Sunday, August 17, 2008

Fight to land Volkswagen plant went to finish line

The Associated Press
Saturday, August 9, 2008

NASHVILLE, Tennessee: After an intense fight that involved two other states, Tennessee has hoisted what seems to be 2008's top trophy for automotive development in the U.S. investment worth nearly $1 billion and 2,000 new jobs for a Volkswagen assembly plant in Chattanooga.

Volkswagen plans to begin producing a new midsize sedan for the U.S. market at the plant in 2011 and possibly a second automobile "in the foreseeable future," according to spokeswoman Jill Bratina.

Initial production is pegged at 150,000 vehicles annually, with a capacity for as many as 250,000. Volkswagen aims to triple its U.S. sales to a million by 2018.

But Michigan and Alabama proved to be tough contenders, and Tennessee came very close to losing in the final laps.

A victory seemed possible early on after Volkswagen AG executives told Tennessee officials their first presentation for the plant "blew the others away" and put the state on a short list of sites.

But on June 30 15 days before Volkswagen's board was to pick the plant site Tennessee Gov. Phil Bredesen found out the German company had doubts about how the state planned to deliver on the infrastructure and training incentives it promised.

"I think it's fair to say that two weeks out we did not have it, it was going somewhere else," Bredesen said.

That's when staffers in Tennessee's Department of Economic and Community Development started pulling all-nighters and working through July 4th vacations ECD Commissioner Matt Kisber spent his family's Florida beach visit inside a condo revising the incentive structure to address Volkswagen's concerns.

Their effort got Tennessee back in the race.

Bredesen and Kisber who pride themselves on staying mum during sensitive industrial recruitment efforts divulged some of the behind-the-scenes work the state did to forge the Volkswagen deal in an interview with The Associated Press last week.

Tennessee's recruitment effort began about a year ago when the state heard through contacts in the economic development community that Volkswagen was looking for a U.S. manufacturing site.

Bredesen wrote to the chairman of Volkswagen AG last October asking for the chance to make a presentation. Kisber and his team visited the company's global headquarters in January.

They showed a 40-minute high-tech presentation that included virtually transporting executives from Wolfsburg, Germany, to the Chattanooga site and provided detailed information about logistics, suppliers and the quality of life in Tennessee issues the Tennessee recruiters knew were important to Volkswagen decision-makers. It closed with a video invitation from Bredesen to visit Tennessee — an offer that Kisber said the Volkswagen executives accepted on the spot.

Once in Chattanooga, Volkswagen officials dined on venison at the home of U.S. Sen. Bob Corker, the city's former mayor. Bredesen said they seemed disengaged at first, until the discussion turned to alternative fuels research in Tennessee. The state has invested $63 million in biofuel projects and is one of a handful of U.S. states seeking to turn switchgrass, corn cobs, wheat straw and other fibers into fuel.

"They got really interested," Bredesen said of the Volkswagen officials. "The fact that we were not only talking about it but that we had real plans under way was huge."

Volkswagen claims environmental responsibility as a core value of the company. It heavily markets the fuel efficiency of its models, like the Passat and GTI, to U.S. buyers, and the company cited Chattanooga's "strong environmental commitment" as a factor in winning the plant.

Kisber and Bredesen said the officials were also intrigued by the state's unified pitch from state and local governments and Republican and Democratic officials.

The cooperation was crucial when a Volkswagen executive advised state officials that the potential plant site "looks like a forest and ... it needs to look like a site" before company executives returned.

The next morning, city and county public works officials began clearing trees at the site a former World War II Army ammunition plant with no tenant before Volkswagen. A webcam was installed so VW officials in Germany could monitor cleanup progress via the Internet.

"The only thing we didn't do was bring in the National Guard with their heavy equipment down there, but that would've happened in the last week if we had to," Bredesen quipped.

Tennessee's incentive package had been a sticking point in recruitment efforts before Volkswagen. The same Chattanooga site was runnerup to Mississippi for a new Toyota plant last year, and Bredesen said then that Mississippi's incentives were more generous.

Tennessee state law provides for a $5,000 corporate tax credit for each new employee brought to the state in large industrial projects. Those credits last up to 20 years for investments of at least $1 billion and 1,000 new jobs.

