Businesses looking to move operations to new geographic locations face multiple challenges in the wake of the Covid-19 pandemic.
Investors are looking to diversify their global footprint amid the Covid-19 pandemic in an attempt to eliminate concentration risks. However, transforming a company’s operations and deciding on new site locations requires extra resources, at a time when cost cutting is at the top of the agenda for most organisations.
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The pandemic has created a stir among the economic development community, resulting either in a pause in investment projects, or investors reconsidering their strategic footprint and taking a different approach towards organising their business.
“Covid-19 exacerbates myriad challenges that many industries and companies were already facing prior to onset of the pandemic,” says Alex Ash, global director, location and incentives strategy, at Hickey and Associates. “While many companies battle for survival, some are pivoting to formulating strategies to revitalise their businesses.”
A recent survey about site selection amid the Covid-19 crisis by the Site Selectors Guild, an association of professional site selection consultants, found that 52% of the companies interviewed are pausing site selection projects, 45% are moving forward with site selection, while the rest of the responders are opting for a combination, depending on the industry and function.
“De-risking operations and increasing resilience will be key focuses of restructuring efforts going forward, with rationalisation and the transformation of the geographic footprint playing a critical role,” adds Ash. “This is going to require significant investment at a time where cost cutting is at the top of the mind for chief financial officers.”
With investors seeking to minimise their losses amid the current turmoil, expanding to new locations has become of secondary importance for some. However, for those moving forward with site selection, the ban on international travel is another barrier to overcome.
Consultants agree that some due diligence processes can be done from the desktop, but for foreign direct investments (FDI) that necessitate making visits on site and building strong relationships with the local community, social distancing can also act as a major obstacle, threatening the success of these projects.
Investment attraction will likely include less travel and fewer trade shows, with a substantial increase in digital marketing and virtual meetings, says Parker Poe Consulting principal Mark Simmons, who adds that it will become increasingly important for all parties to become effective at using digital tools to maximise their chances of success.
“Features such as screen sharing, whiteboard, drawing, password entry, waiting rooms and polling will allow users to maximise these tools to their benefit,” he says.
“Additionally, those involved in investment attraction may want to use virtual reality technology to conduct site visits via drone footage, video and virtual site/building presentations.”
Gregg Wassmansdorf, senior managing director in global strategy consulting at Newmark Knight Frank, says that lots of processes can be carried out from the desktop at an early stage or midway in the process. However, he highlights that one of the challenges of continuing with desktop analysis is that much of the data will have changed in the meantime, especially around labour markets.
“It commonly takes two to three months before labour data is published in a way that you can use to compare one place to another,” Wassmansdorf explains. “Other data sets take much longer to be updated. This means that you need to rely more on interviews and speaking with people, collecting anecdotal evidence of what is happening in a place.”
Nevertheless, he adds that it is in the later stages of a site selection project when it becomes more and more important to actually travel, do due diligence on the site and community, meet utility providers, or even begin interviewing developers or contractors.
“It is the later stages of the process that really benefit from on-the-ground, face-to-face engagement,” he adds.
A little local assistance
As travel restrictions prevent investors and consultants from making in situ visits, the responsibility is now falling on the shoulders of people who are on the ground, including investment promotion agencies (IPAs) and chambers of commerce, to provide assistance.
“There is the immediate effect on corporate site selection visits and the need to offer companies the possibility to undertake virtual visits and meetings,” says director of the Portuguese Trade & Investment Agency in the UK Pedro Patrício. “This implies a joint effort with several local stakeholders. Local business expansion and minimisation of risks are now the main priorities for a large number of companies.
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“This increases our need to communicate effectively with clients and targets, in a more proactive manner than ever, conveying our key competitive advantages.”
For locations with clusters of businesses that are popular at the moment, such as logistics and life sciences, or IPAs based in highly developed countries, the situation might not be so tricky compared with agencies operating in less technologically advanced areas.
The lack of good internet connectivity and broadband was seen as an obstacle towards economic resilience and diversification before the Covid-19 crisis, a problem that the current situation has only served to exacerbate.
“Especially now with the pandemic, people are told to work or to study from home,” says Wassmansdorf. “Locations without effective broadband access are disadvantaged. It is a serious problem that preceded Covid-19. Countries and local areas need to address it because this can be a serious competitive gap.”
Resistant to risk
Investors seem set to look for locations that promise to be more resistant to future pandemic outbreaks, meaning a shift from the low-cost approach that they have typically embraced, as this strategy is seen to be riskier moving forward.
This doesn’t mean the end of production facilities in Asia, however, as companies are seeking to build flexibility by also producing in other regions and diversifying their footprint. Having production facilities closer to the source of FDI is seen as a cost advantage for the origin countries.
Indeed, introducing regionalised manufacturing, bringing strategic commodities closer to home, and having smaller plants are among the changes coming to global supply chain strategy, said Michelle Comerford, project director and industrial and supply chain practice leader at Biggins Lacy Shapiro & Company, in a webinar organised by the Site Selectors Guild.
Choosing a corporate site location is a long process, with several due diligence stages that can last from a few months up to a year. However, with most economies on a standstill, investors are adapting a wait-and-see approach, possibly resulting in fewer projects over the next few months and an FDI slump. On this score, the UN Conference on Trade and Development estimates that FDI flows are set to drop by 30–40% during 2020 and 2021, higher than its initial estimation of 5–15%.
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