Money For Jobs

Dec. 21, 2004
Communities globally are offering a wide range of incentives to attract and retain business.

Some Alabamians have taken to calling greater Birmingham "little Detroit". A half hour southwest of the city in a once-sleepy town called Vance a new road, Mercedes Drive, leads to the first Mercedes-Benz auto plant built in North America. A striking visitor center crowned with a roof of textured glass features exhibits that detail the history of DaimlerChrysler AG, as well as the company's hopes for turning Vance into a center of world-class automobile manufacturing. Showcased along with a 1912 vintage Benz car and exhibits on innovations in automaking are displays that offer a few reasons for the company's decision to build its first Mercedes plant in Tuscaloosa County after considering 150 other sites in North America. A record-breaking financial lure of $253 million offered by the state played a role. "Incentives . . . get people in the door. For me the incentives said Alabama was serious about wanting an automobile plant," says William C. Taylor, president and CEO of Vance-based Mercedes-Benz U.S. International Inc. Alabama won more than a factory when Mercedes chose it for U.S. production. Nine top suppliers followed Mercedes to the heart of Dixie. "State officials made a calculated decision that they believed would drive their economic development effort for several years, and it has given them international visibility and paid off in innumerable spinoffs," points out James A. Schriner, an IndustryWeek contributing editor who also directs location strategies for Fantus Consulting, New York. Also setting up operations in Alabama is Honda Motor Co. Ltd., which announced last spring it would establish a $400 million auto plant. For that, Alabama agreed to pony up $158 million in inducements. Incentives have helped to transform other regions of Alabama as well. Northern Alabama, once known for cotton, now employs rocket scientists. In Decatur, after more than two years of construction, Boeing Co. unveiled its $450 million Delta IV launch vehicle factory to produce common booster cores for rocket engines. The manufacturer chose Alabama, and its $80 million in incentives, over Southern California and a few sites in Florida. "From a manufacturing standpoint Alabama has an awfully friendly tax structure. [The state] makes abatements for sales tax and offers a tax credit where over 20 years you can recoup your investment," notes Mike Bunney, director of business resources at the Delta IV launch vehicle plant. While Alabama is particularly generous, similar inducements can be found elsewhere. The most bountiful packages are won when companies negotiate deals with government officials. The use of incentives is limited only by a lack of imagination, a dislike of cloak-and-dagger practices, and sporadic protests by local communities against corporate welfare. In Brazil, some 250 miles south of So Paulo, Curitiba has become the country's second largest auto center thanks to its geography, good infrastructure, and incentive packages. In the former East Germany small and midsized manufacturers can obtain cash worth up to 50% of their capital investment; while large corporations can get up to 35%. In South Korea, the city of Changwon aggressively solicits foreign manufacturers with cheap loans and tax rebates. Incentives take as many forms as innovative economic development officials can create. Some inducements offset a deficit, such as urban blight, poor roads, or inadequate sewers. Others sweeten the pot and make decisions easier. Either way, they benefit the bottom line, and not enough manufacturers take advantage of them, believes Schriner. He estimates that less than half of all incentives offered are used. Some fail to draw interest because they're not very attractive. For example, manufacturers tend to avoid red herrings such as rebates on school taxes. In other cases, companies fail to understand the range of packages offered. A few states are rectifying this. Virginia, for instance, wins kudos for its Virginia Business Center -- a one-stop information source on incentives, regulations, permits, and other aspects of doing business in the state. Now that skilled employees are hard to find and retain, executives rank subsidized training programs as a top priority. Boeing applauds Alabama's Industrial Development Training program. "They administered everything from advertising, to processing 39,000 job applications, to training and delivering employees to us," explains Bunney. Other states offer similar programs. South Carolina's Special Schools Program is widely benchmarked in the U.S. and abroad. Although large corporations and the generous inducements that lure them capture most of the headlines, small companies also garner incentives but often at the local level. Liberty Orchards Co. Inc. has manufactured Aplets and Cotlets fruit-filled candy in Cashmere, Wash., for the last 80 years. It is the largest employer in the town of 2,300, a two-and-a-half-hour drive over the Cascade Mountains from Seattle. The candy maker wanted to expand and to increase its customer traffic so it started looking at a new site on the tourist trail a few towns away. "We were exploring a move, we thought confidentially, when the mayor and a group of councilmen came to us and said, 'You can't do that -- it would devastate the