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July 1, 2014

Strength in Clusters

Why transportation is fueling prosperous regional manufacturing centers

When Illinois-based Caterpillar Inc. chose Georgia as the plant site for re-shoring small tractor production from Japan, the Midwestern state’s governor, Pat Quinn, complained, “We don’t have any oceanfront property in Illinois. … We met with the Caterpillar people and they made it pretty clear that the logistics would drive the decision.”

Years earlier, when reporters asked Nebraska’s then-Gov. Ben Nelson why his state lost to South Carolina in a competition for BMW Group’s first U.S. auto plant, Nelson said, “I can’t move the Atlantic Ocean.”

The truth behind these grumbles is becoming far more apparent as America’s manufacturing sector slowly rebounds from the 2008–09 recession. The ability to efficiently move manufactured products in a global market will affect the post-recession viability of manufacturing centers across the nation.

Executives in commercial real estate and regional development say the acreage around seaports and inland ports—transport hubs where goods move easily by ship, truck, air, barge, pipeline or rail—is now far more than just a place for more giant cranes, docks, rail yards and warehouses. The land is just as likely these days to become the core of manufacturing clusters.

“When you go to these places, the entire supply chain will be there,” says Jim Tompkins, CEO of supply chain consultancy Tompkins International in Raleigh, North Carolina. “It was Henry Ford’s concept of assembly. An automotive assembly plant is a supply chain hub. But the logistics is more important now than it was, because we have become more sensitive to transportation costs.”

And to energy prices as well. Lower-cost natural gas in the United States will attract manufacturing plants, says Yossi Sheffi, director of the MIT Center for Transportation and Logistics. “These plants are energy hogs,” he says. The regions around transportation hubs, Sheffi adds, are fertile ground for manufacturing as companies combine production and distribution to save on energy costs.

 

Magnets for Manufacturing Growth

A manufacturing presence around logistics centers—including inland ports such as Chicago; Dallas/Fort Worth; Memphis, Tennessee; and Kansas City, Missouri—can be a magnet for manufacturing growth, Sheffi says.

“If you are a manufacturer, you want to go to a place where there are other manufacturers of similar things,” he explains. “You will find the right labor. You will find schools that generate people with expertise. You will find that government already understands what you’re doing.”

To be sure, no one believes existing manufacturers will abruptly uproot their factories and replant them closer to seaports or intermodal rail/highway hubs. But the desire of global manufacturers, such as Caterpillar and BMW, to combine assembly and distribution into a tighter and more energy-efficient footprint bears watching for several reasons:

  • The “shore” in “re-shoring” highlights the fact that U.S.-based equipment makers bringing production home from Asia intend to move goods to global markets, just as they do from Asia. Non-U.S. manufacturers opening or expanding plants here have the same goal. The result is a greater concentration of private resources and economic development dollars in port-centric regions.
  • Hundreds of millions of dollars invested by railroads, especially in the South and Southeast, have produced new, shorter rail corridors with double-stack container trains connecting seaports to the American heartland and beyond. Shorter-haul rail corridors are expanding shipping options for manufacturers, small and large, whether they utilize seaports or not.
  • Congestion at seaports spurs the growth of inland ports as pressure-relief valves. In the heartland, NAFTA-related traffic congestion from Mexico to Canada is likewise prompting growth at inland ports that combine rail, truck, air, freight and barge shipping. Manufacturers are finding a home around each of these hubs.

A Little History

The idea of manufacturing centers, defined as a set of related companies within a state or region, dates back to the late 19th century. Economist Alfred Marshall, in his book Principles of Economics, studied groups of manufacturers in the same industry within a community. The economic value of the sum of these like-minded companies, which often were competitors, was greater than the parts, Marshall found. He attributed the added value to related companies’ ability to share a skilled labor pool, the availability of suppliers serving multiple customers in the same industry and the benefits of knowledge sharing among kindred companies.

In the current era, Harvard Business School professor Michael Porter is the reigning scholar of industrial clusters. His cluster-mapping project at Harvard’s Institute for Strategy and Competitiveness identifies existing industrial constellations, large and small, around the country. “We define a cluster as a geographically proximate group of interconnected companies, suppliers, service providers and associated institutions in a particular field,” he writes.

The power of such clusters has prompted more than half the states to target their economic development and job-creation programs toward existing industry groups within their borders, according to the National Governors Association.

The Up-and-Comers
Transportation efficiency is sparking two of America’s fastest-growing regional manufacturing centers.

