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JANUARY 1999 |
Locating in North America: A Site Selection Primer
“The idea of entering new markets worth billions of dollars in revenue has generated pervasive optimism, enthusiasm and investment capital,” Gaik says. “But that hype is gradually being tempered by the realization of how complex, expensive and time-consuming those ventures can be.” That isn’t altogether surprising, since the workplace is where all aspects of corporate strategy take form. Extending the workplace into totally new arenas requires new strategies, even within a solid, predictable investment environment like North America. Clearly, no easy, one-size-fits-all approach can ensure North American site selection success (and if there were, your friendly local brokers and service providers would be beating down your door to sell it to you). Here, though, are some pitfalls to avoid in establishing a North American presence. Location Models and Labor Finding your workers: North America’s recent economic boom has particularly tightened the skilled labor market. Raw unemployment statistics however, can be misleading. Many firms have successfully tapped locations with substantial pools of underemployed labor, often areas in which a major employer has shut down (e.g., military bases). Other firms have found “hidden” pockets of North American skilled labor among retirees, students and U.S. Welfare-to-Work program participants. Legal and Structural Issues Companies considering North American expansion should also carefully examine national, state and provincial foreign ownership laws. While most laws are liberal, some restrict ownership in industries including banking, insurance and public utilities. Business structure: As in most industrialized nations, North American corporate tax rates certainly aren’t low: 29 percent in Canada, 34 percent in Mexico and 35 percent in the USA.
But many firms new to North America fail to take advantage of various readily available tax breaks.
A KPMG Peat Marwick study of U.S. locations, for example, concludes that “most international corporations are not optimally structured to minimize” tax liabilities. “They’re not getting a lot of state and local breaks they’re entitled to,” says says Michael Lippman, KPMG national partner in charge of state and local tax services. For example, a company setting up a U.S. arm can secure exemption from federal income taxes and many other taxes by shareholders electing to be treated as an “S corporation” — essentially, a nontaxable startup conduit. Even if no shareholder distributions are made, S corporation shareholders are taxed on their individual share of corporate income, rates generally lower than corporate levies. And S corporations’ operating losses are generally “passed through” and deductible at the shareholder level. Companies locating North American facilities should thoroughly investigate other tax-minimizing avenues in structuring operations. For example, establishing a separate U.S. legal entity limits tax liability to U.S.-generated revenues, while a U.S. subsidiary may be taxed on worldwide revenues. Incentives and Flexibility But North American location incentives abound. Recent Site Selection surveys reveal that some 70 percent of North American development agencies offer corporate prospects “financial incentives on a selective basis ,” while some 25 percent offer incentives “to all prospects.” North American location incentives run a wide gamut, including infrastructure and site improvements, worker training, cash grants and low-interest loans, and, for a few large projects, even free land and facilities. But many non-U.S. firms, Lippman says, “erroneously assume that tax incentives are only for huge conglomerates, though mid-size firms also can often take advantage.” Incentives, however, should not drive North American location decisions. The location short list should include only sites meeting business requirements, with incentives used as a decision-making tie-breaker. Another pitfall to avoid: location consultants with fees structured on the total location incentives they secure. North American site selection history suggests that such fee arrangements promote bad location decisions and create public relations damage that may be irreparable. Most established, reputable firms shun such practices. Selecting your site and structuring your space: Obviously, unique business requirements dictate exact locations. North America’s strong telecom infrastructure, however, has made it far less crucial for some facilities to locate in their respective industries’ traditional epicenters. Regardless of the chosen site, the North American real estate market facilitates building critical flexibility into corporate space. Taking advantage of that flexibility, however, requires a long look into the corporate crystal ball, analyzing how the North American operation’s needs will evolve in terms of labor and technology. Such crystal ball-gazing has led many companies to negotiate North American space options to expand or contract as needs dictate. Others are opting for leased “generic space” that can be quickly reconfigured and rewired. North American building owners, developers and brokers understand such business space needs and