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14 September, 2022

How important is an anchor tenant to attracting further FDI to a location?

Why are anchor tenants considered so important for attracting FDI? And is there a downside to bringing in this kind of big business?

By Cara Lyttle

Securing the right anchor tenant can be hugely lucrative for a country or region’s economy. It not only generates significant capital investment and job creation, it can also attract a host of new companies drawn in by any initial success.

Anchor tenants can strengthen regional supply chains and, as they rarely relocate, offer a strong sense of employment security. With so many economic benefits it is easy to see why investment promotion agencies (IPAs) are so keen to attract them. However, is there a downside?

Nissan: Sunderland’s automotive anchor since the 1980s

Nissan’s journey in the UK began almost 40 years ago when the Japanese car manufacturer decided to open its first manufacturing plant in the country on the former site of Sunderland Airfield. In 1986, a mere two years later, production at the site began and since then it has been a staple of north-east England’s automotive industry.

In mid-2021, Nissan announced plans to establish a $1bn electric car (Y143.89bn) plant in the city, creating 1,650 direct jobs. However, the implications of this announcement spread much further. When considering indirect jobs such as component suppliers, it is estimated some 30,000 people can attribute their employment to Nissan’s Sunderland operations.

Nissan arrived in Sunderland at just the right time for the city after it experienced significant job losses in its traditional industries of shipbuilding and coal mining. The move also formed part of a wave of Japanese automotive companies setting up bases in England, including Honda coming to Swindon in 1979 and Toyota launching operations in Derby in 1992.

IPA Invest North East England refers to the region as “a centre for manufacturing automotive excellence” with more than 240 automotive companies active in the area. Regionally, more than 25,000 people are directly employed in the industry, with an estimated 116,000 indirectly employed in the wider manufacturing sector, generating an annual turnover of £11bn ($12.8bn).

The North East offers its businesses a robust supply chain, with 31 Tier 1 suppliers (direct suppliers to the original equipment manufacturing industry) including power electronics manufacturers, battery manufacturers and engine manufacturers. Automotive producers in the North East are now producing one-third of the UK’s passenger vehicles as well as 20% of all battery-powered vehicles in Europe, showing how significant the region’s automotive manufacturing has become. When there was a perceived threat to the region’s car-making industry as a result of the Brexit deal, the UK government was quick to step in with a deal to shore up Nissan’s investment.

With such a well-established and competitive supply chain, along with government support, it seems the North East will continue to attract significant investment in the automotive industry for many years to come.

Intel announces its largest-ever foreign investment in Germany

In March 2022, after much speculation, Intel officially announced that it had chosen Magdeburg in Germany as the location for its new €17bn mega-investment. In the initial phase, Intel plans to develop two semiconductor fabs in Magdeburg, with construction scheduled to begin in the first half of 2023. The investment is the largest ever in Germany and will create 3,000 permanent high-tech jobs.

Magdeburg, located in east-central Germany, has a population some 16 times smaller than that of Berlin, and prior to Intel’s investment the city was known for little other than its historical landmarks. In addition to the 3,000 staff to be employed at the facility, around 7,000 additional workers will be hired for its construction.

Intel’s German operations will represent only part of the first phase of its EU investment plan. The company has confirmed plans to invest up to €80bn in the EU by 2032 across the entire semiconductor value chain, including research and development, manufacturing and logistics.

Intel’s decision to confirm Magdeburg as its chosen location was delayed slightly due to the Russian invasion of Ukraine, but after conferring with local authorities the company decided to proceed with the investment. Patrick Gelsinger, the company’s CEO, confirmed the news, explaining to the New York Times: “We found no hesitation on their part, and there is none on ours... [The conflict in Ukraine] just reinforces our priority to build out more resilient global supply chains.”

The huge expenditure in Saxony-Anhalt (the state in which Magdeburg is located) will almost definitely encourage an influx of investment as companies scramble to set up supply chain operations and reap the downstream rewards of such a significant project. Regionally, the area will benefit from an upsurge in employment, increased local spending and a demand for indirect jobs to support Intel’s ambitious plans to tackle the global shortage of semiconductors.

