JPR

Jackson Productivity Research Inc.
Productivity is our middle name

Home   Time Study   Layout    Cost Reduction    Piece Rates   Workload    Capacity    Track Record   About Us  

Our Productivity and Industrial Engineering Books, click cover for contents

Industrial Engineering includes the contents of Time and Motion Study, Layout, and Cost Reduction; but not Construction Piece Rates .


Amazon calls it HQ 2, and plenty of communities want to attract that facility.

An interesting story, of no relevance to me. Unless - wait a minute, my company is considering a new facility, can we learn from the Amazon circus? You bet.

Here is a primer on the corporate relocation / incentives scene; what, how much, why, and how. Oh yes, there is a caveat. For new facilities there WILL be short term costs. There MAY be long term benefits.

1. What: The marketplace

Businesses who seek another location will find an active marketplace composed of organizations whose objective is to attract new industry and business to their area.

"Another location" may mean in addition to, or it may mean instead of. Amazon's search apparently is in addition to; while Boeing's recent HQ move to Chicago was largely instead of.

The marketplace includes not only nations, states and communities, but utility and energy companies, railroads, air and water ports, geographic areas, financial organizations, enterprise zones, real estate companies and developers, industrial parks, research centers, educational institutions.

Businesses who consider a new site tend to pursue different objectives from the communities where they search. A community will attract investment to itself regardless of its ability to meet the particular company requirements, (Do 238 sites have the resources to satisfy Amazon? Really?) while a relocating business company seeks the one community which best satisfies strategic corporate objectives. (Or the decision maker's personal preference; please don’t underestimate that.)

2. How much can incentives be? (Read here, how much could my business get?)

Laws and regulations are established in many states to allow incentives to business, and bureaucracies are set up to encourage businesses and consider applications. Obviously, there is no guarantee of success when an application is made for assistance, but there is little cost to find out.

Some programs are readily funded by states and communities, for instance training assistance. Other programs, e. g. outright grants, are more difficult to obtain. States or communities may negotiate tax relief or exemptions, financing through bonds, loans and guarantees, tax increment financing (TIF). Major concessions tend to involve facilities which generate many jobs, such as a new auto plant, or Foxconn or Amazon. Some companies are able to negotiate incentives, even though no formal program may be in effect.

Some states, Texas and Georgia come to mind, provide help to resident companies who would expand locally; but relocation between states has traditionally been incented more successfully, to the dismay of local competitors.

Very few companies will have to finance their own infrastructure. Most communities provide water, sewer, utilities and power, access roads, and communications to industrial sites if they are not already in place. A business which requires access to seaports, airports, or railroads can find many sites where these are available.

Your business may look for new property, while another seeks for empty facilities. (These are already built and available, but to someone else's spec; a mixed blessing.) In parts of the US, there is a surplus of available property; closed military bases and vacant textile plants are good examples. There may well be costs such as retrofit and perhaps hazardous substance residue, but the net cost of such a facility can be quite competitive.

According to news reports at the time of an announcement, these new facilities have attracted substantial incentives over the years; but at a wildly different price per new job. The blank sections were not announced. And alas, some expected deals failed to materialize.

Company

Site

Year

Expected

Jobs

Incentive

Millions

$ Per Job

Foxconn $2.85 billion plant

S. E. Wisconsin

2017

To 13,000

$3,000

($3 billion)

$230,700

Samsung $380 MM plant

Newberry, S. C.

2017

950

LG $250 MM plant

Clarksville Tennessee

2017

600

Tesla, battery

Reno, Nevada

2016

6,500

$1,300

$200,000

Foxconn

$30 mil plant

Pennsylvania

Did not happen

2013

Apple

Austin, Texas

2012

3,600

$21

$5,833

ThyssenKrupp AG

Mobile area, Alabama

2007

2,700

$811

$300,370

Toyota

Blue Springs Miss.

2007

2,000

$363

$ 181,500

Daimler Chrysler

Pooler Ga.

Did not happen

2002

3,200

$320

$100,000

Hyundai

Montgomery Ala.

2002

2,000

$118

$ 59,000

Toyota

Huntsville Ala

2001

350

$29

$ 82,857

Nissan

Canton Miss

2000

4,000

$299

$ 74,750

Honda

Lincoln Ala

1999

1,500

$165

$110,000

Mercedes

Vance Ala

1994

1,500

$289

$192,667

BMW

Greer SC

1992

1,900

$155

$ 81,579

Toyota

Georgetown Ky.

1986

3,000

$214

$ 71,333

North Carolina and Virginia deservedly get a lot of credit for their governmental economic development efforts, but quietly South Carolina and other southern states attract some pretty impressive deals. And stay mum to their voters, about how much it costs.

