Some states appearing to offer incentives for EMS providers and manufacturers are really just imposing more taxes. Understanding which states are more aggressive when it comes to incentives capabilities can be game changing in the decision-making process. Available incentives will largely be attributed to the entity creating the jobs…so, if a project is awarded to an EMS provider for outsourced contract manufacturing by an OEM the incentives will flow to the EMS provider.
In today’s race to lure manufacturing operations and their skilled workforce, states are willing to go the extra mile to secure projects. Understanding what’s truly at stake for these projects in the way of incentives is crucial for the decision maker.
With slowing growth expected in the global contract electronics manufacturing services (EMS) sector, companies that are experiencing growth should place heightened importance on incentives in the site selection decision process.
Role of incentives
When negotiated, structured and implemented properly, incentives can produce enormous savings for a company. In fact, negotiated benefits can equal anywhere from 25% to 100% of the capital investment required for the project.
Incentives vary widely from state to state and county to county. There are ‘as-of-right’ and ‘discretionary’ programs available to most projects provided certain headcount and investment hurdles are met and adhered to for a period of time.
Five years ago, incentives were more icing on the cake whereas today they often steer the location decision among relatively equal sites.
What’s crucial, especially for companies considering implementing a project themselves or entertaining a contract manufacturing scenario, is that proper due-diligence is done to understand the advantages and challenges of each site – particularly regarding operating expenses.
With this in mind, it’s important that site selection teams are able to effectively understand and convey the company’s tax position to the state and local authorities under consideration.
For example, as a function of a prospective operation bringing in net, new jobs, a state may offer income tax credits which the company may or may not be able to fully utilize for varying reasons such as being in a net operating loss (NOL) position or that they are not refundable.
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It is incumbent upon any site selection team to wade through any gray areas when sizing up potential manufacturing locations and presenting recommendations.
Additionally, studies have shown that 50% to 85% of benefits desired at a project’s beginning are rarely captured – placing heightened importance on the implementation of any benefits negotiated.
North American technology and electronics manufacturing hotspots
Areas in North America that come to mind in the contract EMS sector are places like Austin, Boston, Research Triangle Park and Silicon Valley. There is something to be said about the intellectual capital in these areas that render them synonymous with the field, but for projects and contracts that are destined for the United States, considering other destinations could prove worthwhile.
Understanding which states are more aggressive when it comes to incentives capabilities can be game changing in the decision-making process.
The breadth of intellectual capital in the above hotspots is sizable, but when talking about outsourcing the manufacturing function, all efforts to drive costs out of the supply chain should be considered.
If this means looking outside the buzz-word cities to other viable communities, so be it.
Spatial view of business incentives and taxes
Figure 1 below illustrates states in North America that tend to be more aggressive in their incentive program offerings. It’s important to also keep in mind the actual business tax burden on the company as some states appearing to have more incentives are really just imposing more taxes as the tax on inventory and personal property indicates. (Figure 2)
Figure 1: Economic incentives landscape across North America
Figure 2: Tax on personal property and inventory across North America
In addition, it is important to consider the right-to-work status of states (Figure 3) as these states tend to experience more positive growth of private sector jobs vs. states that are not right-to-work.
Figure 3: Right-to-work law states across North America
The Tax Foundation (www.taxfoundation.org) recently released its annual ranking of state and local tax burden for FY 2009. (Figure 4) Tax imposed on a given project should figure prominently in any manufacturing organization’s ability to reconcile its cost of doing business in certain states along with any upfront and on-going assistance made available via negotiated incentives.
Figure 4: State and local tax burdens and ranks, FY 2009 (Source: taxfoundation.org)
EMS outside the box
Given these varying business environments in today’s market and tax consequences nationally, it is important to analyze the possible implications nationally for contract EMS projects especially for those that are multiple year engagements (5 to 10 years or longer).
Further, if new facility space is required either by a contract EMS provider or the OEM, significant incentives could be available depending on the size and scope of the project.
In the US, incentives available will largely be attributed to the entity that is creating the jobs. So if a project is awarded to an EMS provider for outsourced contract manufacturing by an OEM the incentives will flow to the EMS provider.
The incentives may then be passed through to the OEM in the form of rate reductions or other actions on a case-by-case basis.
In recent news, Intel announced plans for a $5 billion facility upgrade in Arizona as well as plans for an Oregon facility. These announcements are great wins for both states especially considering neither is known as the strongest player on the incentives front and given the size of the investments proposed.
Intel’s presence and history in both states likely impacted the decision to expand.
The most telling location decisions of late have been the automotive manufacturers who clearly believe the southeastern part of the United States offers the best pools of both labor and incentives for their capital intensive operations.
A recent example with this is Volkswagen Group of America’s Chattanooga, TN manufacturing plant.
In selecting Chattanooga, Volkswagen conducted a national search factoring in a multitude of criteria before finally deciding between sites in Alabama, Michigan and obviously Tennessee.
For manufacturing plants with high levels of job creation and capital investment, the southeastern US, in general, tends to be more aggressive in luring and winning these types of projects through cash or cash equivalent mechanisms.
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In fact, many southeastern states have discretionary ‘deal closing funds’ made available to the governor for highly desired projects where a manufacturer is considering multiple states for its project.
Discretionary deal-closers
Understanding which states possess ‘deal closing funds’ – or essentially, war chests in place to lure projects with high capital investment and employment – should factor prominently in the final decision. Chart 1 illustrates a sampling of some noted funds.
Chart 1: States with a deal-closing fund
There are many factors to weigh when considering a new manufacturing operation. Given the compelling opportunities overseas in countries like China, India, Malaysia or Vietnam, to name a few, the focus placed by manufacturing executives on better understanding and effectively leveraging incentives that can attract organizations to further build and retain a manufacturing base in America is sure to grow.
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