Fall 2009

Popular Misnomers in Economic Development

By Mike Randle

With this new year, I would like to try and bury two misnomers in economic development in the South forever. Please pass the word.

"Eighty Percent of All New Jobs are Created by Existing Business and Industry"

Not hardly. If I hear that statement again, I am going to hurl. We can only think of one static number in economic development in the South, whether the discussion is about land prices, unemployment rates, state and local tax revenues or the source of new jobs. To claim that 80 percent of all new jobs created in the South come from existing industry (and to declare it each and every year, year in and year out, for decades), if I can borrow a phrase from the late Frank Zappa, "is like dancing about architecture." In other words, it is pointless and doesn't make any sense.

Our data, which goes back to 1992 and includes every project announced in the South with 200 or more jobs, shows that when the South's economy is humming, about 40 percent of all new jobs come from new and relocating industry and the rest come from existing industry.

On the other hand, when the economy is really bad, like it's been the last two years, the total might reach 80 to 90 percent or more of all new jobs coming from existing industry. In fact, I’d bet if the South didn’t have such a good quarter (profiled in this issue, fall 2009), it would easily have pushed the 90 percent threshold in 2009. In contrast, in 1997, when the economy went nutty-nut good, our figures showed that new and relocated industry to the South were responsible for 54 percent of all new jobs created, the only year on record when existing industry did not top new in the creation of jobs in the South.

Oh, and that one static number in economic development? It's this: One-hundred percent of all lost jobs come from existing industry.

"Incentives to Locating Industry are Counterproductive and should be Outlawed"

I've written about this many times and you may have seen me on a cable news show or two debating the subject with the nonbelievers. The debate has resurfaced, especially in North Carolina after Texas-based Dell announced the closure of a large plant there last quarter.

Shortly after Dell announced it was building that plant five years ago, there was a huge fracas in the Tar Heel State about the incentive package the computer maker was getting. One writer that worked for a conservative think tank based in Raleigh told me during an interview that he would like to see the incentives that were going to locating industry invested in education and public safety. My response was, "If you do that, North Carolina will be the safest, smartest, 20 percent unemployment state in the South."

My questions to the incentive nonbelievers are: (1) even after bankruptcy, how much in wages alone -- not counting tax generation -- has GM paid to workers in Michigan compared to what that state has given out in incentives to the struggling automaker over the last 100 years? I would estimate the ratio could be 100,000 to 1. (2) How much has Tennessee earned in its $1 billion or thereabouts investment in Nissan over the last 20 years? Let me answer that this way: A reporter questioned me about Tennessee's incentives to Nissan over the years. He asked me if Tennessee "has gotten a good return" on its investment in Nissan. My answer was, "Multiply 6,000 (the number of workers at Nissan's plant in Smyrna, Tenn.) by $60,000 (the average annual salary) by 20 years (the number of years Nissan had been in the state). What's the total?" The reporter said, "There are too many zeros on the calculator." I said, "There's your answer." Of course, at the time Nissan wasn't headquartered in Nashville as it is now.

And finally (3) how much of a return has Texas received from its investment in Dell? (Which, by the way, has been minimal over the years.) Dell is headquartered in Texas, has its R&D in Texas and employs over 20,000 in the state. Again, nonbelievers, get out your calculators. The returns have been enormous for Texas for its investments in Dell and the folks in North Carolina knew that fully well when it came to investing in the company five years ago.

Incentives to locating industry, especially to commerce giants like Dell, Nissan and GM, are like any other investment you, me or Warren Buffett makes. Or are they? Actually they are not. Incentives to locating business and industry are the best and safest investments on the planet. If they work, the returns are usually ridiculously high, like 100 to 1, 1,000 to 1, or even, in the case of GM, possibly 100,000 to 1. And these days, with clawback provisions and other legal documents protecting state and local governments from losing their investments if the company doesn't create as many jobs or capital as it stated it would, where else can you find an investment where you get all of your money back if it doesn't work out?

mike@sb-d.com

Editorial

Finally, Business is picking up in the Southern Automotive Corridor

By Mike Randle

In the fall 2009 quarter good news bestowed the South's automotive industry. We saw more suppliers add jobs last quarter than we’ve seen in quite a while. There were also several important OEM announcements as automakers gear up for a recovery that could result in 11 to 13 million vehicles sold in the U.S. in 2010.

In the fall quarter, Mercedes-Benz announced it is bringing C-Class production to its Alabama plant, Kia opened its first U.S. assembly plant in west Georgia; GM added a third shift in Kansas; Toyota said it is moving its California production to Texas; Nissan broke ground on its $1 billion lithium-ion battery plant in Tennessee; VW continued building its new factory in Tennessee unabated; Toyota announced more work at its engine plants in West Virginia, Tennessee and Alabama; the Chinese company that bought Hummer said it will continue to assemble the brand in Louisiana; and two Chinese-linked start-up automakers revealed their hopes in Mississippi and Alabama. Add to that the V-Vehicle start-up in Louisiana that was announced in mid-summer and what you get is the most active OEM period in the Southern Automotive Corridor in at least three years, maybe longer.