work to accommodate them. Getting Market Insights and Services A few newcomers setting up their first North American facilities have the necessary in-house, in-depth market knowledge. Most, though, don’t, necessitating outside expertise. As a first step in knowledge gathering, firms should scrutinize the extensive, free services that North American economic development groups, utilities and banks provide to companies considering setting up facilities within their service areas. Those valuable services often include in-depth listings of sites and properties, local area suppliers, potential joint venture partners, and financing sources, including venture capitalists. Finally, top real estate professionals regularly employ another free tool to deepen market knowledge: interviewing managers at facilities already in an area under location consideration, who provide invaluable insights that are unfiltered and unbiased. Acquiring real estate services: After investigating those avenues, many companies find that they still need more sophisticated location assistance — namely, real estate providers’ paid services. North America boasts most of the creme de la creme in real estate services, offering highly skilled professionals and global scope. It’s decidedly a borrowers’ market for real estate services in North America, where a fierce, price-sensitive war has thinned the industry’s ranks. That makes it even more urgent for firms setting up North American operations to require competing real estate service providers to submit requests for proposal, which should precisely detail both the quantity and quality of services to be provided. Open-ended, “fuzzy” agreements can resurface as disastrous cost overruns. Also be careful of the kind of real estate work that’s outsourced. Being overly dependent on outside players is dangerous. Service providers should handle tactics, not real estate strategy, which should remain a core in-house function. Most top service providers fully understand that, but don’t take anything for granted. Both North American development groups and service providers can help in understanding cultural nuances, where simple mistakes can kill. Chevrolet, for example, once introduced the Nova auto in South America. In Spanish, however, no va roughly translates as “it does not go” — hardly the stuff of auto marketing success. Capital Matters Many foreign firms have successfully used “non-domestic” sources to finance North American facility expansions. As in most highly industrialized nations, Canada and the USA have long offered deep, broad capital sources to fund facilities, including equity issues, bonds, notes and derivatives. And raising corporate capital has recently become feasible in parts of Mexico, reports Fairfield (Conn.) University’s Center for Global Competitiveness. Reflecting the continent’s recent economic boom, North America is a borrowers’ market. Strong economic growth and low inflation have dropped interest rates. North American-based commercial and investment banks are major players in promoting economic development. Many have expanded their global presence, facilitating access to North American capital. Citibank, for example, has offices in 38 nations; Salomon Bros. is located in 23 countries, and Bear Stearns has seven major global commercial centers. Some North American economic development agencies also offer “creative financing” arrangements that allow companies to retain capital liquidity for critical product development and marketing. For example, some agencies will build a facility to meet a company’s specific needs, then buy the building, with the company occupying the space under a long-term lease. Listing a company on a North American stock exchange is another option for raising expansion capital. In general, though, going public in North America requires considerable financial acumen, analysts caution. Requirements are more comprehensive and rigorous than in most other nations. U.S. financial statements can be prepared under the accounting principles generally accepted in a company’s home nation. However, any departures from U.S. Generally Accepted Accounting Principles (GAAP) require an addition to the issuing firm’s financial statements, reconciling its income statement and balance sheet with U.S. GAAP standards. Minimizing capital risks: Global expansion spreads out market risks. Diffusing financial sources offers added benefits in diffusing capital risks and lowering borrowing costs. “Cost savings is the basic issue driving corporations to issue securities outside their home markets,” says Peter Milhaupt, New York City-based Bear Stearns capital markets senior managing director. Tapping multiple financing sources can also cut international cash management costs, as it has for U.S.-based agricultural equipment maker Deere & Co. Until the 1990s, Deere initiated separate foreign-currency trades each time it needed to pay a plant supplier in a non-U.S. dollar currency. That cumbersome, piecemeal process squandered time and increased transaction spread costs.
Granted, few firms have Deere’s clout. But similarly staying on top of the basics in going global has a lot to do with making North American site selections successful. SS
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