Site Selection – “Taking Off”
Aerospace and Defense are often lumped together as one. For most companies in these fields, the two are almost synonymous, but not always. Some companies only specialize in commercial and private aircraft, while others, (defense) may provide only IT services, Homeland Security or logistical support to government agencies and military ground operations. But then again, ground support often requires close coordination with aircraft, satellites and ships. Most of the basic site requirements for these companies go hand in hand.
Many similarities exist for site needs of the industry. There are also some unique needs independent from one another. For example, the defense industry often requires the same skill and education levels of employees as commercial aerospace (i.e., engineers) but a key discriminator in defense-related work is the classified security clearances and the requirement of only employing American citizens.
The matrix of key factors and a weighing/scoring system is the essential tool. (What looks like a good opportunity now, or on the surface, may not be the best choice going forward.)
Similarities – the basic essential minimum requirements to choosing the right site are:
Talent Availability – It is becoming increasingly difficult to hire and retain skilled talent. The communities that have the available talent infrastructure, or are located in a desirable geographic location where the right talent wants to live, have the advantage. Having the critical mass of talent is a key driver in looking at the first swath of communities. There are consultants and software databases to help lead a company to these locations.
Clustering – Communities, regions and states that have been able to cluster similar companies, along with suppliers and vendors in close proximity, have an advantage. These are communities one should always consider but be careful of oversaturation, particularly as it relates to talent availability. Supply and demand of labor drives the cost of securing and retaining the right talent.
Educational Centers of Excellence – It is essential to locate in an area that has committed significant resources to higher education, research and development institutions and engineering schools, but also possess a strong K-12 school system, with ample internship and mentoring opportunities. It is generally accepted that if a younger person is not on the math/science track by fifth or sixth grade, they will not pursue engineering, science or math in the future. And as we all are too well aware, the U.S. is not graduating enough skilled workers. A critical challenge for the site team is to devote sufficient time to analyzing the educational awareness and opportunities in a given community or region.
Cost of Doing Business – Not just start up or initial costs, but an analysis of the future expenses of locating in a particular community is critical. Tax structures, lease costs, wages, level of impact fees, and other community-related costs must be factored and fully vetted. In locations that have a strong legacy of industry participation, the existing workforce may add other challenges. Mature workers in the industry are working longer than 10 years ago. This is a good thing but can be expensive as older workers have higher seniority and are often grandfathered in the more expensive health care program. The availability of public incentives to offset start up and ongoing costs often makes a significant difference in the right location.
Companies are looking offshore. This creates a dilemma where only so many H1B VISAS are allowed (60,000 per year) and in the Defense industry “only Americans need apply.” In the commercial aerospace field, market global competition has become intense so the ability to deliver product on time at the lowest costs is critical to success. In the defense industry, the bidding for contracts often comes down to the best price at the best quality. (Defense cannot outsource for lower labor costs so this industry is at a disadvantage.) Companies with a strong commercial presence are at an advantage by potentially transferring savings from offshoring to reduce a bid for a defense contract. Incentives can make the difference in a successful bid and help a domestic firm win a commercial contract.
Infrastructure – Shovel-ready sites, existing buildings, roads, runways, sufficient power and good transportation networks are essential ingredients to the right location at the right cost. It is best to try to locate in an area that prioritizes the industry and has invested in not just adequate infrastructure, but sufficient infrastructure that can accommodate your future potential growth.
The communities will influence the priority industries that economic development groups ultimately attempt to recruit. Will they prioritize manufacturing, warehouse/distribution, assembly and/or aerospace/defense, or will the future priority be in the office or retail market?
It is essential to understand the community-planning model as an indicator of your company’s worth and value to the local political leaders. It is a delicate balance. Also, if priorities shift in a community, will there be sufficient infrastructure and other vital community resources?
Public Incentives Can Make the Difference
Many communities will offer incentives that may or may not add value to your operation. Always search for the ones that add to the bottom line and will reduce costs for the specific operation, or add revenue to accelerate your growth.
Communities will broadcast their “As-of-Right” incentives (more easily captured for job growth, wage rates, capital investments). They are readily available for the asking, but still require significant effort in completing applications, agreements, contracts and administration. They always require diligence in the ongoing tracking and administration, which is often spread out over years.
Discretionary Incentives – Not widely communicated nor advertised. They require sophisticated research and understanding on where they are and how they work. Remember there is a good reason they are called discretionary! These incentives require extensive and experienced negotiations, but at the end of the day, can be very lucrative. Often these become the biggest and have the greatest value.
Key Incentives to Pursue
Determine the right value incentives to your firm and renegotiate initial offers to meet your specific needs.
Lumping Apart – Or Are the Needs Really Different?
Aerospace is in defense and defense is in aerospace. However, aerospace can be standalone, by only producing commercial and private aircraft. Defense can be in many facets and involve support positions, without providing services to aerospace (planes, missiles, rockets, helicopters, etc.).
In defense-related businesses, locations for growth, expansion or a new site are many times determined by the customers. The Federal Government and the military dictate where to locate, often in a clustered environment with other similar support functions and contractors, or in close proximity to an existing military base. Remember, however, that with the continuous exponential growth of technology, more of the work can be accomplished in virtual remote locations (of course depending on the clearance level of employees and the security of the software interface technology).