 

Tire-Making in South Carolina

Since the end of the 2008-09 recession, three global tire makers—Germany-based Michelin Group and Continental Corp., and Japan-based Bridgestone Corp.—have pledged $2.85 billion for new and expanded tire manufacturing plants in South Carolina, motivated in large part by the Port of Charleston.

The rush of capital and jobs is expected to make South Carolina the leading state in tire manufacturing. Already, the state accounts for 30% of U.S. tire exports. Michelin said it would export 80% of the giant earth-mover tires produced at its newest South Carolina plant, which opened last December.

It’s not surprising that the three tire makers have formed a lobbying organization within the South Carolina Chamber of Commerce to press for the completion of dredging operations at the Port of Charleston.

“South Carolina will soon become the largest tire manufacturing state in the country and currently ranks first among states in tire exports,” said Steve Evered, vice president for government affairs at Michelin, in announcing the new tire manufacturing council.

 

Medical Products in Memphis, Tennessee

Getting hip replacements and the results of medical tests to patients quickly requires a world-class logistics center, says Mark Herbison, senior vice president of economic development of the Greater Memphis Chamber.

Medical device manufacturing, much of it based near the Memphis International Airport—the world’s second-largest air cargo terminal after Hong Kong—is the fastest-growing industrial cluster in Tennessee, relative to the sector’s total national employment, according to Harvard Business School’s cluster mapping data.

Among the medical device companies drawn to the Memphis logistics hub are the spinal products business Medtronic Inc., orthopedic device companies Wright Medical Technology Inc. and MicroPort Orthopedics Inc., and medical equipment manufacturer Smith & Nephew Plc. “We’re the largest center in the country for the manufacturing of hip and knee replacement joints,” Herbison says. Other time-sensitive medical companies, including medical testing facilities, also have found a home in Memphis, he says.

 

History Alone Is No Guarantee

States like Texas are proof that building on a region’s industrial strengths is a winning strategy. The Texas aerospace industry, first seeded in the 1960s by President Lyndon Johnson through the space program, is a powerful force for the state’s economic growth, innovation and supply chain synergies. Texas has ranked third—behind Washington and California—in aerospace manufacturing almost annually since at least the 1980s. State and local officials continue to nurture this classic industrial center. In the last 10 years, the legislature has awarded nearly $65 million in economic development spending to the well-entrenched industry.

Still, a historic industry presence, like nostalgia, may turn out to be poor rationale for an economic development strategy. Once-thriving industry centers do decline because of global competition, obsolescence, regulation or other threats. The decrease of U.S. manufacturing employment over many decades proves that the resulting voids are not easily filled.

“That is a reality that needs to be addressed,” says Richard Bryden, director of information products at Harvard’s Institute for Strategy and Competitiveness and a developer of the institute’s industrial cluster maps. “States and regions need to find the ‘layer underneath’ their historic economic brand,” he says.

South Carolina is one state that has found that layer. “The Port of Charleston may be the most important economic driver in the state,” says George Fletcher, retired executive director of New Carolina, a private economic development agency in South Carolina.

The manufacturing renaissance of South Carolina in the past 20 years has not been a function of any traditional industry building on its strengths. Rather, new and diverse industries and distribution operations entered the state to utilize the port for importing and exporting, including Michelin Group tires in 1975, BMW cars in 1994, Boeing Co.’s Dreamliner assembly plant in 2012 and an Adidas Group shoe distribution center in 2010.

“When you get a robust cluster … you get the innovation, you get the entrepreneurship and you get the companies themselves looking to where there are supply chain holes,” Fletcher says. “They do the economic development for you.”

 

Recruiting the Right Kind of Industry

Put another way, “you throw the kitchen sink at an original equipment manufacturer and the tier-one suppliers,” says Lewis Gossett, CEO of the South Carolina Manufacturers Alliance. “You focus on recruiting the right kind of industry and the clustering will take care of itself.”

The Port of Charleston, connected to CSX and Norfolk Southern rail lines, is the deepest in the south Atlantic and the only one in the region accepting ships that draft up to 48 feet, according to Chicago-based commercial real estate firm Jones Lang LaSalle. A 10-year, $1.6 billion capital investment is underway by the state ports authority and state legislature aimed in part to better enable the port to handle a new generation of container ships that will fit through the Panama Canal when the canal expansion is completed.

