11.1.5: Explain why some industries locate near markets.

Situation Factors: Proximity to Markets

For many firms, the optimal location is close to customers. Proximity to markets is a critical locational factor for three types of industries: bulk-gaining industries, single-market manufacturers, and perishable-products companies.

Bulk-Gaining Industries

A bulk-gaining industry makes something that gains volume or weight during production. To minimize transport costs, a bulk-gaining industry needs to locate near where the product is sold.

A prominent example of a bulk-gaining industry is the fabrication of parts and machinery from steel and other metals. A fabricated-metal factory brings together metals such as steel and previously manufactured parts as the main inputs and transforms them into a more complex product.

Fabricators shape individual pieces of metal using such processes as bending, forging (hammering or rolling metal between two dies), stamping (pressing metal between two dies), and forming (pressing metal against one die). Separate parts are joined together through welding, bonding, and fastening with bolts and rivets.

Beverage bottling is another good example of a bulk-gaining industry. In this case, the product gains weight. Because water is the principal ingredient in beer or cola, a filled container is much heavier than an empty one. Shipping filled containers is more expensive than shipping empty ones, so to minimize shipping costs, bottlers locate near their customers rather than the manufacturers of the containers.

Single-Market Manufacturers

A single-market manufacturer is a specialized manufacturer with only one or two customers. The optimal location for these factories is often in close proximity to the customers. An example of a single-market manufacturer is a producer of buttons, zippers, clips, pins, or other specialized components attached to clothing. The clothing manufacturer may need additional supplies of these pieces on very short notice. The world’s largest manufacturer of zippers, YKK, for example, has factories in 68 countries in order to be near its customers, the manufacturers of clothing.

The makers of parts for motor vehicles are another example of specialized manufacturers with only one or two customers—the major motor vehicle producers, such as GM and Honda. Carmakers’ assembly plants account for only around 30 percent of the value of the vehicles that bear their names. Independent parts makers supply the other 70 percent of the value. In the past, most motor vehicle parts were made in Michigan and shipped to nearby warehouses and distribution centers maintained in that state by the major producers. From the warehouses, the producers sent the parts to plants around the country where the vehicles were assembled. Parts makers now ship most of their products directly to assembly plants and are therefore more likely than in the past to cluster near the final assembly plants.

Honda’s U.S. and Canada Assembly, Engine, and Transmission Plants

Figures show 2017 production volumes.

Perishable-Products Companies

To deliver their products to consumers as rapidly as possible, perishable-products industries must be located near their markets. Because few people want stale bread or sour milk, food producers such as bakers and milk bottlers must locate near their customers to assure rapid delivery. Processors of fresh food into frozen, canned, and preserved products can, however, locate far from their customers. Cheese and butter, for example, are manufactured in Wisconsin because rapid delivery to the urban markets is not critical for products with a long shelf life, and the area is well suited agriculturally for raising dairy cows.

Pause & Reflect 11.1.5

How do transportation costs help to determine the optimal location for each industry discussed on this page? Explain your answer.

Motor Vehicle Production & Sales

The motor vehicle is a prominent example of a fabricated metal product that is likely to be built near its market. Around 90 million new vehicles are sold annually worldwide. China accounts for 30 percent of those sales, other Asian countries 19 percent, North America 20 percent, and Europe 22 percent.

Motor Vehicle Sales

China, the rest of Asia, North America, and Europe account for more than 90 percent of world vehicle sales.

Not surprisingly, in view of the importance of producing vehicles near their markets, the regional distribution of production is extremely close to that for sales. China has 30 percent of world production, the rest of Asia 25 percent, Europe 23 percent, and and North America (including Mexico) 21 percent. For example, around 80 percent of vehicles sold in North America are produced in North America. Around 10 percent come from Japan and 10 percent from elsewhere. Similarly, most vehicles sold in Europe are assembled in Europe, most vehicles sold in Japan are assembled in Japan, and most vehicles sold in China are assembled in China.

Motor Vehicle Production

The regional distribution of vehicle production closely matches the regional distribution of sales.

While most vehicles are produced near where they are sold, the nationality of the manufacturers is less likely to be local. Eight carmakers sold at least 4 million vehicles in 2017 and together accounted for 64 percent of the world’s sales. These included two based in North America (Ford and GM), three based in Europe (Germany’s Volkswagen, France’s Renault (which controls Nissan), and Italy’s Fiat Chrysler), and three based in East Asia (Japan’s Toyota and Honda, and South Korea’s Hyundai). These carmakers operate assembly plants in all three major industrial regions.

Within North America, most motor vehicle production is clustered in the corridor known as Auto Alley, formed by north-south interstate highways 65 and 75 between Michigan and Alabama, with an extension into southwestern Ontario. A second cluster has formed in central Mexico.

Changing Distribution of North American Assembly Plants

Ford Motor Company Engine Plant Casting Plant, Brook Park, Ohio