The Japanese (Honda, Toyota and Nissan), the Koreans (Kia and Hyundai), the Germans (BMW, Mercedes-Benz and Volkswagen) and possibly the Chinese, are all preparing for not only next generation vehicles in the South, but to grab their own shares of the what will be the lost sales of GM and Chrysler in the near future. In 2008, GM owned almost a quarter of the U.S. sales market, or about 3 million vehicles sold. Chrysler sold about half of GM's total in 2008.

Some are predicting that 2010 will match 2008 in total vehicle sales here in the U.S. If that is the case, how could a collapsed GM and Chrysler even come close to 4.5 million sales of its models in 2010? They won't. We predict that GM, with just three brands and Chrysler will sell about 2 million cars and light trucks in the U.S. in 2010. That means, if we get back up to 13 million vehicles sold annually in 2010 or 2011, other automakers will have to replace GM's and Chrysler's future lost sales. That figure is going to be significant. It could total 2.5 million vehicles annually by 2011 or 2012. For more information on the South’s automotive industry, go to www.SouthernAutoCorridor.com.  

mike@sb-d.com

Editorial

Is Volkswagen Tightening its Labor Noose?

It's Official: Adjacent VW Supplier Park Earns Approval

Communities in and around Volkswagen's assembly plant under construction near Chattanooga have anxiously awaited news on parts supplier announcements. In fact, over the last six or eight months SB&D has received dozens of phone calls and emails asking if we had information about where prospective VW suppliers will likely locate. Those calls eventually evolved into a different refrain: "Where are the suppliers" to the VW plant? That's because, to date, there have only been a few suppliers chosen by VW and with a window now of just over a year before production begins, there isn't much time left if suppliers must build new facilities to serve the plant.

County governments in Tennessee and neighboring Alabama and Georgia have invested much time and money to land parts suppliers to the VW plant. And when it is all said and done, some will. But on October 28, after months of negotiation, Volkswagen officials announced that a large supplier park that could accommodate 15 or more parts suppliers will be developed next to the German automaker's assembly facility. The news is great for Chattanooga, but not so great for other markets within 100 miles of the VW factory.

A supplier park located next to a vehicle assembly plant has its advantages and disadvantages. The advantages are clear: a location next to an assembly facility redefines the phrase "just in time” or the delivery of parts at the very hour or even minute of assembly as opposed to storing and shipping. The close proximity of the supply chain obviously reduces costs, both in shipping and in timeliness of delivery.

But there are also disadvantages to supplier parks and most of those are centered on labor issues. With a supplier park, you usually concentrate fifty-percent or more of the supply chain next to the assembly plant's total labor force. That means more labor must come from a smaller geographic area, which translates into fewer skill sets to choose from and a smaller labor shed. 

But then again, since we began covering the automotive industry closely in 1992, there has never been an assembly plant built in the Southern Automotive Corridor when the unemployment rate was in double digits. Even more, applicants for the 1,200 jobs VW is currently advertising will most likely come from a much larger area than ever before because of the 22-month recession. That written, labor issues, or finding enough quality candidates in and around Chattanooga may not be an issue at all. But when you concentrate so much labor "in the gate," or in one spot, sometimes labor can be an issue.

While Toyota officials will not admit it publicly, labor issues have cropped up from time to time at its San Antonio pickup truck plant, which opened in 2006. Toyota's Texas facility was the last assembly plant in the Southern Automotive Corridor that built a supplier park onsite, or "in the gate." Many of those labor issues have been solved and Toyota is about to ramp up hiring at that facility as it brings in another model and more production in from California.

Today, there are as many workers (2,100 at 11 parts supplier facilities, located on 200 acres adjacent to the plant) at the supplier park in San Antonio as there are at Toyota's assembly facility. In fact, we estimate that Toyota's supplier park in San Antonio is the largest in North America. We know it is the largest in the Southern Automotive Corridor.

So, with VW's announcement that as many as 15 or more suppliers may locate next to its plant in Chattanooga, the German automaker will be rewriting the history books when it comes to the number of automotive workers placed "in the gate." While the poor economy may give VW and its suppliers "pick of the labor litter" for now, the automaker’s supplier park decision could create labor availability issues in the future if unemployment rates seen earlier this decade return.

For more information on the South’s automotive industry, go to www.SouthernAutoCorridor.com.

