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Automation Drives Construction

Equipment advances and modernization prompt companies to build plants with shorter life cycles.

The multi-storied behemoths that dot the landscape of the American Northeast and South serve as a reminder of days when companies built physical facilities to be viable producers for more than a half-century.Today, however, many companies build plants with much shorter life cycles. Its not uncommon to see plants built as late as the 1960s or early 1970s no longer in use, according to industry engineering/construction consultants.Machinery changes so quickly now, said Wilson Tillotson, division manager, manufacturing, Lockwood Greene, a Spartanburg, S.C.-based engineering company. Buildings that were well-equipped for the latest manufacturing technology just a decade ago are woefully obsolete today.Automated processes, such as new doffing mechanisms for roving and spinning frames, require a different physical layout than older, more labor-intensive machinery. High-speed rapier looms need stronger, more stable flooring with less vibration; air-jet machinery taxes the capabilities of air compression systems; and temperature/humidity requirements stress the air conditioning.It is not uncommon to see companies move more toward pre-engineered construction, especially for some of the lighter processes, Tillotson said. You will likely see more and more companies gravitate in this direction.Pre-engineered facilities are suitable for such functions as cut-and-sew operations, Tillotson said. Heavier manufacturing, such as spinning and weaving, however, still require substantially more structural strength.The two biggest obstacles that confront most new facilities are environment and electronics, according to Neal E. Tonks, Ph.D., director of manufacturing, Bayer Corp.s Bushy Park plant near Charleston, S.C.Environment is, of course, an old issue, one that textile companies have faced regardless of when and where theyve built new plants. Electronic considerations, however, are relatively new to the industry so new, in fact, that it is easy to overlook their importance until painful and costly experience teaches otherwise.