town,'" recalls Greg Taylor, president and grandson of Liberty Orchard's founder. Taylor met with the officials and they came up with a list of suggestions to increase tourist traffic. The town implemented a number of them: It changed the two street names that pass Liberty Orchard's complex to Aplet and Cotlet Ways; they erected signs on the highway directing drivers to Liberty's factory tours; they officially adopted a new slogan, "Cashmere: the home of Aplets and Cotlets"; and they provided more parking spaces. Taylor has seen an increase in traffic. "The changes have helped us. Visitor counts were up by one-third this summer, and we're bringing more business into town," he notes. Increasing customer traffic can help, but for most manufacturers the most effective lure is cash. "Anything that helps a company avoid upfront investment is going to draw a lot of interest," observes Ed McCallum, managing director of Fluor Daniel Global Location Strategies, Greenville, S.C. To make the most of incentives, manufacturers need to fit a community's niche. Singapore, for instance, concentrates on building knowledge jobs and solicits companies setting up R&D facilities, engineering offices, and product development operations. The city-state also targets particular industries such as pharmaceuticals and electronics. Singapore, and many other highly developed regions, steer companies outside identified niches to other locations. As a result, certain low-tech manufacturers struggle to find homes. Tanneries, textile makers, or companies offering minimum-wage jobs may find themselves unwelcome in developed nations. In Alabama, for instance, incentives generally kick in for manufacturers offering jobs paying $8 an hour, and the state is trying to complement its auto and rocket-science sectors with semiconductors and other high-wage industries. It's also helpful for manufacturers to bond with newly elected government officials, especially those seeking to make their mark in economic development. Companies in sought-after industries have found that negotiating for tailored financial packages can prove to be a lucrative approach, even in areas that downplay their incentives. The Canadian province of Ontario, once aggressive in the giveaway game, curtailed offerings after seeing a few costly cases of companies taking benefits and then failing to live up to job or investment promises. But site-location consultants believe that a new manufacturing complex offering thousands of jobs would reverse that policy. "When we come in with a $1 billion to $3 billion investment and 1,500 to 3,000 jobs, all of a sudden things change quickly. Incentives play a role, I don't care where you go," counters Fluor Daniels' McCallum. Bartering for generous inducements can require secrecy. When thousands of jobs and millions of dollars are under discussion, manufacturers opt for stealth and speed. Decision makers tend to travel to prospective sites under assumed names and drive in unmarked cars. When Mercedes pulled together a group of 12 managers in 1993 to work on a new U.S. project, few of the dozen knew the details of their assignment. When they learned that it would be to scout a location to build the company's first sport-utility vehicle, they visited the best sites during a five-month period, but made the final decision while sequestered in a trailer in Stuttgart. Billy Joe Camp, a 20-year veteran of economic development in Alabama who has worked with several governors, helped to land the Mercedes deal. Now the president and CEO of World Business Alabama, a private organization established to assist the state's development efforts, Camp remembers six visits to Alabama by Mercedes representatives. "I never asked if they came in on their own, but it happens all the time. A couple of guys arrive incognito, rent a hotel room, and look at the other side of town," he says. Officials can be secretive, too. In Alabama, the City Council is allowed to meet surreptitiously when discussing economic development. Similarly, in Texas, Kentucky, Mississippi, and other states, the government can debate and offer incentives without notifying the public. Often it is these quiet meetings between high-level officials and executives that bring results. Shortly after an encounter between Virginia Governor James S. Gilmore III and Volvo Trucks North America Inc.'s President and CEO Marc F. Gustafson in 1997, the governor announced his Virginia Investment Partnership program designed to retain existing manufacturers interested in expanding. Volvo quickly signed on, and was awarded an incentive package worth $60 million to cover a major expansion. The use of incentives, and the amounts offered, is growing on a global basis. Elected officials employ them to help create high-paying employment for their constituents such as the 1,270 jobs that Volvo's expansion promises to produce. When countries such as China and Mexico offer companies low-cost locations for production, communities in industrialized nations feel compelled to counter with other kinds of incentives. Economic-development inducements have a long history in the U.S., dating back to the awarding of land to Europeans in colonial times. U.S. settlers and their followers built manufacturing centers such as the one in Lowell, Mass., that sparked that state's industrial revolution in textiles. When manufacturing in Massachusetts became