Manufacturers Guide to Economic Incentives

From time to time, you’ve probably read about significant business expansion headlines in the news. However, you may be surprised to find out that these projects were likely made possible through economic incentives offered by the winning municipality to give them the edge over other possible expansion locations. 

Chances are, in today’s growing economy, you’ll be faced with similar opportunities to expand your manufacturing operations, so it’s a must to consider economic incentive procurement as part of company planning. Because manufacturers are becoming more and more capital intensive than ever, the importance of building a solid incentive plan cannot be overstated.

Why My Business Planning Should Incorporate Incentive Procurement

According to PEW Charitable Trusts, “Tax incentives—including credits, exemptions, and deductions—are one of the primary tools that states use to try to create jobs, attract new businesses, and strengthen their economies.” States will generally compete for jobs, so it’s critical for companies to be able to effectively negotiate and take advantage of these programs as securing incentives can translate into hundreds of thousands $$$ to millions $$$ in awarded benefits to an expanding company.  

Recent manufacturing related industry trends are connected to four compelling reasons for pursuing incentives; these are discussed in the following points.  

Investments in Business Transformation Can Be Incentivized

Manufacturers have been making considerable investments in automation technology areas such as collaborative robots, the Industrial Internet of Things (IIoT) and machine learning to transform their business.  Case in point, here’s an excerpt from an article written in Assembly Magazine:

New technology will redefine certain roles in both name and skill requirements. Jeannine Kunz, vice president of the SME’s training and development arm, Tooling U-SME, says traditional positions, like manufacturing engineers, that have existed for decades have evolved and now require new knowledge and skills. People may move to adjacent positions that require a similar skill set but reflect the impact of new technology. Certain positions may no longer require a worker to perform physically demanding tasks, which would be taken on by robots and automation.

As a manufacturer, it’s likely that you’re already engaging in a lot of activities, such as investments in automation, that qualify you for economic incentives. However, it’s likely that you are not doing all the required steps to identify, qualify, negotiate, and secure the ideal incentive benefit that would typically include actions for procuring incentive offers from available expansion site locations. The key to making the incentive negotiation most successful is to start the site evaluation well ahead of future growth by leveraging an experienced navigator to complete these required steps and secure the best possible deal.

Training Your Workforce May Be Subsidized by Grants

As manufacturers transform into more cutting-edge operations, these companies will look to train new employees and building new skills and knowledge with their existing workforce and replace lower-wage jobs with automation and technology. The concept of upskilling has become a primary focus to manufacturers as quoted in a recent manufacturing trends article by the Association of Equipment Manufacturers:

There’s no overstating the seriousness of the manufacturing industry’s skilled worker shortage in 2019. Manufacturing employs roughly 9 percent of the U.S. workforce, yet it is increasingly unable to fill necessary positions with qualified people. As it stands, there are three times as many open skilled labor positions than are being filled. The skills gap is significant problem right now, and there’s no reason to suggest anything will improve in the short term.

Many states have efforts underway to help address the skills gap including sponsoring award competency-based certifications, provide assistance to schools in updating their curriculum and equipment to address certain skills, and support for career navigators and teachers. Employers are also dedicating significant resources to address the ongoing labor skills gap. Some companies have focused externally via third-party vendor resources as a method to train their future workers on a core competency of the few specialized tasks that they will be asked to perform. Other companies have leaned on internal mentoring as an approach and have seriously focused their efforts on the development and training up of current employees.

Despite such an emphasis on upskilling their workers, companies frequently do not take the time to qualify themselves for state training grant incentives. Tapping into these available incentives can represent significant funding opportunities and so it is incumbent on company leaders to understand, qualify, and pursue these valuable programs ahead of future training initiatives. 

States Typically Pay for Job Creation

Frequently, when companies invest in technology transformation and automation, there will be a direct impact on the overall economic landscape between the company and the local, neighboring community. Company automation can lead to a corresponding company restructuring of manufacturing positions where the overall employment levels may stay the same, decline, or increase. Corresponding employment composition changes can typically involve adding new skilled positions while eliminating unskilled positions that are now being covered, in function, through the new automation equipment. Upskilling existing employees and future hire to manage the new technology should create opportunities for adding higher-paying skilled positions into the local labor market. This transformation should then be of benefit to your company and to the local economy.  

Depending upon the company’s situation, including the overall headcount and total gross wage impact, there may be an opportunity to qualify the new jobs and/or additional gross wages for employment-based incentives. States will generally compete for well-paying jobs (i.e., jobs at or above the average state and/or county wage rate) and so understanding when and how to apply for applicable state programs can make all the difference when pursuing these valuable incentives.

Incentive Awards Can Be Substantial

As an HR manager or company controller, how much farther how much more will you stretch your dollar with a 30 – 50% state training grant reimbursement? As a CFO or controller, instead of projecting planning for property tax increases on new automation capital investments, what impact would a complete property tax moratorium for five years have on re-allocating funds to other strategic growth areas?  