Mike Randle
mike@sb-d.com

next

Fall 2009

Popular Misnomers in Economic Development

By Mike Randle

With this new year, I would like to try and bury two misnomers in economic development in the South forever. Please pass the word.

"Eighty Percent of All New Jobs are Created by Existing Business and Industry"

Not hardly. If I hear that statement again, I am going to hurl. We can only think of one static number in economic development in the South, whether the discussion is about land prices, unemployment rates, state and local tax revenues or the source of new jobs. To claim that 80 percent of all new jobs created in the South come from existing industry (and to declare it each and every year, year in and year out, for decades), if I can borrow a phrase from the late Frank Zappa, "is like dancing about architecture." In other words, it is pointless and doesn't make any sense.

Our data, which goes back to 1992 and includes every project announced in the South with 200 or more jobs, shows that when the South's economy is humming, about 40 percent of all new jobs come from new and relocating industry and the rest come from existing industry.

On the other hand, when the economy is really bad, like it's been the last two years, the total might reach 80 to 90 percent or more of all new jobs coming from existing industry. In fact, I’d bet if the South didn’t have such a good quarter (profiled in this issue, fall 2009), it would easily have pushed the 90 percent threshold in 2009. In contrast, in 1997, when the economy went nutty-nut good, our figures showed that new and relocated industry to the South were responsible for 54 percent of all new jobs created, the only year on record when existing industry did not top new in the creation of jobs in the South.

Oh, and that one static number in economic development? It's this: One-hundred percent of all lost jobs come from existing industry.

"Incentives to Locating Industry are Counterproductive and should be Outlawed"

I've written about this many times and you may have seen me on a cable news show or two debating the subject with the nonbelievers. The debate has resurfaced, especially in North Carolina after Texas-based Dell announced the closure of a large plant there last quarter.

Shortly after Dell announced it was building that plant five years ago, there was a huge fracas in the Tar Heel State about the incentive package the computer maker was getting. One writer that worked for a conservative think tank based in Raleigh told me during an interview that he would like to see the incentives that were going to locating industry invested in education and public safety. My response was, "If you do that, North Carolina will be the safest, smartest, 20 percent unemployment state in the South."

My questions to the incentive nonbelievers are: (1) even after bankruptcy, how much in wages alone -- not counting tax generation -- has GM paid to workers in Michigan compared to what that state has given out in incentives to the struggling automaker over the last 100 years? I would estimate the ratio could be 100,000 to 1. (2) How much has Tennessee earned in its $1 billion or thereabouts investment in Nissan over the last 20 years? Let me answer that this way: A reporter questioned me about Tennessee's incentives to Nissan over the years. He asked me if Tennessee "has gotten a good return" on its investment in Nissan. My answer was, "Multiply 6,000 (the number of workers at Nissan's plant in Smyrna, Tenn.) by $60,000 (the average annual salary) by 20 years (the number of years Nissan had been in the state). What's the total?" The reporter said, "There are too many zeros on the calculator." I said, "There's your answer." Of course, at the time Nissan wasn't headquartered in Nashville as it is now.

And finally (3) how much of a return has Texas received from its investment in Dell? (Which, by the way, has been minimal over the years.) Dell is headquartered in Texas, has its R&D in Texas and employs over 20,000 in the state. Again, nonbelievers, get out your calculators. The returns have been enormous for Texas for its investments in Dell and the folks in North Carolina knew that fully well when it came to investing in the company five years ago.

Incentives to locating industry, especially to commerce giants like Dell, Nissan and GM, are like any other investment you, me or Warren Buffett makes. Or are they? Actually they are not. Incentives to locating business and industry are the best and safest investments on the planet. If they work, the returns are usually ridiculously high, like 100 to 1, 1,000 to 1, or even, in the case of GM, possibly 100,000 to 1. And these days, with clawback provisions and other legal documents protecting state and local governments from losing their investments if the company doesn't create as many jobs or capital as it stated it would, where else can you find an investment where you get all of your money back if it doesn't work out?

mike@sb-d.com

Editorial

Finally, Business is picking up in the Southern Automotive Corridor

By Mike Randle

In the fall 2009 quarter good news bestowed the South's automotive industry. We saw more suppliers add jobs last quarter than we’ve seen in quite a while. There were also several important OEM announcements as automakers gear up for a recovery that could result in 11 to 13 million vehicles sold in the U.S. in 2010.

In the fall quarter, Mercedes-Benz announced it is bringing C-Class production to its Alabama plant, Kia opened its first U.S. assembly plant in west Georgia; GM added a third shift in Kansas; Toyota said it is moving its California production to Texas; Nissan broke ground on its $1 billion lithium-ion battery plant in Tennessee; VW continued building its new factory in Tennessee unabated; Toyota announced more work at its engine plants in West Virginia, Tennessee and Alabama; the Chinese company that bought Hummer said it will continue to assemble the brand in Louisiana; and two Chinese-linked start-up automakers revealed their hopes in Mississippi and Alabama. Add to that the V-Vehicle start-up in Louisiana that was announced in mid-summer and what you get is the most active OEM period in the Southern Automotive Corridor in at least three years, maybe longer.