Clustering of both industries is most often beneficial. Aerospace, near airports, vendors, suppliers, and a skilled workforce; and defense, where a conglomeration of contractors and subcontractors, with skilled and vetted personnel holding security clearances, can significantly reduce costs and enhance efficiencies.
Key Discriminators - Commercial Aerospace
Where are the best locations and how to pick them? First start with looking at legacy locations that have proven successful for your company or even for a competitor. However, keep your options open – there is a wide universe of locations. Timing and preparation are critical. Give yourself plenty of time to explore all parts of the country or globe. And prepare and understand the key requirements for success.
Starting with the Selection Team, (Real Estate, Human Capital, Finance, Tax, Legal, Public Relations/Government Affairs, Third Party Consultants, Site Selectors), make sure you are prepared to conduct the Macro Analysis. This consists of the broad overview of sites in identifying the general basic Factors and parameters, i.e., sufficient land, proper density/altitude ratings, existing structures, runways in close enough proximity to an airport, rail lines, educational excellence, etc. We call it the 40,000-foot view.
It all starts with the adequate and right infrastructure. We define it as both hard and soft infrastructure, those solid foundations that must be in place. The hard infrastructure is water, sewer, roads, power, etc. The soft is the available talent, education institutions, population growth, etc.
The next step is drilling down to the Micro Analysis (determining the Factors assigning weighing criteria and scoring the larger swath of areas.) The scoring will help determine the shorter list of 10 or more sites that can then be reduced to the final two to four locations to visit. We call this the view from 10,000 feet. The process is now getting closer to the landing.
As one industry expert put it, “in Defense we can’t outsource security.” Many of the same Factors apply as in aerospace with one major difference, “American citizens only need apply.” The market realities are quite different between the two industries. In commercial Aerospace, the market dynamics are in play – cost, supply, demand and delivery. If you build it at the best price with the right quality, and deliver on schedule (your product and service) you win the competitive battle. In defense, the industry is dependent on continued funding and the political process in Washington. The U.S. market is in flux due to the political uncertainty in Washington and the impending Presidential election.
The Growth Quotient - U.S. and Abroad
Okay, so where do you go from here? We established that the difference between a high probability of success with reasonable profits is grounded in people, process, performance and the other three critical elements, location/location/location. The rest of the world has become an opportunity, but also a danger. With the depreciated value of the dollar, and the technology excellence of the U.S., more orders are coming in from around the world. At the same time however, the globe has become smaller and more sophisticated. As a result, serious competition is springing up from Europe, Asia, China, Canada and other areas.
The Northrup Grumman partnership with the European Aeronautic Defense and Space Company (EADS), to build 179 refueling tankers is a prime example of the global penetration into the U.S. markets. The good news is that the project is based in Mobile, Alabama, creating over 2,000 jobs. The Joint Strike Fighter project, a partnership with Lockheed Martin, other U.S. Defense Contractors and NATO countries, is being built principally out of Fort Worth, Texas, with parts and some assembly from other NATO nations.
The Value of Aerospace and Defense - To the U.S. and World
The major U.S. corporations represent a significant contribution to the national GDP. This helps drive many of the economic engines throughout the U.S. They also establish the education standards and expectations that have elevated the status of many communities. Some of the major public companies where data is readily available include: Boeing Company, Lockheed Martin Corporation, General Dynamics, Northrup Grumman Corp. and Raytheon Co. Combined, their impact is significant.
The value of these companies and economic impact go way beyond these numbers. Often utilizing the U.S. Department of Commerce, Regional Input Output Model (RIMS II) the indirect and induced jobs and capital circulation multiply two to four times throughout the community. For example, a $200 million dollar investment with 300 jobs can translate into over $600 million and 700 – 800 jobs. Also, the technology spinoff from the military and space programs have added an incredible value throughout the country. Cell phones, BlackBerry devices, voice recognition, microwave technology, etc, are just a few of the spin-off products and services spread throughout the economy.
The Ground Game - The Landing
No site decision can be made without the key business stakeholders visiting several short-listed sites. The “ground game” is a vital part of the process. There have been numerous occasions where the site location Decision Matrix evaluates communities high or low only to change and reprioritize once the team gets on the ground, views the community up close and meets the key people.
Company officials must personally visit each location and not rely solely on site selectors or real estate brokers. These consultants are an important part of the team; however, companies should never rely on outside council to make the selection.
When visiting a potential location, the team needs to meet more than just the economic development and elected officials. They should insist on meeting other companies operating in the community without public officials present. Candid discussions should involve an available and realized workforce, regulatory environment, costs of doing business and perceived business friendliness with an appreciation for the manufacturing sector. Always ask, “If you had it to do over again, would you choose this community? Why or why not?” There is no substitute for face-to-face discussions with other businesses.
Closing the Deal
Now that the appropriate process has been followed, the Decision Matrix has been absolutely evaluated, vetted and scrubbed through the key Stakeholder Team, the Site Team has been thoroughly utilized, the short list locations visited, costs research has been vetted, demographic studies completed, public incentives that add revenue and value have been secured, and the ink from the final signature of approval has dried - what’s next? Let the game begin; choose the proper position players who will contribute to the construction and implementation phase. Stay diligent and follow the process that got you where you need to be – on target with a perfect landing.