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 / Winter 2010 / Issue 61(originally published by Booz & Company)


Five Factors for Finding the Right Site

Placing a new research, design, or engineering center in emerging markets demands more than just “location, location, location.”

Many companies choose particular locales as the homes of new engineering, R&D, and design sites for all the wrong reasons. Some cities get the nod because a top executive lives nearby or the person in charge of looking for space has been there before and likes the restaurants. Other places are picked because they’re trendy (everybody’s going to Mumbai, so we should go to Mumbai, too). Sometimes a city is chosen because the company has a factory in the region.

But such a casual, even offhanded approach to picking a future engineering beachhead — perhaps the most critical long-term decision in establishing a profitable global engineering footprint, and one that is increasingly on the minds of multinationals as they place R&D facilities in emerging nations — can be a big mistake. Instead, an array of concerns must be considered. On the one hand, some cities well known for their skilled technical professionals are in such demand among multinationals that the competition for good engineers is stunningly steep. As a result, compensation for the engineering workforce in these areas is inflated and still rising. Unless it is absolutely essential to hire the very best engineers, a facility in these cities could wreak havoc with a company’s cost structure. On the other hand, if a design site is going to be completely supervised by, say, U.S.-based management, a Chinese Tier Two or Tier Three rural town might be bucolic and remarkably inexpensive, and might have enthusiastic if not highly skilled workers, but it would also represent such a cultural mismatch that it could take years before the center produces anything of true value.

To avoid the missteps many companies make when choosing a new engineering or R&D site, particularly in low-cost countries, multinationals must weigh five factors: We call them the five Cs. Companies should identify which one or two of the five Cs are the most important for their decision to locate a facility, and then determine which cities meet these criteria. It’s essential to assess the characteristics of prospective locations today and to anticipate what they will be like in three to five years. Will the infrastructure be better or worse, will investment increase, will costs rise, will the number of skilled workers decline, will crime escalate, will the political situation worsen? Those and other similar questions, keyed to the specific traits that the company is looking for in an engineering site, must be addressed in order for the company to avoid making a decision that it will regret in a matter of months. The five Cs are:

1. Cost: attractiveness of location based on required expenditures for setting up engineering centers and covering ongoing operating activities. Included are the costs of buying or leasing land, office equipment, communications, wages, training, taxes, and IT infrastructure. Expenses are always important — indeed, cost cutting is the default mode for many companies — but in most cases they cannot be the only element driving the decision of where to place new facilities in low-cost nations. Companies solely seeking the lowest-cost venue, rather than one that matches the organization’s needs and capabilities, often end up paying more than they anticipate. However, if cost is paramount, make sure to carefully forecast how the local standard of living — particularly when it comes to wages — may change in the near future. For example, Kuala Lumpur in Malaysia is often short-listed because for a relatively inexpensive city, the population’s English skills are excellent and there are a large number of technically advanced workers. But a minimal investigation would reveal that costs in the city are rising rapidly, and in five years Kuala Lumpur will be as expensive as, say, London. Thus, a better option could be a nearby Malaysian city like Penang, which has many of Kuala Lumpur’s benefits without its cost trajectory.

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