too expensive following World War II, textile and apparel makers moved south in droves, attracted by lower wages and incentive schemes. Mississippi's incentive program emerged during the Great Depression. "In 1936 we were the first in the nation to offer industrial bonds. We had an agrarian economy and needed to bring in other things," relates Harry Martin, president of the Tupelo Community Development Foundation, who has helped turn that Mississippi city into a major center of upholstered-furniture manufacturing. Development authorities outside the U.S. also employed incentives to build industries or regions. Singapore launched its Economic Development Board in the 1960s to attract multinational corporations. For the industries it wants Singapore provides everything from energy to pollution control to assistance in arranging a network of suppliers. Competition for factories in the U.S. heated up in the 1980s. In 1985 the multistate battle for the first Saturn Corp. automobile plant raised the incentive stakes. State governments in the U.S. now compete not only with each other but with global locations as well. Brazil introduced incentives in the 1990s in hopes of drawing more foreign investment. Irish officials turned to incentives and low taxes to transform one of Europe's poorest nations into a Celtic Tiger. But incentives don't always work. Sweden, for example, offers generous incentives, but only to manufacturers building in sparsely populated areas. Also, Sweden's taxes are high. The Nordic countries have social-welfare costs that "are enough to make you cry," observes William R. Goode, deputy managing director of Xerox Corp.'s European operations, which recently built a manufacturing facility in Dundalk, Ireland. Goode notes that Swedish company L.M. Ericsson Telephone Co. moved one of its key offices out of Stockholm to London. Swedish business groups, in fact, have warned the government that the country will lose corporate headquarters if social-welfare costs are not lowered. Incentive packages that are too successful can impact existing businesses, especially when a corporate newcomer begins hiring local employees. Even thriving Mercedes is aware that the new Honda plant going up just 60 miles away may draw from its engineering talent. Incentives also could lure a manufacturer to an inappropriate location. While the company may collect a few million dollars, it could end up in an area with an inadequate workforce. The host communities can be disappointed, too. Companies taking incentives and then closing or moving before providing a fair return have pushed officials to begin insisting on clawback provisions. These require companies that don't reach performance goals to return incentives. The use of clawbacks is growing in the U.S. and in countries such as Singapore. Occasionally, entire incentive packages are called into question. Some believe that anger over the Mercedes deal is what led former Alabama Governor Jim Folsom to lose his reelection bid. Other leaders have similarly struggled. "A state will commit to a large project, and it wipes out their budget," warns Schriner. An incentive plan can remain on the books, but funding to cover it disappears. "I've seen projects where everything is pretty well outlined in a summary sheet, but it's not signed. Make sure it gets signed," urges World Business Alabama's Camp. A broad support network may help companies counter backlash and complaints about corporate welfare. One detractor is Greg LeRoy, who directs Good Jobs First, a Washington-based organization that tracks corporate subsidies. LeRoy has been tracking the impact of incentives for 15 years, and has authored a book about clawbacks. "There's alarming evidence that incentives are undermining funding for basic public services such as education and infrastructure," he says. In the U.S., the booming economy has reordered business priorities. Capital is plentiful but labor is not, and incentives should be restructured to reflect to this climate, LeRoy urges. In some states citizens and officials are clamoring for new priorities. In Maine economic development authorities say their citizens won't pay for big corporate grants, but instead favor performance-based training programs. Minnesota's Citizens League wants resources to be redirected at skilled labor and away from corporate tax credits. Economic development authorities in many states agree they should stop competing against one another for deals, but none is willing to be the first to halt the practice. To prevent such competition in Europe, the European Commission maintains strict rules covering incentives. Ireland's low corporate tax rate of 10% lured a number of manufacturers, causing resentment in other parts of Europe. Under pressure, Irish officials raised it to 12.5%. Recently the EC governing body has taken a hard look at policies of countries that offer large financial grants. In the U.S., however, incentives in one form or another are here to stay, believes Schriner. "Even if there is legislation that curtails or eliminates incentives, aggressive communities will find some ingenious way to make themselvesmore attractive. That's the definition of an incentive." Contributing to this article were Tanya Clark in Tokyo, Tom Mudd in Dublin, Edvaldo Pereira Lima in So Paulo, and Ahn Mi-Young in Seoul.

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