By Dennis J. Donovan, Wadley Donovan Gutshaw Consulting
This article addresses the locational dynamics associated with high technology. While the focus is on the U.S., observations for the global scene are provided as well. At the outset, a definition of the classic high-tech sector is provided. This includes strategic drivers that shape site searches for high-tech. Next we look at geographic concentrations of high technology. This is followed by a listing of factors of importance to high technology operations.
There is no widely accepted definition of the term. But drawing from several sources, one or a combination of the following would comprise a high-tech entity:
- Manufacturing process involving either a heavy engineering content or an above average proportion of revenue devoted to R&D
- R&D labs/centers of excellence
- Any business that employs an above average proportion of scientists and engineering (including IT)
Utilizing these criteria, the following represents a sample of traditional high-technology industries:
Relative to occupations, industries with above average proportion of the following generally fall into the high-tech sector.
Geographic deployment of high-tech operations is shaped by a number of strategic business imperatives. In a nutshell, these imperatives involve the following:
- Knowledge acquisition
- Cross functionality
- Cost effectiveness/value
- Risk mitigation
In the R&D sector, a definitive trend is to configure innovation networks to achieve maximum value, balancing cost and knowledge. This strategy calls for establishing strategic centers to maximize both local and emerging industry knowledge. A good example is Astra-Zeneca, which is consolidating R&D. There will now be three strategic R&D centers for small molecule and biologics (Cambridge UK, Montgomery County MD, and Molndal Sweden). These entities will be supported by large hub centers such as Boston.
Johnson & Johnson represents another example for strategic placement of R&D hubs. Each hub is located in a metro with an extensive talent pool (industry ecosystem). Photo Exhibit 1 shows J&J’s innovation hub in Cambridge (MA).
For information technology, companies are typically employing a follow-the-sun strategy. This will see deployment of IT operations balancing costs, knowledge acquisition, global development teams, and optimal customer service throughout all geographies. Importantly, the strategy could result in locating more cost-sensitive functions in low-cost countries while deploying high-value/customer-centric functions in areas with a vibrant software industry. Companies following this multi-faceted global deployment model include IBM, Google, Oracle, Microsoft, ADP, Citigroup, and General Motors. HCL Technologies operates several global IT service delivery centers – such as the one in Raleigh/Durham (Photo Exhibit 2).
High-tech manufacturing is being affected by competitive marketplace dynamics such as supply chain restructuring, establishing production closer to demand (often part of supply chain restructuring), diversification into other industry sectors and markets, and adoption of new rapidly changing technology. While cost is important the technology, mass customization, production flexibility, customer input/interface/service, and business disruption risk are assuming primacy in the global location strategy for high-tech manufacturing. There will be less deployment solely for cost reduction/containment, and other strategic forces including market access/penetration will become increasingly more important. A glance at deployment strategies for several companies, illustrate this axiom. Corporate examples include Intel, Apple, Dell, General Electric, Samsung, Siemens, and Caterpillar.
Embraer located a business jet assembly plant in the epicenter of an industry cluster, Florida’s Space Coast (Photo Exhibit 3). Baxter chose to erect its pharm plant near an industry center (Covington, GA), about 40 minutes east of Atlanta.
At least a basic grasp of strategic drivers helps set the stage for appreciating where high-tech industries have been thriving in the greatest numbers. Some observations on industry agglomerations follow.
WDGC ranked all U.S. metro areas according to high-tech industry and occupational employment. We also arrayed the metros by percent of total employment represented by high-tech (industry and occupation). For this article we present results by occupation. But the geographic deployment pattern is similar when looking at industry employment.
Not surprisingly tier one metros (i.e., larger) come out on top when examining actual high-tech employment. New York is the leader at 1.4 million. Rounding out the top 100 is Bakersfield (CA) at 33,200. There are 22 metros with at least 200,000 residents employed in high-tech occupations. When measuring the concentration of high-tech employment (as a percent of total jobs) there are 27 metros wherein high-tech accounts for 18.5 percent or more of the workforce. Leading the pack is Silicon Valley (or San Jose) at almost 1/3 (32.2 percent). Combining the two criteria (size and proportionality), 11 metros emerge as super high-tech clusters. They are:
Another 11 metros come close to super high-tech status. They have at least 300,000 high-tech workers or at least 100,000 high-tech employees accounting for 20 percent (we round at 19.5) of the labor force. These metros are:
Of course there are other notable high-tech clusters but they display less density than the top 23. Among those (20 all told) with between 100,000-200,000 high-tech employees and with a proportion under 18.5 percent are:
The three lists above give rise to 42 metros that have a significant high-tech presence. As the high-tech industry thrives on agglomeration, it is logical that the longlist of high-tech concentrations is fairly short (less than 50).
This does not imply that the preponderance of new high-tech location activity will be confined to these 50+ areas. There will be legitimate reasons to consider other areas with less but still adequate high-tech resources. These could include small high-tech hotspots such as the following:
Outside the U.S., detailed employment data are not as extensive. Based on experience representative high-tech hot spots by no means all-inclusive include:
Industry ecosystem comprises a dominant locational influence for high-tech operations. It is critical for R&D and important to critical for IT and manufacturing. Industry ecosystem embraces similar companies, talent pool, technical universities, and support services. The ecosystem dynamic is a major reason why many high-tech facilities tend to locate in established or emerging industry centers.
