A n American Company Looks at Plant Construction Abroad
H. C A R L B A U M A N
WHY BUILD PLANTS ABROAD? .
U. S. wage scales make foreign cornpetitton inevitable
. . . Foreign countries do not always guarantee patent protection
. . . Good will is developed with local business men . . . Partic$ation
in local technological developments is assured
. . . T a x deferral advantages may acme . . . Competition with American
n the middle of the last decade, export of surplus
I European and Japanese production and technology
had begun. West Germany had made a spectacular recovery and with an eye toward regaining leadership in industrial areas, began to export new processes through direct sale, joint venture partnership and/or license agreements. It was inevitable that the high standard of living created in the United States since 1945 should become the very cause of the increasing competitive climate. High wage scales in the United States make it inevitable that competition from abroad will soon cut deeply into our productive capacities. EDITOR’S NOTE
This artzcle introduces a series which will discuss costs of constructing chemical plants in foreign countries. Zncluded in the series will be comparisons of equ$ment and Labor costs with those in the United States. Other comparisons will be drawn between costs of entire plants and similar facilities built in the United States. The secondpart of thzs series will appear in M a y . Throughout the discussions, the reader may j n d it somewhat sfrange to see Canada listed as a ‘tforeign” country or referred to as being “abroad.” But many of the basic reasons underlying decisions t o build in countries other than the United States also apply to Canada. And government statistics on investments and expenditures in foreign countries list Canada along with Europe, South America, Africa, and Asia. 34
I N D U S T R I A L A N D E N G I N E E R I N G CHEMISTRY
companies in foreign markets is met
It is oiily a matter of time, therefore, beiore a manufacturing cost balance will be reached between foreign and ilmerican manufactured goods. The determinin? factors for selling price will be low labor rate and high productivity when foreign manufacturing facilities are equal to U. S.levels of capacity and efficiency. Recognizing this truism, American industrial management has been looking abroad to establish industrial footholds through direct investments, wholly owned subsidiaries, partnerships with local business firms, and cross licensing of process know-how. In the two decades after 1929, U. S. investments abroad had increased about 60%. I n the 10 years, 1950 to 1960, investments abroad increased over 177%. During the 10 year period, 1950-GO investments in the chemical industry abroad had the largest advances of all manufacturing groups. Investments rose from $500 million in this period to $1.9 billion, almost 370% in 10 years. These investments were in many products ranging from drugs to basic chemicals and fertilizers. Operations ranged from processing of raw materials to the packaging of finished products. Almost half o€ the investments in the chemical industry were in Canada. Latin American republics received about 21% of the $1.9 billion invested in 1960. Almost 28y0 was invested in Europe, or a total of $537 million. Other investments were in Africa, Asia, and to a lesser degree in practically all other free areas of the world. All
C h m l t Shows the dlnrlbutlon o( Amorloin Invostmmnt8 In f I V 0 mrlor r m u from (02e throush
le60
B i l l h i d Ddln
V O L 5 4 NO. 3
MARCH 1962
35
EVOLUTION OF COMPETITION Drying up of sources o f supply in Europe during W o r l d W a r I led to the establishment of the chemical industry in the United States. Extraordinary demands of W o r l d W a r II and the post-war recovery made this country undisputably the world’s chemical manufacturing leader. Post war recovery programs, initiated largely in the United States, raised health, education, and production standards in underdeveloped areas of the world. And, in many cases, foreign productive capacity partially o r completely destroyed by war, or taken as reparations by the Russians, was completely rebuilt with funds and technical know-how provided largely by the United States. This resulted in a favorable balance of trade for the United States. The memory of two wars did something for Europe which neither treaties nor coercion could in the preceding centuries. A group of Western European nations agreed to form a common market to aid European economic recovery and to offset the threat posed by growing Communist productive capacity. Advantages provided by the European Common Market in lowered tariffs and wide trade latitude among the member nations contributed greatly to accelerating the rebirth of the industrial economy of Western Europe. Advantages of the European Common Market are obvious. Included in this market are 200 million people. Lowering trade barriers between member nations did for Western Europe what the absence of such barriers between our own states did for our country. As a consequence, the integration o f modern industry in Europe brought an early completion of the reconstruction phase o f the recovery program, and the start of the inevitable competitive race with the United States.