The level of computerization in our operation is significant, Tonks said of the Bayer plant. The Bushy Park plant, which manufactures Bayers Dorlastan® spandex fiber, recently underwent a $60-million expansion. Computerization represents fully 25 percent of our total investment cost. We have a sophisticated control system that monitors our processes to ensure exact tolerances. Just the exercise of running cable trays was a major factor in the design of our facility of making sure we had the right infrastructure in place to get power and computer control to where it was needed.Tonks said it wouldve been a costly and time-consuming venture had electronic considerations not been such a high priority with the Bayer design team. It wouldve been a nightmare if we hadnt given thought to how we were going to design the electronic layout.In general, though, I believe these considerations are still an afterthought a lot of times. We are so focused on reaching economies of scale of fitting maximum production capability into minimum space that we overlook having the infrastructure in place to make the most efficient use of what we have.Environmental issues remain a primary consideration in new construction. Working with the EPA and the respective state and local regulatory organizations is old hat for almost all U.S.-based companies in the textile/apparel complex. But other than nonwovens and specialty applications, few new textile facilities are being built in the United States.Thats one reason we dont design plants to be in production for 50 years anymore, said one industry insider who preferred to remain unnamed. Despite all the advances in automation and production speed, textile manufacturing is still a labor-intensive process. The industry, to be competitive on a global basis, has to go to wherever the labor is available. Years ago, it migrated from the Northeastern sector of the United States to the South. Now it is moving to Mexico and Latin America. I believe we have a specific window of opportunity there, however. In the not-too-distant future, basic manufacturing will move again, essentially to wherever there is a ready supply of relatively skilled, inexpensive labor. So it really doesnt make a great deal of sense to build a plant to last 100 years.Environmental factors, depending upon location, might be less stringent in developing nations than in the United States, but major U.S. mills tend to build plants in other countries to specifications similar to those for domestic facilities.Air quality and wastewater treatment standards might be similar, but the process of getting required permits and approvals can be substantially different.Mexico is well-known for its bureaucratic, presentation-oriented approach, according to several mill executives. One mill reported it took more than a year to get the environmental impact statement approved, even though the mill used the same waste treatment, air abatement and hazardous waste disposal procedures that generally win quick approval in the United States.In addition, the same mill reports construction practices in Mexico that differ depending upon region.You find that contractors in the northern part of Mexico generally work much the same way as you would expect in the United States, using a lot of heavy equipment and mechanization, one executive said. The further south in Mexico you go, however, the more labor-intensive construction becomes. In the southern part of the country, if you need a ditch that is 10 feet wide and 40 feet long, you might see people in the trench with shovels. Conversely, you would never see that in the United States or in northern Mexico.Water is a particularly big issue in Mexico because all water is federally owned. A company building a plant has to dig its own wells, pay for all water pumped out of the well and then pay again when treated water is returned.From a cost perspective, U.S. mills say the only significant difference is in labor. Materials cost about the same in the United States and Mexico, and scheduling is very similar.Regardless of location, however, todays plants are built to provide optimum conditions for high-quality manufacturing. High-speed equipment exponentially increases dust and air pollution. Processes that might require one kilowatt of power a few years ago might now require 10. More air exchanges per hour are necessary. Power delivery has to be cleaner to provide uninterrupted operation of sensitive electronic controls.Infrastructure Tax DeductionsOur tax rules go to quite some length to define and limit the tax deductions for the infrastructure of your textile operation or business. Ordinarily, neither the buildings that house the operation nor what tax rules refer to as structural components qualify for fast tax write-offs.The term structural components includes such parts of a building as walls, partitions, floors and ceilings, as well as any permanent coverings such as paneling or tiling, windows and doors. It rarely includes machinery required to meet temperature or humidity requirements essential for the operation of other machinery or for materials processing.Machinery will meet a sole justification test even though it may provide employee comfort as well or serve, to an insubstantial degree, areas where such temperature or humidity requirements are not essential. A good example would be the air conditioning and humidification systems installed in many textile plants to maintain temperature or humidity within the narrow optimum range that is critical in processing particular types of yarn or cloth.Squeezing Faster Depreciation DeductionsUntil recently, textile operations and businesses could choose faster or slower depreciation methods for their machinery and equipment. Similar choices did not exist for buildings and their structural components, which were required to be depreciated over 39 years using the slow, straight-line method of depreciation.Today, the Internal Revenue Service (IRS), in IRS Legal Memorandum 199921045, provides guidance to building owners who want to maximize up-front depreciation deductions. Now, some of the assets installed in a building can be written off via accelerated depreciation over five or seven years (or even expensed immediately under the Section 179, first-year expensing rules) if they are not structural components.MACRS DepreciationUnder the IRSs basic depreciation system, MACRS (modified asset cost recovery system), nonresidential real property is depreciated over 39 years using straight-line depreciation. By contrast, so-called Section 1245 property is eligible for much faster depreciation (e.g., five years) using the 200-percent declining balance method.Under MACRS, a textile operation generally cannot break up a plant building into components and write off each separately. However, according to the U.S. Tax Courts decision in the case of Hospital Corp. of America vs. Commissioner (109 TC 21 (1997), if property would have qualified as tangible personal property for investment tax credit purposes under pre-1981 tax laws, it will also qualify as tangible personal property for MACRS purposes today.Assets Eligible For Quick RecoveryThe Tax Court concluded that Hospital Corp. could depreciate, over a five-year period, a percentage of the electrical systems, measured by electrical load, that was allocable to hospital equipment as opposed to building operation and maintenance. Also eligible for quick write-offs were many components, at least to the extent that they were for a function or equipment unrelated to the operation or maintenance of the building, regardless of the fact that the equipment was permanently installed.When a structure is built to house a restaurant, for example, that part of the cost of its electrical distribution systems that is allocable to the restaurants operation (e.g., refrigerators, freezers, food preparation equipment) would be eligible for five-year accelerated depreciation. Similarly, the owner of a building housing extensive computer operations should be able to claim a quick write-off for the portion of the electrical systems relating to the computers. Obviously, an engineer would have to certify the percentage of the electrical load allocable to non-building operation or maintenance.The IRSs legal memorandum validates the Tax Courts central conclusion regarding whether assets installed in a building should be eligible for fast recovery under MACRS. Unfortunately, that memorandum also states no bright line test exists for determining if property is a structural component or tangible personal property.The IRS doesnt have a test for separating structural components from the tangible personal property supporting your textile operation. However, the faster write-offs now available for that personal property make the effort of following the IRSs advice well worthwhile.By Mark E. Battersby Editors Note: Mark E. Battersby is a tax and financial advisor from Ardmore, Pa. He writes a weekly farm taxes column syndicated in 45 newspapers and a topical tax column carried by several trade magazines and more than 25 business publications.


August 2000



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