Amazon calls it HQ 2, and plenty of communities want to attract that facility. Here is a primer on the corporate relocation / incentives scene; what, how much, why, and how. Because your business may also want to explore a new location, either instead of or in addition to.
Oh yes, there is a caveat. For new facilities there WILL be short term costs. There MAY be long term benefits.
- 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.)
- 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.
Many 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.
Some business looks for new property, others 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 announcement, these new facilities have attracted substantial incentives over the years; but at a wildly different price per new job.
Company, State, Year, Expected Jobs, Incentive, Measured In Millions $ / Job
Foxconn, $2.85 billion plant; Wisconsin in 2017; to 13,000 jobs; 3 billion incentive; $230,700 incentive per job
Samsung $380 MM plant; S. C. in 2017; 950 jobs, incentive value not published to the taxpayers
LG $250 MM plant; in Tenn. In 2017; 600 jobs, incentive not published to date
Tesla, battery plant in Nevada in 2016; 6,500 jobs; $1,300 MM incentive;$200,000 incentive per job.
Foxconn Penn. 2013 $30 mil plant Did not happen
Apple; Texas in 2012; 3,600 jobs; $21 MM incentive; $5,833 incentive per job
ThyssenKrupp; in Alabama 2007; 2,700 jobs; $811 MM incentive; $300,370 incentive per job
Toyota; in Miss. in 2007; 2,000 jobs; $363 MM incentive; $181,500 incentive per job
Daimler Chrysler in Ga. In 2002; 3,200 jobs; $320 MM incentive; $100,000 incentive per job
Did not happen
Hyundai in Ala. 2002; 2,000 jobs $118 MM incentive; $59,000 incentive per job
Toyota in Ala. in 2001; 350 jobs; $29 MM incentive; $ 82,857 incentive per job
Nissan in Miss. in 2000; 4,000 jobs; $299 MM incentive; $74,750 incentive per job
Honda in Ala. in 1999; 1,500 jobs; $165MM incentive; $110,000 incentive per job
Mercedes in Ala. 1994; 1,500 jobs; $289 MM $192,667 incentive per job
BMW in S.C. 1992 1,900 $155 MM $ 81,579 incentive per job
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.
- Why does a community pay incentives?
Why you ask; well that is not so clearly answered as is, how much. There is a constant question, 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?
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, A/C tech, boutique owner, auto dealer, tattoo parlor and expresso bar. A given town may have those people already, and underemployed; which applies an entirely new sense of urgency.
Big companies want nearby vendors, to provide a geographically short supply chain for smaller and reliable inventories. (Remember Asian flu, and tsunamis, and product recalls, container ship strikes and company failures.) Smaller local vendors 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 Silicone 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?
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.
- How to consider a new facility objectively
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.
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, (think location-sensitive costs; 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 will 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.
State and local development agencies are quite willing to work confidentially with 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.
- The bottom line
As with many bottom lines, multiple factor are in play. And incentives are a highly visible factor, but not the only one. Incentives may be whipped cream and a cherry on top, or it may fail to cover the operating costs that can occur after a bad choice considering the other thousand factors.
Good luck if you are in the process. Jack Greene