In recent articles, we have covered site selection “deal killers” and how to spot them. Recognizing these signs early in the site selection process is crucial. We already covered site fatal flaws and lack of site control. This time, we dive into market forecasts.
Expanding a company’s production capacity is a strategic move often fueled by the belief that the overall demand for their product is growing or that they can capture market share from competitors—or ideally, both. The construction of new facilities equipped with state-of-the-art technology and automation can lead to higher-quality products and increased output at lower per-unit costs. While this is a costly endeavor, companies are willing to make such risk-based investments if they believe the market forecast will deliver a long-term return.
However, when market forecasts take a negative turn, the outlook becomes bleaker. A company’s ability to sell anticipated levels of product at acceptable margins diminishes. This shift can result in site selection projects being put on hold or scrapped entirely. Market forecasts can change for various reasons, such as a downturn in the broader economy, competitors’ enhanced ability to meet demand or rising input costs.
Factors Influencing Market Forecasts
- Economic Downturns: Broader economic declines can reduce consumer and business spending, thereby lowering the demand for certain products.
- Competitive Actions: If a competitor announces new capacity in the same market and promises quicker market entry, it can jeopardize a company’s market share.
- Cost Increases: Rising costs for raw materials or other inputs can make it less profitable to produce goods, affecting the market forecast.
Case Studies
Steel and Lumber Sectors
In industries such as steel or lumber, facilities often serve specific geographic regions. If a competitor announces plans to build new capacity in the same market and within a shorter timeframe, a company might decide not to proceed with its own expansion. The rationale is that the competitor will likely secure that portion of the market share faster, making the new investment less viable.
Truck Tire Manufacturing
Consider a company producing truck tires. Suppose the market they serve is projected to enter a prolonged recession, leading to fewer miles driven by tractor-trailer trucks. In that case, the company might halt or cancel an active site selection project. The anticipated drop in demand for truck tires due to reduced transportation needs would make the expansion unprofitable.
Conclusion
Declining market forecasts have significant implications for business expansion projects. Companies must carefully evaluate the potential returns on investment in light of changing market conditions. A less favorable forecast can lead to strategic decisions to delay or abandon plans for new facilities, underscoring the importance of robust market analysis and agility in strategic planning.
The key takeaway is that while market forecasts can be optimistic and drive expansion, they can also turn pessimistic and necessitate a reassessment of growth strategies. Businesses need to stay vigilant and adaptable to navigate the uncertainties of market dynamics effectively.
Strategic Development Group
Our experienced team is singularly focused on finding your project the best site for long-term success. We take a holistic approach and have the expertise to negotiate and navigate the intricacies of your unique company and needs.
Founded in 1999, SDG is a highly specialized site selection consulting firm. We focus on promptly identifying optimum locations, maximizing the value of incentives, and minimizing risk for corporations worldwide. SDG has managed projects with capital investments ranging from $15 million to over $1 billion for companies in a wide range of industries, including automotive, chemical, steel, and life science.
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This blog is an excerpt from Mark Williams’ revised and expanded book on site selection, “Corporate Site Selection and Economic Development, A 30-Year Perspective,” scheduled for release early next year.