3. Why does a community pay incentives?

Why you ask does a community pay to attract newcomers? Well, that is not so clearly answered as is, how much. There is a constant question in the trade, are incentives a win / win, or win / lose. or lose / lose situation? If one community wins, doesn't another have to lose? Especially if a business is attracted from one community to another; perhaps from the rust belt to the sun belt? Or offshore? Don't incentives come from a municipal budget? Do they get their money back?

As a consultant, I believe that while financial justification will vary for new or relocated job creation in the USA, communities will definitely receive benefits from new contributors to the economy, and should be prepared to sweeten the deal in return.

Communities will receive taxes and fees from businesses and their employees for years to come, although communities will have to provide streets and sewers and schools to service the new residents. But also remember that when new people move to town, they will want to deal with a butcher, baker, candlestick maker, air conditioning tech, auto dealer, boutique owner, tattoo parlor and expresso bar. A given town may have those people already, and underemployed; which applies an entirely new sense of urgency. Or those people will also relocate into the area economy and contribute as well.

Big companies want nearby vendors and contractors, to provide a geographically short supply chain which allows reduced but reliable inventories. Smaller local vendors add to the community, and tend not to be able to negotiate incentive deals that the big firms do. The local economy will benefit mightily from the support that grows in place. What would Silicon Valley be like without the high tech base? Northern Indiana without RV manufacturing? Alabama without all the auto industry jobs that came with the Mercedes plant in Vance and the multitude of suppliers that sprang up as a result?

An interesting question for analysis in ten years; did the Amazon project attract as many concomitant vendors and contractors as a manufacturing plant did?

A economist might not quantify the benefits, but there is clearly a huge influx to local cash flow when a big new player comes to town.

4. How should a business objectively consider a new facility?

The executive who is first to consider consolidation or expansion or another location will make a few notes, then call someone else in, and close the door. Good thinking. Such strategic sessions will be full of "what if" scenarios, not ready for prime time. Keep them confidential.

Still with the closed door, add a few more people in the room. Your organization may not be experienced in strategic concepts, either in the statement of justifications, definition of factors to be considered, or with the frameworks necessary to support investigation and implementation. Keep it quiet, but talk to all the players even, or maybe especially, those who might express valid questions or concerns about concepts and details. There WILL be short term costs. There MAY be long term benefits.

Set up a process to assure an objective analysis. There will be ample opportunity for judgment, but to the extent possible let the data drive the decision.

An effective way for a company to proceed is retain a consultant to establish its objective and subjective criteria; then confidentially locate the communities which are most likely to satisfy those criteria; then initiate initial discussions at the potential destination. Much of the site search can be done on the internet; the marketplace is very well represented on line.

· For criteria, think location-sensitive costs, availability of skilled labor, "Right to Work" states, utilities, transportation in and out, communications, waste disposal, regulation, local vendors and subcontractors, available property to lease or build on, quality of life, corporate image, corporate and individual taxes.

· Then sort through competing community claims; create a short list, zero in on The One Best Place. The client need not be identified until he is ready to take a public position.

Even after a decision is made, confidentiality is vital because a company retains the best leverage over incentives and real estate costs before its identity is announced.

At least that has been the tactic for smaller companies than Amazon and Boeing and Foxconn and Tesla. Smaller companies, my clients at least, typically want to avoid internal and external publicity until basic groundwork is complete and negotiations are underway. However most companies don’t have the stature to attract bids by the dozens, either.

Let me tell you sometime about the corporate jet which was met by the DEA and sheriff of a small town in Georgia (who thought the jet was a drug smuggler) while all the execs wanted to do was visit an empty manufacturing plant. Confidentially. Another CEO saw the San Antonio mayor to talk about relocation incentives; the citizens of his home city found out about the visit from the mayor's public list of visitors and were not pleased.

State and local development agencies are quite willing to work confidentially with a consultant before they learn the identity of a client; they presumably don’t want an open bidding war. Industrial Development groups, politicians, realtors, financial institutions, technical or educational institutions are very helpful in the relocation process as they provide information, but they have a different agenda and set of priorities than the company. A experienced consultant understands the questions to ask, and how to find answers; he / she can deflect from the company the considerable attention a community brings to bear, during the decision process.

5. The bottom line

As with many bottom lines, multiple factor are in play. While incentives are a highly visible factor, they aren't the only one. Incentives may be whipped cream and a cherry on top, or it may fail to cover the operating costs that rise, after a bad choice considering the other thousand factors.

Good luck if you are in the process. Jack Greene

To comment on the blog, or discuss, contact Jack Greene at 843-422-1298 or at  
jack@jacksonproductivity.com