Bredesen and Kisber wouldn't detail how they retooled the Volkswagen incentive package. The state hasn't yet announced the total cost of the incentives, saying it depends on the plant's design and the infrastructure needed for it.

Tennessee got its first foreign auto investment in the 1980s when Nissan began making pickups in the Nashville suburbs a relationship the state recently parlayed into a deal for the Japanese automaker's North American headquarters. As he pursued the Volkswagen plant, Bredesen considered what it could mean to Tennessee years or even decades from now.

Volkswagen recently became the third largest car company in the world and has ambitions of rapidly moving up.

"America is their largest market," Bredesen said. "They're willing to make this their flag in North America. Well, that's something worth going for."

Mack's pullout a blow to Valley's psyche

Symbolic: Big hitters no longer backbone of the local economy.
By Gregory Karp Of The Morning Call
August 17, 2008

Sometimes a company defines a local economy, if not in reality then in perception.For a long time in the Lehigh Valley, it was Bethlehem Steel with its long and storied history.

More recently, it was the flameout of Agere Systems, the former Lucent Technologies and Bell Labs division that briefly put the Lehigh Valley on the high-tech map.

Mack Trucks was among them. Alone, it never defined the Lehigh Valley economy. It never employed as many people in its heyday as the biggest employers. But for most of its 100-plus years in the Valley, Mack Trucks was always part of the definition, a major player listed among the impressive name-brand companies in the region.

Though very different, these three companies share one important trait: each was headquartered here. Another: they no longer are.

Mack Trucks announced Thursday it will move its world headquarters from Allentown to Greensboro, N.C., to join parent company Volvo's base of operations. But it's not all doom and gloom.

As part of the restructuring, Mack also said it will boomerang assembly of its highway trucks -- a product line that left the Lehigh Valley in 1987 -- back to the local Macungie plant. Mack's test center on Lehigh Parkway in Allentown will become a customer demonstration and reception center. A loss of 680 jobs at the headquarters and 300 jobs at the test center is offset by the addition of 200 jobs each at the demonstration center and Macungie factory. That puts the net loss at 580 jobs.

That's a lot of jobs and a lot of lives disrupted. But in context, the fallout isn't nearly as bad.

In the Lehigh Valley, several hundreds jobs one way or the other is a ripple in a sea of 350,000 local jobs, not enough to move the needle on the unemployment rate. It's not like when Agere or Bethlehem Steel shed thousands at a time. Through the years, Mack factories regularly added and subtracted hundreds of workers as its workload ebbed and flowed.

"There is not a huge economic impact one way or the other," said economist Kamran Afshar, who studies the Lehigh Valley economy. "These aren't huge numbers." More here.

Thursday, August 14, 2008

Around The Web
From Area Development

The Best States For Business
Why Small Cities
Cities that Work for Business -- and Their Customers
Survey Ranks Top U.S. Counties with Outstanding Use of Technology Center for Digital Government
Export Boom Fuels Factory Town's Revival
Best Places For Business And Careers
The Gone Global Interactive Map
Indiana scores an A when it comes to manufacturing, logistics Ball State University
Innovation and the Role of the Economic Development Practitioner AngelouEconomics'
In the Hills of Nebraska, Change Is on the

Cities that Work for Business -- and Their Customers

Joel Kotkin is the author of "The City: A Global History" and is Presidential Fellow in Urban Futures at Chapman University in Orange, Calif. He is also a senior fellow with the New America Foundation in Washington and a senior fellow with the Center for an Urban Future in New York.

Below is review from Kiplinger on his book which argues that while high-end cities try to appeal to the "creative class," "opportunity urbanism" aims at building a broad business base and strong middle-class.

As many businesses know -- and many smaller businesses are hurt by -- there is a war on. Cities are fighting each others to attract business, often trying to lure large corporations with benefits usually not afforded to smaller companies already operating in the area. And some cities often try to attract business by making themselves attractive to the young, upwardly mobile and trained "creative class that many companies are scrambling to hire.

But such strategies mean setting up a competition that only a handful of cities such as San Francisco and Boston can really win because they cater to an elite class. Joel Kotkin, a nationally recognized expert on urban revitalization and planning, argues that building and maintaining a stronger middle-class will do far more to revive and sustain cities and the businesses and create economic possibilities.