The following specific examples are also compelling:

• A tier 1 Japanese automotive component manufacturer secured a $1.1 million economic incentive benefit during a multi-phase expansion initiative.
• A business unit of a top automotive supplier achieved a $4.2 million benefit as part of a comprehensive procurement process.
• A substantial incentive package was secured on a $60 million expansion made by a leading medical device manufacturer; the overall economic benefit was projected of around $12 million.
• During site selection and economic incentive procurement on a $160 million expansion made by a major food processor, the company was able to achieve a $16 million incentive package.
• Site selection incentive negotiations yielded $500,000 to a commercial developer for their $3.5 million expansion.  

For Additional Consideration

After reading the article up this point, you are probably asking, “why on earth isn’t every manufacturer taking advantage of economic incentives?” Some of the reasons are surprising, especially since so much business recruiting has been undertaken throughout the years by state and local economic development agencies. The top four, recurring reasons that typically see are summarized in the following points. 

Knowing Your Company’s Plan

In many circumstances, wheels are placed in motion with strategic growth initiatives and company financial leaders are not brought into the loop until too late in the process. These same individuals are frequently not aware of, nor are they experts on how best to pursue economic incentive requests as a funding strategy on corporate growth. As a starting point, having internal discussions with key company leaders early in the budget cycle will help build awareness for opportunities to incorporate incentive planning including possibly bringing in an outside expert.

Building a Competitive Incentive Offering Takes Time

The ideal process for incentive negotiation often takes around 9-12 months. All too often companies start the process too late and as a result, they miss out on opportunities because they were not aware of all the incentives or could not afford the extra time to evaluate alternative sites because they just got rushed.

It’s the beginning of 2020 so if you want to qualify your growing business for incentives this year, it’s important to begin diligence as soon as possible, but no later than the end of the first quarter. The research diligence and negotiations become time-consuming and intensive and it’s important to not short cut key steps because doing so can adversely affect realized benefits to the company.

Taking Ownership of Incentive Requests Can Become A Full-time Job

In general, the challenge with state and local incentive programs is that they’re complicated and time-consuming. In reality, economic incentives are another temporary, full-time job that your staff doesn’t need to add to their current duties. It’s also a complex area of finance and requires specialized knowledge in several different areas, such as public relations, state and local tax structures, and incentive impact planning/analysis. 

Most manufacturing companies do not have a person on-staff that possess this knowledge or the skillsets to effectively bring together leaders from across all functions of the corporation to develop and implement an effective incentive procurement strategy. For these reasons, it makes sense for manufacturers to consider hiring an incentive expert. This seasoned consultant will be able to then dedicate ownership to the entire procurement process for the company while advocating for maximum level incentives on their behalf.

Knowing How to Recognize a Good Deal

When financial or human resource managers spearhead an incentive project request, they typically have little experience with having worked with economic incentive government leaders, including leading public hearings with media involvement. With so little experience, how would they recognize a good deal? You have heard the saying, “knowledge means power.” In the case of incentive negotiation and procurement, that is entirely the case. 

When a company realizes that they cannot cover all bases for their project expansion planning, including the incentive negotiation, hiring an expert becomes a prudent decision. Some examples where incentive experts typically add a lot of value are:

• Knowing the state and local process for seeking and obtaining incentives will lend greater predictability to overall company expansion planning.
• Uncovering less commonly known or offered incentives.
• Reviewing the company’s structure to ensure that the subsequent incentives offered are actually usable.
• Creating a realistic incentive impact analysis that takes into account a detailed review of the company’s planned capital investments by item; this is of tremendous help during incentive negotiations and to reference during ongoing project budgeting.
• Reviewing draft incentive agreement offerings to ensure that any claw-back (i.e., repayment of incentive benefits when the company misses the mark on employment or invested capital) language is reasonable.
• Understanding the requirements for initial applications and annual compliance for each incentive to steer the company clear of any pitfalls which may disqualify the company from applicable programs or possibly reduce the annual benefit.
• Lending an extra element of accountability by building a competitive incentive offering across multiple sites.  Noteworthy is that an incentive expert will be able to “benchmark” the company’s incentive offers against their experiences with hundreds of prior incentive negotiation results which is where the concept of “knowledge is power” comes into play.  

For these reasons, adding these value-added capabilities of an expert to your project can make a dramatic difference through increased benefits.  

Final Thoughts

Economic incentives are not a silver bullet or a magical potion. They represent opportunities to save real dollars and cents, frequently in the hundreds of thousands $$$ to millions $$$, that your company can reallocate to other areas of greater priority.  

A word to the wise. Don’t go at it alone – let a property tax expert help you and your company navigate the incentive procurement process. Your company’s savings account will thank you in the end!