What are the issues, advantages and disadvantages of opening a plant or office south of the border? Find out from companies which have made the move.
January 1, 1999 by Cindy Macdonald, associate editor
If you have trouble delegating responsibility, don’t set up a second plant in another country, counsels one molding company owner. “You need to put your trust in the local employees,” he says.
“There are no Canadians at my U.S. plant. It is very important to validate the local people, to encourage them to do their best and take ownership of the operation.”
This executive, who wishes to remain anonymous, says with modern communication capabilities, he could have 24-hour monitoring of all the operations at his U.S. plant, but he has learned to relinquish the day-to-day control.
John Lefas, president of Wedtech Inc. agrees that local input is critical to the success of a plant in a foreign location. Wedtech is opening a compounding and grinding operation in Houston, TX to be near the Gulf Coast petrochemical market.
“We’ve hired local people because there are a lot of differences in the way things are done in Houston, in terms of laws and customs. We use local accountants and lawyers. It is important to appear to be a local player, not a transplant operation. We want to be a part of the community,” he says.
But local autonomy had to be balanced with functions and procedures at Wedtech’s other operations in Calgary and Brantford, and the Toronto head office.
“If you set up a totally independent company, you have duplication,” says Lefas. “We have installed an integrated manufacturing system that links all locations and functions of the company in a common platform. This permits us to centralize certain functions in purchasing, systems, and accounting to maintain efficiencies.”
In the case of our anonymous molder, he found that economies of scale in purchasing were lost as a cross-border company, but these were offset by lower transportation costs.
EXAMINE THE COSTS, LABOR MARKET
“When you get right down to it, the costs of operations in Michigan and Ontario are very similar,” says Richard Meyers, owner and president of M2M International Ltd., Wallaceburg, Ont. “The costs may be spread over different areas, but when you add them up they pretty much balance.”
M2M opened up a sales office in Michigan nine years ago, and a manufacturing facility in the state a few years later. Meyers says the decision to expand into Michigan was based on the need to be closer to their customers in the automotive sector. He says the Michigan state government was supportive in finding a building and getting established, but that a newly proposed tax (yet to be finalized) on businesses with home offices outside Michigan could severely detract from the incentive to do business in the state.
The anonymous molder noticed a marked difference in the quality and quantity of labor available for his Toronto plant and the subsidiary operation near Scranton, PA. “In Toronto, you have abundant skilled and unskilled labor,” he says. “In the U.S., it is difficult now to find workers because of the low unemployment level.” He has also found the labor resources for his U.S. operation are less technically skilled and do not have the fierce work ethic he is accustomed to in Toronto.
Lefas notes that the labor market in Houston is tight, and the economy is in a growth phase. This has made it a more lengthy and more costly process to have the new plant built, but enhances long-term growth and creates a positive business environment once the operation is up and running.
DON’T TRUST VERBAL AGREEMENTS
While the unnamed cross-border molder advises putting your faith in the local people, he says not to depend on promised incentives or low power rates when making a relocation decision.
“Initially, I was told electrical costs were competitive with Canada, but now I pay significantly more in the U.S.,” he says. His advice: if you are promised a low rate by a utility, get it in writing, and agree on what recourse you have for compensation if the agreement is not honored.
On the positive side, there is plenty of power available for his U.S. plant, in contrast with Canada, where he’s had a four-month bureaucratic battle just to get upgraded service for the Toronto site.
As for incentives, “You should not even consider the incentives offered by state and municipal governments as a factor in decision-making. There’s so much red tape involved, you’ll probably give up on them.”
SOURCES OF ADVICE
The local Chamber of Commerce was the best source of relocation assistance for information on contacts and local customs for this molder. The Chamber of Commerce or economic development agency should be your first stop, he advises. Have someone drive you around the area so you can observe the town and its people.
Lefas also counts on his own observations when choosing a site. “You have to walk the land, do your own homework,” he counsels. In researching the Houston move, he tapped into the resources of the local Chamber of Commerce, a group called Texas International Partnership, realtors, and business associates, including suppliers and prospective customers.
INTERNATIONAL UPS AND DOWNS
A benefit of launching an international location, says Lefas, is the diversification it provides for your business. “Because you are operating in two markets, your business becomes more robust. As well, you have access to different technologies, different cultural influences, different talent.”
On the down side, Lefas finds himself traveling a lot and he’s had to spread management pretty thin to cover the new operation.
M2M’s Meyers says expansion to the U.S. has given his company local presence in a much bigger market and the ability to interact more closely with his customers. “I think it’s a necessity in doing business in the automotive market that you have a manufacturing or engineering office in Detroit, even at the smaller levels of a $10 million-per-year company.” CPL