It seems quite weird when you hear that large corporations close factories which are efficient in operation and profitable and are rated among the top factories by the firm. Closing such factories would at least seem counterproductive to the aim of creating wealth for shareholders. Nevertheless, corporate behaviour is affected by both internal and external factors which go more than just the economic bottom line.
Corporate Strategy Change and Business Restructuring
Companies are subjected to changes associated with market forces, the advancement of technology, or competition. At times, a corporation may decide to change its long-term goals or perspective on a product which may result in the closure of even the most efficient structures. For instance, even if a plant is generating adequate profits, a company may decide to close it if the firm wants to stop doing business in that geographic area or stop selling that particular product. On other cases the market share is shrinking and the total corporate manufacturing capacity results above the future needs; the fixed costs which were acceptable become than unbearable.
In automotive, energy or electronics industries, it could happen situations when companies start seeking growth on wholly novel segments, like electric vehicles or green energy technologies, while abandoning production of obsolete goods or goods which will be phased out in about two to three years.
Optimization of Global Supply Chain
Although a plant may be reasonably priced within itself, it could be inefficient when put in the overall picture of the corporation’s global supplies chain plans. Big corporations are present in different regions and continuously evaluate their supply chain networks for possibilities of efficiency. It is even imaginable that eliminating one factory in one area may make it possible to centralize production in another area where costs of transporting manufactured goods are low, there is better location, or it is more favourable tax-wise.
Sometimes companies centralize their production activities in areas where they get better support by the government. This could be direct through financial contributions or indirect through contribution which are provided to the concerned suppliers in order to create for instance a proper manufacturing and engineering ecosystem around the factory itself.
Progress in Technologies
Technology, automation and robotics development may lead to the depreciation of even low-cost and highly profitable factories. There may be a justifiable reason to close even profitable oil refineries, arising out of the need to develop more ideal, less expensive, and greater production oil refining and automation facilities to replace the old ones. In several sectors, automation eliminates or significantly reduces the human workforce requirements and enhances operational efficiency thereby inducing investors to put their money to modern plants equipped with advanced technology.
This is particularly true for industries such as manufacturing, where plants that utilize automation technology are able to run on operating costs that are considerably lower than those of physical plants which largely depend on labor scare manpower. More often than not, the promise of future profitability in such highly automated settings outweighs the immediate returns from the current, population-based factories.
Environmental and Sustainability Considerations
Corporate Social Responsibility, as well as its corresponding commitment to sustainability, has been integrated into business operations. Pressure is building on Large Enterprises from governments and consumers as well as investors to attain Environmental, Social and Governance (ESG) targets. A factory with effective and efficient processes and economic aspects could be shut down if it fails to satisfy today environmentally acceptable principles or the carbon emissions are high even if the economic profitability is high.
For example, facilities that use more carbon and are out of compliance with the company’s sustainability objective might be disbanded and replaced with less carbon-intense ones. Companies have in certain occasions taken actions that impacted in the short-term on the company’s bottom line by investing in measures that minimize the company’s carbon footprint.
Mergers, Acquisitions, and Corporate Consolidation
When companies join together or purchase companies, duplication of efforts is typically found within the new structure of the companies. This may even affect replacement of plants and shut down those that have been generating profits. The thinking in this case hinges upon the need or percentage of those factories that need to be leveraged spread across various production levels and centres so as to cut back on overhead administrative costs.
For instance, a company which has taken over a competitor could have several plants all making the same product lines. With the unification of production on one or two plants even if this involves the closure such a cost efficient plant, there is bound to be less wastages in the running of that business.
Changes in Consumer Preferences
The most advanced and high-capacity factories can also be closed if the buyers of the goods manufactured in these factories do not wish to buy these products anymore. Consumer behaviour sensitivity, trends in the market and advanced technology may render some products intolerable in the industry. For example, as pressure on the world economies to conserve energy and use electric cars grows, plants focused on the production of automotive interiors with combustion engines are likely to be shuttered, regardless of market conditions prevailing today.
Companies always have to adjust theirs and sometimes it is even relevant to say their paradigm in the context of current rather than historical conditions. In such cases, exiting a market with a factory that produces soon-to-be-irrelevant products is viewed as being smart in view of the future.
Cost of Maintenance and Modernization
A particular factory may be economically viable today, but the construction or refurbishment it needs in order to stay relevant in the market can be expensive. Older factories are usually attacked with a lot of money such as maintenance, safety improvements, and modernization of technology to keep up with the prevailing requirements. When the expenses of such enhancements are rated excessive in comparison to the future gains that are projected, the company may choose to put an end to the operations of the given factory rather than continue spending on its operations.
This is especially true in those sectors where the life cycle of technology is extremely short. A company’s decision may well be to build a new plant that fits into longer-term output requirements because further modernization of the existing plant may even though remain profitable in the near future be less cost beneficial than such an investment.
Pressure from Investors and Shareholders
For major businesses, investors and shareholders always expect value addition from their long-term investments in terms of profits. While a given factory may be fetching profits for the business in question at the time, a typology of investors looking for such returns or growth in the future may not see it as a sustainable asset. Therefore, companies can choose to shut down a plant in order to release cash for investment in other promising markets, technologies or products which are likely to offer better returns.
