out of the suburbs and into the city, where millennial employees enjoy a work-live-play lifestyle.” GE moved its headquarters from the suburbs of Connecticut to Boston; HomeAdvisor moved from suburban Golden, Colorado to Denver’s River North Arts District; Expedia left suburban Belleview, Washington for Seattle; Pinterest relocated from Palo Alto, California to join Zynga and Airbnb in San Francisco; and even Coca Cola, an Atlanta, Georgia icon, transferred its tech workers from a suburban high rise to downtown Atlanta to access top-quality talent.
Companies cannot ignore this trend, either, as to do so would be to their detriment. As one CEO found, relocating his company’s headquarters to downtown Minneapolis was the “only way that—in an age where most marketing is now digital—he could attract the software engineers and other top talent the firm needed to change its focus and thrive.” Young America or YA CEO Chris Behrens stated, “As the business progressed and the world turned toward technology, and social and mobile applications, the talent pool that drove the decision was much more digitally oriented… And to attract top talent—software engineers—you had to be downtown. That was the main driver.” Millennials, as they have in so many other aspects of life, have “flipped the company relocation playbook on its head” and now businesses have to cater to them instead following the traditional script of young professionals graduating from college and moving to where the jobs are.
The talent pool consideration is not restricted to headquarters relocations. Manufacturing facilities also need to consider the workforce of any community it is thinking of moving to. In fact, manufacturing companies that have long been a part of rural communities are finding it necessary to move closer to cities because of the “need to hire workers with higher skills than in the past.” By choosing an urban location, manufacturing companies are better able to combat the workforce shortages that can come with staying in or selecting a rural community. However, manufacturing facilities must also balance the consideration of higher wages that often come with city location. In addition, they must also be sensitive to the relative ease with which employees can “leave one company for another that pays more,” which is less of a factor when a rural manufacturing facility is the primary employer in town.

Proximity to customers

A second major consideration for executives when relocating a company is proximity to customers. As Christopher Thornberg, a founding partner of Beacon Economics stated, “it (a relocation decision) all boils down to access to clients.” While technology such as video conferencing has certainly made the world a smaller place, it still can’t replicate “the relationship-boosting benefits of mixing in the same circles as clients and industry insiders.” For some companies like Amazon, which has a global client base, proximity to customers is not as critical a factor. However, for other businesses, “it’s vital to be near their current clients and future markets.” For instance, when Boeing made the decision to relocate from St. Louis, Missouri to Washington, D.C., it was mainly due to the fact that being in the nation’s capital gave the company easy access to the Pentagon. Likewise, government contractors have found that moving to Virginia puts them on the doorstep of government decision-makers, which can greatly improve their chances of landing contracts. In Tennessee, there is a “bustling healthcare market,” which in turn attracts “the various technology companies and service providers needed to support this large industry.”
Manufacturing companies often do not have direct clients, but proximity to their supply chain is a critical factor in an executive’s decision on where to relocate. For instance, food manufacturers often have a need to be located close to their suppliers, since there can be issues with “perishability and the expense of shipping.” However, this does not mean that customers don’t have a direct impact on some manufacturing facility relocation decisions. For instance, the Plastek Group, a manufacturer of deodorant containers, made the decision to relocate to Hamlet, North Carolina based on the wishes of a single customer, who wanted to lower his shipping costs. Don Prischak, Vice President for Sales and Marketing of Plastek Group, stated, “The cost to the customer was $4 million to $5 million per year, and they wanted us to be closer to save the transportation costs.” As such, it is clear that executives of manufacturing facilities also take customer needs into account when making a relocation decision.

Transportation and Transit

Easy access to transportation and transit facilities is another factor executives tend to take into consideration when searching for a community in which to relocate. This is largely because their target workforce, millennials, desire to work in cities that do not require them to own a vehicle. According to a recent study conducted by Cox Automotive, 57% of urban consumers, which are primarily millennials, said that “access to mobility is more important than vehicle ownership.” This indicates that the current largest workforce in the United States needs to be employed near facilities that offer access to mobility rather than be in jobs that require a vehicle for a long commute. Millennials, and subsequent generations, have shunned vehicle ownership in favor of living in an area where everything, including their job, is “within walking distance of public transportation.” For this reason, companies that relocate are looking for communities that already have a strong transit infrastructure in place as can be seen with Amazon’s requirement that “mass transit [must be] available at the site” that is selected for its HQ2. When Amazon announced its first cuts, cities like Phoenix and Detroit did not make the short list because “they lack[ed] an efficient public transportation system.”
However, for executives considering relocation, transportation issues extend further than employee access to transit facilities. For instance, a major consideration for Amazon’s HQ2 was that the chosen city must have “an international airport no more than about 45 minutes away [and] one or more major highways or ‘arterial roads’ no more than 1 to 2 miles away.” With corporate headquarters often being the destination for many business travelers, including employees, customers and vendors, it is vital that multiple transportation options are available. Trade Industry and Development recommends that executives also consider airports that have “specific routes to key destinations” and an “airport hub,” which is “often a differentiating factor between locations for headquarters projects due to cost and time savings.” As an example, SunCoke Energy recently relocated its headquarters from Knoxville, Tennessee to Chicago because the new location had “access to international air service so its worldwide locations could be reached.”
Access to air service and major highways is also a necessary consideration for an executive looking to relocate a manufacturing facility. This is mostly related to the supply chain factor mentioned above. Manufacturing facilities, especially in industries like food or other time-sensitive sectors, must consider transportation and delivery logistics when selecting a community in which to relocate. In addition, manufacturers that “ship globally may focus on proximity to transportation hubs” to cut down on costs related to extra steps in the shipping process.