The Japanese (Honda, Toyota and Nissan), the Koreans (Kia and Hyundai), the Germans (BMW, Mercedes-Benz and Volkswagen) and possibly the Chinese, are all preparing for not only next generation vehicles in the South, but to grab their own shares of the what will be the lost sales of GM and Chrysler in the near future. In 2008, GM owned almost a quarter of the U.S. sales market, or about 3 million vehicles sold. Chrysler sold about half of GM's total in 2008.

Some are predicting that 2010 will match 2008 in total vehicle sales here in the U.S. If that is the case, how could a collapsed GM and Chrysler even come close to 4.5 million sales of its models in 2010? They won't. We predict that GM, with just three brands and Chrysler will sell about 2 million cars and light trucks in the U.S. in 2010. That means, if we get back up to 13 million vehicles sold annually in 2010 or 2011, other automakers will have to replace GM's and Chrysler's future lost sales. That figure is going to be significant. It could total 2.5 million vehicles annually by 2011 or 2012. For more information on the South’s automotive industry, go to www.SouthernAutoCorridor.com.  

mike@sb-d.com

Editorial

Is Volkswagen Tightening its Labor Noose?

It's Official: Adjacent VW Supplier Park Earns Approval

Communities in and around Volkswagen's assembly plant under construction near Chattanooga have anxiously awaited news on parts supplier announcements. In fact, over the last six or eight months SB&D has received dozens of phone calls and emails asking if we had information about where prospective VW suppliers will likely locate. Those calls eventually evolved into a different refrain: "Where are the suppliers" to the VW plant? That's because, to date, there have only been a few suppliers chosen by VW and with a window now of just over a year before production begins, there isn't much time left if suppliers must build new facilities to serve the plant.

County governments in Tennessee and neighboring Alabama and Georgia have invested much time and money to land parts suppliers to the VW plant. And when it is all said and done, some will. But on October 28, after months of negotiation, Volkswagen officials announced that a large supplier park that could accommodate 15 or more parts suppliers will be developed next to the German automaker's assembly facility. The news is great for Chattanooga, but not so great for other markets within 100 miles of the VW factory.

A supplier park located next to a vehicle assembly plant has its advantages and disadvantages. The advantages are clear: a location next to an assembly facility redefines the phrase "just in time” or the delivery of parts at the very hour or even minute of assembly as opposed to storing and shipping. The close proximity of the supply chain obviously reduces costs, both in shipping and in timeliness of delivery.

But there are also disadvantages to supplier parks and most of those are centered on labor issues. With a supplier park, you usually concentrate fifty-percent or more of the supply chain next to the assembly plant's total labor force. That means more labor must come from a smaller geographic area, which translates into fewer skill sets to choose from and a smaller labor shed. 

But then again, since we began covering the automotive industry closely in 1992, there has never been an assembly plant built in the Southern Automotive Corridor when the unemployment rate was in double digits. Even more, applicants for the 1,200 jobs VW is currently advertising will most likely come from a much larger area than ever before because of the 22-month recession. That written, labor issues, or finding enough quality candidates in and around Chattanooga may not be an issue at all. But when you concentrate so much labor "in the gate," or in one spot, sometimes labor can be an issue.

While Toyota officials will not admit it publicly, labor issues have cropped up from time to time at its San Antonio pickup truck plant, which opened in 2006. Toyota's Texas facility was the last assembly plant in the Southern Automotive Corridor that built a supplier park onsite, or "in the gate." Many of those labor issues have been solved and Toyota is about to ramp up hiring at that facility as it brings in another model and more production in from California.

Today, there are as many workers (2,100 at 11 parts supplier facilities, located on 200 acres adjacent to the plant) at the supplier park in San Antonio as there are at Toyota's assembly facility. In fact, we estimate that Toyota's supplier park in San Antonio is the largest in North America. We know it is the largest in the Southern Automotive Corridor.

So, with VW's announcement that as many as 15 or more suppliers may locate next to its plant in Chattanooga, the German automaker will be rewriting the history books when it comes to the number of automotive workers placed "in the gate." While the poor economy may give VW and its suppliers "pick of the labor litter" for now, the automaker’s supplier park decision could create labor availability issues in the future if unemployment rates seen earlier this decade return.

For more information on the South’s automotive industry, go to www.SouthernAutoCorridor.com.

Mike Randle
mike@sb-d.com

next