Similarly, US-based semiconductor chip producer GlobalFoundries has plans to invest $1bn to expand its chip plant in Dresden, a German city located three hours south-east of Magdeburg. Although not in immediate proximity, two such facilities operating in the same sector and in the same country have the potential to encourage yet more investment, as Tier 1 suppliers can locate in-between both facilities and, should they have the capacity, increase their outputs.

Magdeburg had previously been overlooked by several established companies, which opted for more well-known Germany cities. In 2005, BMW considered the city as a location for a plant but chose Leipzig, while Tesla recently announced Gruenheide on the outskirts of Berlin as the site for its first European gigafactory. Intel’s vote of confidence in Magdeburg could finally propel the city and the region forward. With such a prominent anchor tenant producing in-demand products during a global shortage, its profile will soar and the city will appear more firmly on all high-tech companies' radars.

How Ireland became a technology hub with several anchor tenants

Despite stiff competitions from cities in the nearby UK, not to mention those on the European mainland, Ireland, and particularly its capital Dublin, has managed to carve a name for itself as a leading technology hub. Primarily focused in Dublin's Silicon Docks, and spreading out to smaller Irish cities such as Galway, Cork, Limerick and Waterford, about 80,000 people are believed to be working in the country's booming tech industry.

California-based tech giant Apple first came to Cork in 1980, employing 60 staff. Fast-forward 40-plus years and the site now operates as Apple’s European headquarters, employing 6,000 staff and expanding to include support services and logistics. As with Nissan in Sunderland, Apple managed to secure additional tech investment for Ireland’s second-largest city. In 1990, Dell Technologies established operations in Cork, and in 2005, global cloud computing company VMWare opened its office in the city, with the company’s chief technology officer commenting on “the exceptional talent pool Ireland provides". However, although Cork provides generous examples of successful anchor tenants in Ireland, Dublin wears the crown.

The Silicon Docks, located in the southern part of the inner city, has transformed from a derelict area targeted for redevelopment to a symbol of Ireland’s hard-earned prosperity. It is now home to some of the world’s largest tech and professional services companies including the likes of Meta (formerly Facebook), Google, Airbnb, TripAdvisor, Accenture and Indeed.

Although the corporate tax rate offered in Ireland is undoubtedly an added appeal to investors, a host of thriving anchor tenants is perhaps more alluring for would-be foreign investors. Unlike with major manufacturing investments (when one tends to dominate a region), tech and service-based companies can often co-exist well in a cluster environment.

Manufacturing versus service-based companies as anchor tenants

Aside from needing much less physical space than those in manufacturing, service-based companies also tend to require less support from authorities when setting up operations. Although Dublin is already home to a multitude of such companies, it still has the capacity, and desire, to attract more. If US-based social media giant Meta was to close its Dublin operations tomorrow it is likely its staff could find alternative employment within the Silicon Docks area. The cluster of companies in the area employ workers with similar skill sets, and so being located in such close proximity offers additional job security for the companies and workers alike.

In contrast, large manufacturing anchor tenants are, by nature, more resource heavy. Magdeburg would undoubtedly struggle to support another multi-billion-euro investment after accepting Intel’s proposal. The physical space required to set up such facilities, the infrastructure needed to support transportation to and from them, and the large of pool of staff needed to work there make having multiple such investments in one smaller area fraught with difficulties. Anchor tenants create countless economic and social benefits for a region; however, there is one looming question – how quickly can sustentation turn to over-reliance?

Can regions become over-reliant on their anchor tenants?

Winning one significant anchor tenant can be worth its weight in gold for a region (and its IPA). Unemployment rates will typically drop, and regional turnovers will increase as wages from new facilities are pumped back into the local economy.

When this occurs, the main potential disadvantage becomes over-reliance. Entire city economies can be based around one small industry, which has been devastating in the past when, for example, coal or steel plants have closed down, or an industry has declined due to cheaper foreign competitors emerging, as happened to Detroit and its automotive industry.

In late 2021, US-based gas and chemical company CF Industries announced it was halting production at its UK sites due to a rise in natural gas prices, leaving 600 local jobs hanging in the balance – and this is at the smaller end of the scale. If a mega-investment anchor tenant where to shut up shop or relocate to pastures greener it could cause irreparable damage to a region’s local economy. Anchor tenants that drive investment and additional big wins should be celebrated; however, it should be remembered that over-reliance on one company, or even one industry, can expose a location's weakness.

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