Tax Incentives

Somewhat surprisingly, tax incentives fall fairly low on most executives’ list of factors they look for in a community when relocating a company headquarters or large manufacturing facility in the United States. In fact, a study from George Mason University found that “there are more important factors than tax incentives and direct subsidies” and that when speaking of Amazon’s search for a second headquarters location, “both theory and experience suggest that cities and states are throwing their money away when they court Amazon’s favor through subsidies.” This is mostly because when looking at the long term relocation benefits of a community, factors such as “the presence of a skilled workforce, local cost of living, access to transportation, and synergies with other industries… can lead to far greater growth than a multi-billion dollar offer.”
Even so, most relocation experts and studies still list tax incentives and subsidies as a reason why executives might select one community for relocation over another, for both headquarters and manufacturing facilities. As pointed out in AreaDevelopment, “the availability of financial incentives from state and local governments can play a substantial role in the relocation decision.” This is because local governments often believe that luring big companies to their cities can cause a ripple effect on the economy by increasing the area’s desirability. Numerous states and cities have established tax credits and rebates in an attempt to attract companies to their jurisdictions. JLL Consulting states that selecting a community in which to relocate depends on what stakeholders value the most, which certainly may be “cost and economic incentive,” especially if they aren’t directly affected by the other factors that potential employees find critical. Still, even potential employees may be attracted by financial incentives such as cities that do not require an income tax. If a business receives a tax incentive or rebate from an income-tax-free city, like Austin, Texas, such a move would be financially beneficial for all involved.

Special relocation considerations for manufacturing facilities

In addition to the above-mentioned factors, executives looking to relocate a large manufacturing facility in the United States must also consider adequate space and capacity, zoning and pollution laws, and energy costs. As Trade and Industry Development observed, “traditional manufacturing and distribution projects are driven by the need for additional capacity, resulting in an objective site selection process and decision.” Essentially, a main driver for the decision to relocate is the need for more space. As such, it is vital for companies to “look at least 10 years forward” before selecting a relocation site to ensure that “if necessary, future expansion [is] practicable.”
Moreover, Manufacturing companies cannot relocate just anywhere, as they must take aspects like zoning and pollution standards into account. In many cases, they have to find a space that allows for industrial activities, which limits their options. This is why many manufacturing companies select suburban or rural areas for relocation. Not only is there more space, but there are often fewer zoning hurdles to clear. In terms of pollution standards, one factor manufacturing executives must consider is the cost associated with legal compliance. For example, some manufacturers avoid California altogether due to the “cost of complying with California’s strict pollution laws.” However, even some manufacturers have found that other considerations like talent pool and tax incentives outweigh the costs of pollution compliance, so experts agree it is critical for manufacturers to give themselves enough time to make a balanced and informed decision.
Finally, executives looking to move their manufacturing facilities typically need to be more concerned about energy costs than those looking to move their headquarters. This is because manufacturing typically uses much more energy to produce a product than a non-manufacturing facility does. When looking for a location, manufacturing facility executives need to know that “energy — whether electricity or natural gas — can deviate by as much as 45 percent to 60 percent” from one location to the other. If the primary driver for the relocation is cost reduction, then the cost of energy becomes a primary selection criteria as well.

Conclusion

While other factors such as cost of living, educational opportunities, partnerships with local universities and research facilities, the availability of cultural and recreational activities, and healthcare often make the list of what executives look for in a community when relocating a company headquarters or a large manufacturing facility in the United States, they are far down the list compared to the local talent pool of the community, proximity to customers, access to transportation and transit, and tax incentives. For executives looking to relocate a large manufacturing facility, additional considerations such as space and capacity, zoning and pollution laws, and energy costs must also factor into the ultimate relocation decision.

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