When the state’s dominant textile industry began to decline in the 1980s, its conventional development strategy—based on low wages, low taxes and cheap land—failed to make up the loss, according to an economic history of the state by New Carolina. The mood changed sharply in 1994 when BMW opened its first U.S. production plant in Spartanburg in the northwest corner of the state.

That decision was not based on a water view. Highway, rail and airports typically converge in a regional mix. “Interstate 85 is an important interstate that gives us the capability to bring our goods to the plant,” says Alfred Haas, manager of material planning at BMW. Spartanburg “had all the factors—railway and a good connection to the Port of Charleston, I-85 and I-26, an interstate to the port,” he says. “It was a very well-selected site for us.” BMW exports 70% of its Spartanburg production.

 

Not Standing Still

A 100-acre intermodal inland port opened last year near Spartanburg, extending the Port of Charleston’s reach 212 miles along a Norfolk Southern line in Greer, near Spartanburg. BMW pressed for the new hub, which handles double-stack containers, but unrelated companies nearby quickly climbed on board.

“We are moving about half of our Spartanburg-bound cargo through the Greer Inland Port,” says Paul Morin, head of U.S. transportation for Adidas. The German athletics products maker consolidated its U.S. shoe distribution in Spartanburg in 2009. “We are in the process of onboarding other steamship lines that call on the Port of Charleston to get 95% of our Spartanburg freight [moving] via the Greer port.”

There are similar short-haul intermodal connections between seaports and mixed-use inland terminals about 200 miles from seaports in Norfolk, Virginia, and Savannah, Georgia. Taken together, a seaport and an intermodal port 200 miles away comprise an industrial center. Short-haul inland ports “remove congestion from major ports and get goods inland quickly,” says Joni Casey, CEO of the Intermodal Association of North America (IANA) in Calverton, Maryland.

“The added benefit of driverless transport, consistent transit times and greener environmental impacts all can figure into a given company’s decision” about where to locate, says Jason Reiner, assistant vice president for industrial development at Norfolk Southern.

Since the Navy ended shipbuilding in Charleston in 1996, the deep-water port has been a magnet for new industry and a windfall for local manufacturers, says Joe Schady, vice president of Alpha Sheet Metal Works in Ladson, South Carolina.

His company, which receives raw materials and ships to customers by truck, doesn’t require seaports or intermodal rail shipping. But its fortunes, previously linked to supplying a local defense contractor, improved when it landed a contract in 2011 with Boeing’s Dreamliner assembly plant in North Charleston. “When Boeing came in, they decided to localize their supply base for their plant infrastructure,” Schady says.

 

 

 

The NAFTA Corridor

Like Atlantic Ocean seaports bulking up for greater Panama Canal ship traffic, trade agreements linking the United States, Mexico and Canada are redrawing the industrial map of America. In both cases, manufacturers as well as logistics providers are clustering around major transportation terminals in urban centers.

It’s not surprising to see manufacturers, such as Minneapolis-based medical device maker Medtronic Inc. and auto parts supplier Martinrea International of Vaughan, Ontario (just north of Toronto), establishing a presence in large urban centers. But the motivation—combining manufacturing and distribution—demonstrates the dominance of logistics in today’s industrial site selection.

Twenty-nine years ago, Ross Perot had the idea of turning 10,000 acres of cattle-grazing land north of Fort Worth into a transportation hub, centered on a freight-only airport. The scope of the project, named AllianceTexas, expanded when BNSF established a truck/rail port on the property, which today comprises 18,000 acres.

Major logistics service providers, including FedEx, UPS and DB Schenker, became tenants. Cellphone maker Nokia Inc., which leased space in 1994, was the first manufacturer on the property. Nokia closed its operation in 2006.

 

“We saw for many years the clustering on the distribution side,” says Tony Creme, a vice president at Hillwood Properties, the Perot family company that operates AllianceTexas. The biggest catch among manufacturers arrived in 2011, when General Electric built a locomotive manufacturing center near the Hillwood property, Creme says. The company said the Texas site, adjacent to a BNSF rail line, would increase its flexibility in reaching customers beyond its long-standing Erie, Pennsylvania, locomotive plant.

 

Blurring Manufacturing and Distribution

About 500 miles to the north of AllianceTexas, auto parts maker Martinrea International of Ontario is merging manufacturing and distribution in a new plant site in Riverside, Missouri. The plant, announced by the company and Missouri officials last spring and expected to be completed in 2015, will produce engine cradles and other assemblies for a General Motors plant nearby in Kansas City, Kansas. In a similar move last year, auto parts supplier Grupo Antolin of Spain announced it would build a parts plant to supply Ford Motor Co.’s Kansas City assembly plant.