indications are that the trend for foreign investment is still increasing rapidly. A significant proportion of the earnings of U. S. chemical companies are plowed back into research to develop new products which enable the U. S . to maintain its high standard of living. Adequate guarantees are provided the developers through the protection of the U. S. patent system to make it possible to recover research funds. This is not always the case abroad. Italy, for instance, does not grant patents for new drugs and pharmaceuticals, nor does she recognize our patent laws. Italian manufacturers can duplicate any American drug without payment of royalties or license fees to the inventor or his assignees. Since it requires relatively small amounts of capital to build drug manufacturing facilities to produce a satisfactory grade of product, the field is open to many marginal producers looking for quick profits, made at the expense of firms who spend considerable portions of their income for research and development of new products. I t becomes impossible to compete in such an utterly free market with drugs manufactured in and exported from the United States. One solution is to acquire production facilities abroad to equalize the cost of manufacture, thus providing a basis for competing against high U. S. production costs and foreign duties. Business proponents of high tariff walls await the results of President Kennedy’s proposed Tariff plan to overhaul the Reciprocal Trade Agreements Act. As this is written, agreements have already been reached between the U. S. and the Common Market to reduce tariffs on selected industrial items and some agricultural products approximately 207,. Whatever the long term effects of liberalizing reciprocal trade agreements may be, American industry continues to consider advantages of additional foreign investments to protect its markets a t home and abroad. One argument for lowering tariff walls relates to the fear of reprisal by imposition of higher duties by exporting countries now purchasing large volumes of American products. The climate for receiving American investments still remains favorable. However, serious competition may be expected from the Communist countries anxious to obtain economic footholds in the newly formed nations in Asia and Africa, as well as the underdeveloped countries of the world. There are indications that the USSR is attempting to sell licenses in Russian patents, even in the United States. An important reason for extending U. S. business enterprises in foreign countries relates to the good will that partnerships with local businessmen engender. The trend is toward operating entirely with indigenous labor and materials so that in all respects the business
H. Carl Bauman is Manager of the Cost Engineering Department, Engineering and Construction Division of American Cyanamid. H e authored IdYEC’s Costs feature on alternate months from Aprii 7958 to October, 1961. AUTHOR
36
INDUSTRIAL A N D ENGINEERING C H E M I S T R Y
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mntributes to the well txme 01 tne local economv. AO investment abroad also assures participation in local ological developments. Research and developt costs are comprised largely of salaries for skilled tists, engineers, and technicians. The very linely ated and trained technical personnel still available ughout Western Europe can be retained at salaries good deal lower than in the U. S. Certain tax deferral advantages and the tax haven ' ple may still accrue to the advantage of U. S. established in foreign countries. Not the least of ns for establishing businesses abroad is the fact reign firms, particularly those in European untries, are competing increasingly in the U. S. petition among U.S. firms building abroad makes it perative to consider establishing plants overseas to te with the American firms in foreign markets. United States government has recognized the r overseas projects throughout the post war enod. Much encouragement is given the American I
Table 1.
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DuSlneSSman to mvest m toreinn fieldsor to establish some of his plants and subsidiaries abroad. There are many Federal agencies organized to aid the businessman seeking overseas commitments. The Export-Import Bank has been established many years and specializes in making loans for foreign enterprise on reasonable terms. The U. S. Department of Commerce acts as a clearing house for information on foreign business and investment. The International Cooperation Administration encourages and aids U. S. private investments in underdeveloped countries. The Development Loan Fund provides capital on reasonable terms for the economic development of certain Western countries. Other agencies aiding the development of overseas projects are the International Bank for Reconstluction and Development, The International Monetary Fund, and the recently organized Inter-American Development Bank. This latter agency is a counterpart for the Western Hemisphere of the International Bank.
Exporh VI. lmporh of Chemicals and Related Products
(Comfiared with foreign trade of all U.S. mnchnndise; yearly averages in millions of dollars) A l l Merchndue Chemicals, Related Products Ljport % sf Export % of Exports Imports excess exports Exports Imports excess ex@rts 80 73 47.7 153 738 22.8 2,482 3,220 131 269 67.2 65.0 400 6,537 10,051 3,514 119 597 83.2 43.7 716 6,659 5,170 11,829 268 677 71.6 945 4,501 29.4 10,832 15,333 79.0 1,437 306 1,131 5,544 29.0 13,650 19,194
Year 193640 1942-45 1946-50 1951-55 1956-60
-.
Abrh4
J Ih U * w SUII, 7961
Table II. The Trend In Foreign Investments Is Upward
(Billion dollars; book values) Industry Manufacturing Petroleum Mining and smelting Public utilities Other Total
1929
1946
1950
1957
1959
196P
1,8 1.1 1.2 1.6 1.8 7.5
2.4 1.4 .8 1.3 1.3 7.2
3.8 3.4 1.1 1.4 2.1 11.8
8.0 9.0 2.4 2.1 3.7 25.2
9.7 10.4 2.9 2.4 4.3 29.7
11.1 10.9 3.0 2.5 2.7 32.7
Sarv: (I. S B.riw, Imstmmli in Fmitn c.mhi.~,U. S. DmrIarrr e/ Cm-, R.fimia,wy.~
1960; h , of Cwml Bu&r.. ky. 7967.
a
Table 111.
.
s-s:
1950 1957 1959 1960"
Foreign Investments of
Total AN Areas 138 205 221 512 1,378 1,661 1,902
U. S. Chemical and Allied Products Industry AH &owin# (Million dollars) Latin Ammkan Canado Republics 24 45 27 99 65 86 198 205 647 334 743 358 817 408
U.S.Bur*ur elurnauk F m ' p Uabi.r, 7960 (1. S. LWrfmM of
% I * .
Ihamm; ST 'W
Europe 58 71 52 74 319 447 537
All Other counhies 12 8 18 34 79 113 139
$ &ml BuinU., ky. 1967.
VOL 5 4
NO. 3 M A R C H 1 9 6 2
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