The key, he says, is for cities to create a comfortable quality of life combined with a reasonable cost of living. "What we have found … is that most working people have more real income -- measured by what they can buy, given their average incomes -- in a place such as Houston than they do in superstar cities such as New York, Los Angeles or San Francisco," he writes. That has made Houston and other growing Sunbelt cities a destination for many of the educated and well-trained talent that businesses are hunting for. "These cities are also showing marked gains in attracting high-wage employers and educated migrants, including members of the ballyhooed 'creative class,'" he writes. "These are, of course, the very jobs and workers that are widely thought to be concentrating in more elite places."

Read More

From Banktown to high-tech Biotown?

By Christopher D. Kirkpatrick
Posted: Friday, Aug. 08, 2008

Now thought of as Banktown, Charlotte could soon start marketing itself as a hub of medical manufacturing companies and others connected to the life sciences.

The Charlotte Chamber says there are hundreds of unheralded companies in the area that turn scientific research into real products, such as artificial limbs and sterilization equipment. Many have sprung from the region's old-line manufacturing past.

Marketing the Charlotte area as a successful home to specialized manufacturing would be a high-tech addition to an image once defined by textiles and more recently by the rise of big industries such as banking and motorsports.

That news could be used as potent advertising to lure fresh investment to the 16-county region and build on the momentum of the $1.5 billion North Carolina Research Campus under construction in Kannapolis, said Erin Watkins, research director for the chamber.

To try and prove its point, the chamber won a $50,000 grant in June from the state-funded N.C. Biotechnology Center to research and define the area's biotech companies and their numbers. An initial study last year surprised Charlotte boosters because it suggested more than 500 companies connected to the life sciences were operating in the region. The chamber sought the grant to take a closer look at the operations, some mom-and-pop outfits largely unnoticed by the broader business community.

It would be one of several sectors that have existing clusters of businesses in the region that economic developers see as strengths, such as banking, defense, motorsports and energy companies, among others.

To be sure, the Charlotte region isn't and probably won't ever be a biotech hub on the order of Boston, San Diego, San Francisco or Raleigh. Those areas are famous for their multi-billion dollar research and drug-manufacturing economies based on international drug conglomerates and major universities, such as MIT and Harvard. More here.

Wednesday, August 06, 2008

KC development is stuck in the doldrums

It’s been a difficult time on the development front in recent weeks for a variety of reasons — some beyond local control and others more homegrown.

Kansas City lost its bid to land a Bombardier Aerospace aircraft plant that would have employed 2,100 people. From the beginning, economic development officials knew the odds were long a Canadian company would build its plant anywhere but Montreal, but they believed we had a real shot.

The state of Missouri approved a $240 million tax credit package; Kansas City offered incentives, too, and most of all, the weakness of the U.S. dollar made it attractive for Bombardier to locate south of the border. Nonetheless, after several months of almost daily talks and several visits, Bombardier stayed home.

The boo-birds were out immediately. Kansas City was a pawn, they said, used only to leverage more incentives from Canada. Development officials countered Missouri showed the world it could compete for big industrial deals and is now ready to play that high-stakes game. More here.

State's economic developers move away from big projects

By Cosby Woodruff

Alabama's economic development focus will shift away from luring mega-projects that create thousands of jobs toward companies that can supply big employers in neighboring states, according to the state's top corporate recruiter.

Neal Wade, head of the Alabama Development Office, told the Montgomery Advertiser that the state will try to take advantage of auto plants near Alabama that are either planned or already under construction.

He pointed to the Kia plant in Georgia, the Volkswagen plant in Tennessee and a Toyota plant in Mississippi as opportunities for Alabama to expand its automotive supplier network.

"It is going to be the year of the supplier," he said. "We are building on our strength."

When VW announced it was locating in Chattanooga, Tenn., rather than near Huntsville, it left the ADO with no 1,000-plus job projects in the pipeline for the first time in recent years.

Wade predicted it would stay that way through at least the end of 2009.

Those huge projects, he said, can jump start an area, but some simply are not worth the incentives needed to attract the company.

