2017 Capital Spending Survey: Foreign Investment Drives U.S. Growth

Instead of exporting finished goods, more non-U.S. food companies are exporting manufacturing capacity to North America.

By Kevin T. Higgins, Managing Editor

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If the budgets of some of the food and beverage industry’s largest companies are any indication, capital spending budgets this year are 10.4 percent higher than what was actually spent last year.

Based on 10K reports and other public disclosures, 38 publicly traded food manufacturers plan to spend $16.5 billion on capital projects in 2017.

A glass-half-empty take would note that those budgets are actually 4.8 percent lower than 2016 budgets, and actual spending last year was nearly 14 percent below what the same companies budgeted for the year. Nonetheless, 2016 actual spending was a healthy 3.9 percent of company revenues for the year on average.

Those reports express the spending in U.S. dollars. For a growing number of U.S. food factories, corporate accountants will denominate spending in euros, yen and other currencies.

Available cash from operations typically funds capital projects, sometimes augmented by credit lines for big-ticket undertakings or when operating losses or other conditions threaten to choke off reinvestment. Capacity expansions, cost-savings initiatives and investments in equipment or software are typical capital expenditures, and building a new production facility can cause capex spending to balloon.

As companies scramble to meet burgeoning demand for their products or to replace older plants that simply do not measure up to today’s food safety standards, there is more activity in major facility expansions and greenfield projects. And increasingly, the owners of those new or expanded plants are based outside of North America.

A new record in foreign direct investment in the U.S. was set in 2016, reaching an estimated $396 billion, 12 percent higher than the already-robust mark set in 2015, according to the Organization for International Investment. Manufacturing is the largest recipient of foreign cash, accounting for more than a third of foreign direct investment, and food and beverage is the second favorite manufacturing sector for those investments. From 2009-2014, foreigners poured more than $122 billion into U.S. food and beverage capex, and a review of current projects indicates that figure is rapidly rising.

Morinaga & Co. is part of the new wave. The Tokyo-based confectioner established a sales and distribution office in Irvine, Calif., to gauge interest in its line before opening Morinaga America Foods Inc. in Mebane, N.C., in 2015. It was Morinaga’s first non-Asian production facility, though something of a homecoming: Founder Taichiro Morinaga mastered candy-making in America in the 19th Century, before returning home and building a confections giant.

“After many years, we came back home,” jests Toshiaki Fukunaga, president, speaking through an interpreter. “We’re very happy to be here.”

CapEx GraphicProximity to major U.S. markets drove the decision to invest $48 million on a 120,000-sq.-ft. facility in eastern North Carolina. Two hundred miles north would have provided even better logistics, but severe weather concerns ruled out Ohio or Pennsylvania. “We wanted to avoid a snowstorm that could close the plant,” Fukunaga says of the location decision.

Chinese companies are beginning to assert themselves in the North American manufacturing space. Feihe International Inc. is expected to break ground in April on an infant formula plant that will come on line in late 2019 north of the border in Kingston, Ontario. The company plans to export 80 percent of throughput back to China.

In North America, the U.S. dollar’s strength vs. the Canadian dollar makes manufacturing particularly attractive north of the border, as does the free-trade policy of Prime Minister Justin Trudeau. “Trudeau is one of the last men standing as a globalist,” points out John Boyd Jr., principal of the Body Co., a Princeton, N.J., site selection consultancy. “Eastern Ontario is exceptional for two reasons: the Saint Lawrence Seaway and the interstate connections” to the biggest U.S. metropolitan markets.

For foreign food companies, establishing U.S. manufacturing capacity could serve as a hedge against trade restrictions. If the only way to tap into the world’s largest economy is to make your products there, building a U.S. plant secures future access.

The value of U.S. food exports exceeds food imports, and the prospect of trade wars has some food manufacturers on edge. In its recently released annual report, TreeHouse Foods Inc. cites the rhetoric of then-candidate Donald Trump regarding the North American Free Trade Agreement and other treaties. “Any changes to NAFTA could impact our Canadian operations,” the company warns investors. “Changes in U.S. political, regulatory and economic conditions or laws and policies governing U.S. tax laws and foreign trade in countries where we or our customers operate, in particular Canada and Italy, could adversely affect our operating results and our business.”

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