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One of the major initial claims about the Internet's affect on business was that it would erase borders and boundaries and make site selection and real estate issues almost irrelevant. That prediction is exactly the opposite of what has unfolded. For hardware makers and assemblers, even those that are moving to Internet business-to-business and direct-to-consumer sales channels, and for the new software delivery companies called Application Service Providers (ASPs), which lease applications over the Web, site location is more important than ever.

On the hardware side, logistics have become the critical issue. Whether a company is shipping direct to consumer or needs to meet the timing and cost requirements for OEMs, geography is a critical factor in the cost and customer service equation. For ASPs, a class of company that has only arisen in the last year or so, "product" may be delivered over the Web, but where to locate servers and the people who maintain them and provide customer service and ongoing development is still a complex site selection issue.

Assembler's Direct-to-Consumer Approach Alters Relocation Strategy

As computer assemblers enter the direct-to-consumer world, they're using site location strategies that resemble those of catalog and Web merchants. Round Rock, Texas-based Dell Computer, which, since its founding, has lead the computer industry in direct-to-consumer, custom-configured PCs ordered over the Web and delivered direct, recently expanded manufacturing and technical support operations in mid-Tennessee, its second major installation after Texas, for strictly logistical reasons. "Our Internet-direct business model, which integrates sales, manufacturing and services within one company, makes Dell more responsive and efficient in anticipating and responding to customer needs," explains Paul Bell, senior vice president of Dell's Home and Small Business group. "Integrating our operations geographically furthers this advantage."

In other words, "Dell found that [by having one location in Texas] they were spending more on transporting PCs than it cost them to make them," says Buzz Canup, Atlanta-based senior manager for KPMG Strategic Relocation and Expansion Services. By expanding to Tennessee rather than staying in Texas, Canup argues, Dell took advantage of Tennessee's central location from the point of view of population, and therefore customer density. "Operations tend to grow where they're created. Companies live with the inherent conditions, at first, and make them work. But as companies mature, they take a broader look at costs," says Canup. "Dell sets a precedent other computer companies will probably follow, to use better logistics as a site selection model."

Dell is in the process of opening a second Tennessee manufacturing plant in Lebanon, and adding a line of notebook computers to its existing Davidson County plant. Under construction is a 250,000-sq.-ft. (23,226-sq.-m.) service logistics center, also in Davidson County.

Chip Manufacturers Opt For Logistics Power

Down at the chips level of computer manufacturing, logistics costs are driving a site location equation that's looking more and more like the apparel industry's strategy. Chips are so inexpensive to ship, explains Canup, that they can be sent to Asia to be imprinted and back to the United States to be finished, much like a pair of jeans can be cut, sewn and finished in three different locations. "With chips, (US)$100,000 worth of inventory fits in a briefcase," he says.

HMT Technology, which manufactures the delicate innards of computer hard drives, seriously considered an offshore move a la the semiconductor industry for cost containment reasons, but instead committed resources to expanding on property adjacent to its existing location in Fremont, Calif. "We thought that manufacturing in Asia would create too much diversion and strain for our management team," says David Gruebele, director of sales and marketing for HMT. Furthermore, HMT figured that travel costs would eat up any advantage. So the company decided to make its new plant highly automated to save on labor. Putting the automation in place required an intense on-site effort, and plenty of local expertise. Gruebele doesn't rule out the possibility of considering moving production to a similarly automated offshore plant, now that HMT is experienced with its new factory floor technology.

HMT's architecturally significant and attractive plant was created with the encouragement of the city of Fremont, which wanted an icon of modern manufacturing to rise over Interstate 880, not an indistinguishable gray box. Fremont fast-tracked the project. "We went from the first shovelful of dirt to the first disk in six months," says Gruebele.

Initially, chipmakers had tried moving manufacturing to less-expensive locations with qualified labor forces like Ireland, Taiwan and South America. Now, with demand on the upswing again, some companies are trying the multinational approach. Others, like Intel, are breaking ground for new fabrication facilities at home, taking advantage of areas that have low operating costs. Distribution costs from remote areas don't outweigh other considerations, given that chips are so cheap to ship. Intel is expected to invest $5 billion in fabrication facilities in the coming year. Part of that is devoted to acquisition of existing plants. Part will be in new construction, including a $500 million plant in Chandler, Ariz.

Another issue for high-growth hardware companies is that they need to expand geographically before they start to mop the local labor force dry. Cisco Systems, the San Jose, Calif.-based developer and maker of a wide range of networking components and solutions, is expanding quickly in the Boston area, for example. Craig Manning, who is in charge of site development for Cisco Systems' West Coast region acknowledges that with nearly 14,000 employees and 6 million sq. ft. (557,418 sq. m.) of office space in Silicon Valley, it's difficult for the company to plan further expansion on the existing California campus. When Manning looks for new campus sites, he shops for synergies with local businesses, a technical labor pool and reasonable costs of doing business. The Boston area's high-tech cluster fits the bill. After five years of having more modest facilities in the area, Cisco has announced a new 1.8 million-sq.-ft. (167,225-sq.-m.) corporate campus there that will house 5,000 research and development employees.