Automation Drives Construction

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

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.
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