In siting R&D centers, human capital overshadows all other considerations. Frequently, HR cost is a secondary issue. R&D centers require the best/brightest talent. The ultimate location selection will be dependent on industry focus, specific skillsets required, scale of operation (headcount), and time to reach mature headcount. Additional significant site selection factors for R&D include ability to nationally recruit talent, air access to headquarters and branch operations (such as manufacturing plants), university/industry collaboration, young/growing population, quality of life attractions, available buildings (often with wet labs), access to customers, and community/building green policies/initiatives. It is important to note that physical worksite will be important for recruiting/retaining A-team employees. Keys will be site orientation to labor pool (commute distances), highway access, mass transit linkage, on-site/walking distance amenities, visibility, security, image, parking, floor size, space layout, and green/clean energy.
IT operations, for the most part, tend to gravitate to areas where there is a sufficient critical mass of skillsets. This includes residents currently employed in pertinent disciplines and annual college graduates entering the workforce.
The locational solution for IT will to a large extent depend on the mix of functions planned for the new center. This could include applications, development, help desk, web design, mobile apps, cloud computing, database administration, project management, and business intelligence analytics. Once functions are defined, then the number of skills by discipline can be quantified. This will shape the character and size of labor markets to be considered for the new center. Other influential criteria will include salary levels, if offshore # English (or other language) speaking, if offshore (mandated/customary benefits), time zone, universities (two and four year) with computer science and engineering programs, available office space, possibly dual telecommunications and electric power feeds, worksite access to talent, worksite amenities, quality of life attractions, sales/property tax rates/exemptions, and once a shortlist of qualified locations are generated, incentives (from payroll tax rebates to investment tax credits).
Manufacturing often has more leeway in terms of selecting locations with a substantial high-tech ecosystem. If there is sufficient depth of experienced and entry level manufacturing workers (such as CNC machine operators, electronics technicians, assemblers, etc.) then having an ecosystem within reasonable proximity (such as a technical university within 60-75 minutes) is often acceptable.
Generally speaking the most pivotal factors for manufacturing high-tech location are labor pool depth for experienced talent, underemployed base to recruit qualified entry level, workforce educational attainment, workforce quality (e.g., basic skills and computer literacy), labor costs, turnover (lower the better), four-lane highway access, air service, small package service, available/modern buildings, electric power reliability/cost, in some cases water supply, unionization, post-secondary Vo-tech training resources, tax policies/rates (especially sales and property), natural disaster risk, quality of life (for a limited number of transferees), and incentives (once several well qualified communities are identified). If a company is looking offshore, additional variables would include labor legislation (especially hiring/firing), infrastructure (e.g., electric power and teleco service can be unreliable), financial stability, social/political unrest, time zone, taxation of foreign owned companies, business regulations, trade policies/tariffs, and intellectual property protection.
When siting a new high-tech facility it is important for the project team to assign site selection criteria into broad categories. These could include:
- Talent pool
- Industry presence
- University resources
- Geographic balance (within the company’s footprint)
- Quality of life
- Office space (or manufacturing space)
- Business costs (including incentives)
Individual factors (e.g., skillset depth in talent pool) are allocated to appropriate broad category. Then each category and specific factor is given weights (such as 1 to 10) based on their importance to business success.
This criteria model can then become a scorecard to rate candidate locations. Typically scorecards will be developed for qualitative factors (e.g., labor market) and cost considerations (e.g., payroll). Areas scoring best on qualitative and reasonable (not necessarily lowest) on cost often emerge as winners. When all is said and done the final decision comprises a value proposition. Frequently this boils down to where can the best talent be found and at what cost (latter typically less important for R&D but more important for manufacturing).
The pace of high-technology location activity gained post-recession steam in early 2012. There has been a steady level of new facility activity since that time. Given economic trends, it appears that high-tech location will continue on an upward trajectory for the next few years.
Corporations adhere to a global deployment strategy for high-tech functions including market access, supply chain risk, knowledge acquisition, and for many situations cost structure to shape geographic deployment of high-tech operations.
While there will be substantial offshore investment, the U.S. remains attractive for high-technology. North America will play a prominent role in the global deployment of high-tech enterprises whether they are American or foreign owned.
Talent will drive location decisions. Industry ecosystem will be important for many operations, especially R&D. New facilities will gravitate to established/emerging high-tech clusters. This will not be a universal truth but rather a predominant trend. Areas that are high-tech poles need to continue investing in policies/programs to support growth of this sector. For other areas, a heavy dose of economic gardening (grow your own), coupled with cultivation (encourage more high-tech expansion by existing companies) and limited hunting (recruiting aimed at a unique resource of the area such as university research center of excellence) will be the best way to ultimately get on the high-tech radar screen for locationally-active companies.
As a parting thought, the importance of HR capital cannot be overstated. Once the strategic framework has been laid (e.g., region to consider for the new facility) the ability to recruit best of class talent now and in the future will constitute the fulcrum for succeeding in a new location. Once HR has been addressed then look at other dynamics for ultimately selecting the final location.
About the Author
Dennis J. Donovan is a principal of Wadley Donovan Gutshaw Consulting based in Bridgewater, NJ and Jacksonville, FL. WDGC specializes in corporate site selection. Clients have included a variety of high-technology enterprises.