In the days of precise just-in-time delivery at auto factories, “the suppliers will tell us they have to be here to supply parts to GM and Ford,” says Chris Gutierrez, president of KC SmartPort, the transportation and logistics arm of the region’s umbrella economic development agency. “They could make the product somewhere else and bring it to a warehouse near the Ford and GM plants. Or they could make it here because of lower transportation costs and logistics advantages of bringing raw materials in and the finished product out.”

In Memphis, Tennessee—where five of the nation’s major railroads, two major interstate highways, the original FedEx cargo airport and the Mississippi River meet—blurring the distinction between manufacturing and distribution has been an economic tradition for many years. Cooking appliance maker Electrolux Group of Sweden opened a cooking appliance manufacturing plant there earlier this year. Last year, Japan’s Mitsubishi Electric began operations at a new power transmission manufacturing plant.

“The fastest-growing sector has been in the orthopedic medical area,” says Mark Herbison, senior vice president of economic development at the Greater Memphis Chamber. “That’s driven by the capabilities of bringing raw materials in by truck and rail, and shipping out the medical kits by FedEx. Our largest manufacturer in Memphis is Smith & Nephew Inc.,” a London-based medical device maker. “There’s been a whole supplier industry [created from] that industry, making screws and pins and rods,” Herbison says.

 

Looking Forward

Such bullish stories about the growth of manufacturing centers in America have one thing in common:
logistics advantages that are nearly impossible to replicate in regions lacking a globally oriented transportation infrastructure.

With the federal Highway Trust Fund and earmark spending by Congress insufficiently meeting infrastructure needs, picking up the slack are private investments by transportation companies and financial backing by state and local governments—aimed mostly at logistics hubs with global trade potential.

Two developments bear watching. First: Are the nation’s major railroads willing to continue their investments in intermodal terminals and short-haul rail corridors that compete with interstate highway truck shippers? Second: Will the East Coast ports that are investing heavily in accommodating larger ships even be used by shippers going through the expanded Panama Canal? 

The answer to the first question is a tentative “yes.” The Association of American Railroads in Washington, D.C., estimates the nation’s freight railroads will invest $26 billion in building and upgrading the nation’s rail network, up from $24.5 billion last year.

So far this year, the most surprising trend in intermodal rail traffic has been the increased use of railcars to carry highway trailers, says IANA’s Casey. She attributes that shift to new federal regulations limiting the hours that truckers may be at the wheel. Fewer driver hours, as well as fewer drivers, shrinks the capacity of trucking companies to meet customer needs.

“There were predictions last year that the hours of service regulations were going to have a negative impact, and that didn’t happen immediately,” she says. “What you’re seeing now is that playing out in a stronger way. The domestic intermodal component of the transportation sector continues to grow incrementally.”

 

As for the second question, for eastern seaports, dredging operations now underway or already completed to accommodate a larger class of Panama Canal ships could be money down the drain if shippers look past these ports to existing and expanding West Coast ports and ports in Central and South America.

“We don’t coordinate,” says MIT’s Sheffi. The East Coast port authorities may be overly optimistic, he says. “If you look at their projections, it looks like every ship will come to them. For one thing, the Panamanians will have something to say about that. The Panamanians want the ships to stop and unload there.”

The case for new manufacturing centers at or near transportation hubs clearly is a work in progress. Existing manufacturers often simply have too much invested in their facilities to move without powerful incentives. “Manufacturers love the idea of saving costs and optimizing their supply chain,” says Michael Murphy, chief development officer at Oak Brook, Illinois-based CenterPoint Properties, a major investor in and manager of seaport and inland port industrial real estate. “But they are so heavily invested in the fixed costs of their facilities, they often wait until they have to move.”

At the same time, upstart manufacturers and existing companies seeking new markets are realizing that transportation may now be the new key to future site decisions. “Manufacturing projects don’t come along very often,” says Grant Cothran, manager of intermodal development at Norfolk Southern. “But the focus in site selection has shifted in the last decade from more traditional real estate searches looking for cheap land and tax breaks. Transportation’s role has been elevated.”
 


Bill Barnhart, a Chicago-based financial writer, was a business editor and columnist for the Chicago Tribune for 30 years. He is the author of MSCI’s 100th anniversary history, “Links in the Long Chain.”