1/1/2007 | 4 MINUTE READ

Insight: How Real Estate Can Help Competitiveness

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The global automotive industry continues to create opportunities and skirmishes within the ranks of the supply chain due to massive change and never-yielding competition.


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The global automotive industry continues to create opportunities and skirmishes within the ranks of the supply chain due to massive change and never-yielding competition. Coupled with intense price-down expectations from customers, rising costs of materials, and the demand for greater investment for innovation, the landscape for supplier business owners is bleak in some segments. This leaves a large number of North American suppliers at a crossroads, asking themselves: “Do I stay in the game the way I’ve played it for many years? Do I change my way of doing business to allow myself to compete globally? Or, absent a viable succession plan or operating plan, do I take measures to exit this industry altogether?”

At least one critical issue in this boiling cauldron is how the North American business owner modernizes plant assets to stave off foreign market competition. At the heart of this issue are investments—both economic and philosophical—and the willingness to make changes and become hyper-competitive via new properties, plants, and equipment. Many North American factory and plant buildings are functionally obsolete. Some properties and plants could even be scheduled for closure, or are no longer suited to serve company purposes. However, these plant and property assets may be well suited for other uses that could bring a new revenue stream to the company, either in the sale of the company or in re-deployment of those assets.

Because of the complexity of the global automotive industry, there are suppliers who need to find alternatives to current plant and office properties and real estate holdings that enable the company to leverage its real estate assets. Someone who has worked closely with suppliers to examine new asset re-deployment strategies is Jack Buchanan, CEO of Blue Bridge Ventures in Grand Rapids, MI. “Taking these assets off-balance sheet and converting them into leases, new sources of cash can be obtained to invest into the business or pay to the shareholders as dividends. When coupled with accelerated tax planning and incentives, there are opportunities to create state-of-the-art plants and office buildings from these proceeds to be more competitive in the emerging global markets,” says Buchanan.

For example, a company may need to sell off selected real estate assets in order to raise needed funds to improve its cash-flow position. In many instances, the real estate assets themselves are more valuable and have a greater market capitalization than the current business operations. By leveraging these assets properly, and taking what may sometimes be viewed as an unconventional balance sheet position, significant funds can be raised and the company positioned to gain competitive advantage with offshore manufacturers.

According to Buchanan, many suppliers are hesitant to take action for a number of reasons: The plant is already paid for, it would be a hassle to move, or there’s a belief that confidentiality could be breached and plans would leak out. “If you get your information or insights only through brokers or appraisers you’re cheating yourself because they will only provide you ‘comparable sales’ data which is many times inaccurate and shortsighted. Better to work with a developer-advisor who will be confidential, and who can look at different visions for your assets, such as unique ways to subdivide the property that create new value, and sharing qualitative insights that tell you why did or why would a buyer pay book versus market prices. Assets don’t have to all be glued together and there is value to be realized in knowing that.”

Implementing these ideas may enable the business to actually reduce size and increase capacity at the same time, with resulting efficiencies that improve profits dramatically. By inserting available tax incentives into these re-deployment strategies, the business owner can accelerate unseen values even more. With the use of proper tax and financial tools, a company can physically move an industrial plant or office location to gain a newer, more modernized facility with little or no additional cash outlay. The new location would provide numerous strategic benefits to the company, while the old location can be re-sold to a developer or other business in a possibly new and different application, such as retail, residential, commercial office.

Dawn Baetsen, an incentives expert with Crowe Chizek, a leading middle market accounting firm, tells her clients to plan early when reaching out to secure government incentives. State and local government will make tax credits, abatements, grants and low interest loans available to retain or attract a company if alerted early in the planning process. “The most lucrative incentive packages are obtained when government is informed early before location decisions and project construction is started. An increasing number of states and municipalities are using discretionary cash incentives or creative ways to lower the capital investment costs required to modernize, replace, relocate or expand a facility. Exit strategies should also be considered when considering a re-location, particularly when incentives have been awarded to prior projects related to the facility being vacated,” says Baetsen.

Leveraging and transforming plant and property assets using these financial techniques cannot by themselves overcome the rising tide of deep challenges suppliers face in today’s global automotive market. But these strategies and incentives can provide a new playing field and new rules with which some of the North American suppliers can more fairly compete with the New Domestics’ Asian supply chain. As they face the expected onslaught of new competitors arriving from China and other Asian regions, I tell suppliers to remember three key things: One, don’t forget you have proven experience here in North America and you understand the indigenous marketing and distribution strategies very well—that knowledge will matter to Toyota, Honda, et al. Two, be able to articulate your value proposition to your customers and make it hard for them to “switch you out.” And, finally, take determined action to “level the playing field” by doing the necessary things to build innovation into your products and services, improve your overall cost structure, and upgrade your people, processes and technologies at every step in the road ahead.