Blow molder Bomatic Inc. expects to make its plastic bottles for 10 percent less at its new plant in Utah, compared with the company's longtime California headquarters facility.
In a tight manufacturing economy, the savings matter. So the company is packing up and leaving the Golden State, part of a small wave of plastics firms and manufacturers that have left California for cheaper locales, often in other Western states or across the border in Mexico.
Factories always have sought out cheap locations - witness the migration of man- ufacturers to the U.S. southeast and now offshore.
But some site-selection experts say that in a soft economy, where 2.8 million U.S. manufacturing jobs have been lost in three years, cost is becoming almost the only thing many companies consider.
``What is driving site selection these days is the cost of operating a manufacturing plant,'' said John Boyd, president of Boyd Co. Inc., a site selection firm in Princeton, N.J.
``Companies say they have to cut costs. They can't boost sales and increase the top line.''
Bomatic's move was precipitated by rising costs.
Since 2000, its electric bill in California has gone from $30,000 a month to $110,000, and its workers' compensation bill has jumped from $80,000 to $340,000 a year.
``Bottom line - we're struggling,'' said Kjell Hestehave, president of the family-owned firm. ``Most of us in the plastics business, we're making a few percent [profit]. The majority of us are making 5 percent or less. These costs are just killing us.''
When the company's new St. George, Utah, factory opens its doors in mid-2004, California will see about 100 jobs disappear.
While Hestehave said he does not want to move, he said the economics became too hard to ignore. In Utah, electricity will cost $15,000 a month, and workers' compensation, $30,000 a year, he estimates. And he can ship products to California in five hours.
``Leaving California has been very, very difficult,'' he said. ``I've been here since 1956.''
Bomatic's not alone: Injection molder Saint-Gobain Calmar Inc. cited taxes and the high cost of insurance, workers' comp and energy in August when it announced it was moving its City of Industry, Calif., spraying systems plant to Mexico.
Closure molder Portola Packaging Inc. said in July it was relocating two plants from California to Arizona.
On both electric costs and workers' comp, the home of Hollywood is being cast as the villain, as far as manufacturers are concerned.
Power to industrial users costs an average of 10.17 cents per kilowatt-hour in California, almost twice the national average of 5.28 cents, and well above some neighboring states, like Utah at 4.18 cents and Arizona at 5.78 cents.
It's a similar story with workers' compensation costs. California costs three times the national average, the highest out of 45 states with private workers' compensation insurance ranked by the Ronkonkoma, N.Y., consulting firm Actuarial & Technical Solutions Inc.
Arizona and Utah, by contrast, are the two lowest-cost states, with costs averaging less than one-sixth of California and less than half the national average. ATS measures workers' comp costs for manufacturers in the 45 states with privately run systems and ranks them in relative terms.
One small Utah economic development agency said it's been visited by so many plastics firms in the past six months, it plans to start targeting the industry.
Lower workers' compensation and energy costs are two of the driving issues, according to Clark Krause, economic development director for the Cedar City/Iron County Economic Development Agency.
North America Packaging Corp. built an injection molding plant in Cedar City in 2002, and has saved $1 million a year in electric costs, compared with its plants in California, Krause said. Companies can truck from Cedar City to Los Angeles or Phoenix in a day, he said.
The rising cost of workers' compensation, back to levels seen in the early 1990s, means the topic is attracting attention in state governments concerned about losing businesses to cheaper states, including in California, said Peter Burton, senior division executive for state relations with the National Council on Compensation Insurance in Boca Raton, Fla.
``It was a significant legislative issue in the early 1990s, when it was tied to business development and business retention,'' he said. ``We're starting to see that return.''
Burton said workers' comp costs are rising for a range of reasons: increasing medical expenses, a slumping stock market that has hurt insurance company investments, and more restrictive policies from insurance companies after Sept. 11.
While costs are rising, Burton said that workers' compensation insurance prices in the late 1990s were artificially low and insurance companies offered discounts to win business.
Economic development officials said the need for businesses to contain costs and deal with more competition, including from abroad, is not lost on them.
``In our talks with some of these plastics companies, China is the buzzword,'' said Mike Harvey, vice president of marketing at the East Tennessee Economic Development Agency in Knoxville.
ETEDA is targeting the automotive and medical segments of the plastics processing industry, in part because it hopes they are more likely to remain in North America.
The agency also sees those plastics companies fitting in with the automotive manufacturing base in the Southeast, and with the medical research community in Knoxville, he said.
The tight economy means fewer site selection projects, Harvey said. But conversely, it also seems to mean those that are going forward are moving much faster. Location decisions that used to take years now are settled in three to six months.
``It's just kind of a response to that global market,'' he said.
Other officials who target plastics firms say the economic environment has pushed them to work more closely with their existing companies.
The manufacturing industry in Yakima, Wash., has receded, part of a more than 20 percent loss in employment in Washington's manufacturing base since July 2000, said David McFadden, president of New Vision, the Yakima County economic development agency.
That loss has made the local industry especially cost-conscious and worried about both the general economic slowdown and overseas competition, particularly China, McFadden said.
So the agency has developed tools like basic skills assessment, focusing on math and research techniques, and seminars on lean manufacturing, he said. Local firms like Macro Plastics have taken advantage of them, he said.
``If companies are facing the competitive pressures, and not expanding, these are the things we can help companies with,'' McFadden said. `` If we're helping local industry and they're happy, we think that's one of the best things that will send the message about our business climate.''
Many companies' desire to seek out lower-cost manufacturing locations has been heightened, he said: ``[Cost has] always been a priority, but it's really accelerating in this economic environment.''
That frugality is serving as something of a boon for Canada. Several site selection experts said that the country's nationalized health-care system imposes fewer direct costs on businesses because personal income taxes pay for more of health care, some experts say.
``There's a big opportunity for Canada for government-provided health care,'' said William Linchwalla, a senior site selection consultant at Plante Moran & Cresa LLC in Southfield, Mich. ``The personal vs. corporate tax structure that puts more of an onus on the individual can provide opportunities for corporations making site selection decisions.''
Depending on circumstances, he said, companies could see savings on nonwage benefits of 25-60 percent in Ca- nada, compared with the United States.
The impact of health-care costs is substantial for U.S. manufacturers. Ford Motor Co., for example, claims health-care costs put it at a $780-per-car cost disadvantage compared with imports produced in countries with nationalized health insurance.
Canada is seeing growth in both the automotive and food-processing industries, both of which are good markets for plastics processors, said site selection consultant Boyd. The food-processing industry is growing in part because Canada pays competitive world market prices for sugar, while U.S. food manufacturers have to pay more because the U.S. protects its sugar industry, Boyd said.
Boyd, who has been in the site selection business for 30 years, said he sees a subtle shift of business north to Canada.
While some observers note that Canada's labor laws generally are less friendly to businesses than those in the United States, Boyd said the tariff-free border and lower fringe benefit and energy costs make the country an inviting spot for European manufacturers that want a North American location.
``In this post-NAFTA phase, our clients are making borderless decisions,'' he said.
Hestehave of Bomatic, the blow molder that is moving to Utah, also is making borderless decisions.
Three years ago, his company set up a plant in Toronto, after looking at Indiana and other locations in the eastern United States. Bomatic decided on Toronto, again in part because of cheaper energy and fringe-benefit costs, and because it easily could ship to the eastern and midwestern United States, he said.
``In our industry, shipping has always been a big problem - that's why blow molders are localized,'' Hestehave said. ``For the last five to 10 years, we've had guys in from Canada shipping it here cheaper than we can make it.''