"I don't think we have to go out and get every project," he said. "We don't have to live and die off of mega-projects."

Incentives, he said, can be used to help companies already here rather than recruiting new companies.

"We need to ask, 'What we can do to help you grow?'" he said.

Alabama laws don't provide statutory incentives to recruit white-collar companies -- but Wade said that's an item that's on their legislative wish list.

"I think we can have more of a balance with more research and development and more corporate headquarters," he said.

Wade said Alabama must continue its political cooperation with businesses if it is going to remain a player in economic development, and it must upgrade its transportation options.

He said Alabama's congressional delegation has worked together to support economic development projects, and he pointed to city-county cooperation across the River Region.

Still, he said Alabama -- particularly the Black Belt -- would have a better chance of landing major projects if there were more four-lane highways to make transportation easier.

Air transport continues to be a headache for developers. He noted the state has no direct flight to the West Coast and Montgomery soon will have no flight west of the Mississippi River.

He took Alabama's loss in the VW race with a little philosophy.

"Playing is everything," he said.

"If you can't play, if you are not ready to play, you can't win. Economic development is a process of elimination. They get it down to three or four sites and the rest of them are not even going to get a visit."

Economic Development Success Stories

Take a look at the Wall Street Journal special report on seven places that took different approaches to economic development -- and came out ahead, beginning with Kalamazoo, Mich., where education was the tool to lure both business and people back to the city. More here.

"The 'Big Push' and Economic Development in the American South"

David Beckworth on evidence for The Big Push theory of economic development, the idea that "publicly coordinated investment can break the underdevelopment trap by helping economies overcome deficiencies in private incentives that prevent firms from adopting modern production techniques and achieving scale economies." Given recent debate over using infrastructure spending as a means of stimulating the economy, the long-run supply-side effects of stimulating the economy through spending on infrastructure are noteworthy:

The 'Big Push' and Economic Devlopment in the American South, by David Beckworth: One of the great stories from 20th century U.S. economic history is the great economic rebound of the American South. From the close of the Civil War up through World War II, this region’s economy had been relatively undeveloped and isolated from the rest of the country. This eighty-year period of economic backwardness in the South stood in stark contrast to the economic gains elsewhere in the country that made the United States the leading industrial power of the world by the early 20th century. Something radically changed, though, in the 1930s and 1940s that broke the South free from its poverty trap. From this period on, the South began modernizing and by 1980 it had converged with the rest of the U.S. economy. But why the sudden break in the 1930-1940 period? A new paper by Fred Bateman, Jaime Ros, and Jason E. Taylor provides a fascinating answer: the economic rebound of American South was the result of a 'Big Push' from large public capital investments during the Great Depression and World War II.

A novel contribution of this paper is that it appears to provide a real-world example of the 'Big Push' theory. Never heard of the 'Big Push' theory? Well, here is how the authors describe it:

According to the “big push” theory of economic development, publicly coordinated investment can break the underdevelopment trap by helping economies overcome deficiencies in private incentives that prevent firms from adopting modern production techniques and achieving scale economies. These scale economies, in turn, create demand spillovers, increase market size, and theoretically generate a self-sustaining growth path that allows the economy to move to a Pareto preferred Nash equilibrium where it is a mutual best response for economic actors to choose large-scale industrialization over agriculture and small-scale production. The big push literature, originated by Rosenstein-Rodan [1943, 1961], was initially motivated by the postwar reconstruction of Eastern Europe. The theory subsequently appeared to have had limited empirical application... [S]cholars have found few real-world examples of such an infusion of investment helping to “push” an economy to high-level industrialization equilibrium.

Until this paper, that is. The authors continue:

We argue here that the “Great Rebound” of the American South, which followed large public capital investments during the Great Depression and World War II, is one such application. Although 1930s New Deal programs are typically presented in the context of their attempt to bring relief and recovery to the U.S. economy through demand-stimulating public expenditures, the long-term economic effects of these and subsequent wartime expenditures were profound for the South. Specifically, and consistent with big push theoretical literature, the infusion of public capital—roads, schools, waterworks, power plants, dams, airfields, and hospitals, among other infrastructural improvements—fundamentally reshaped the Southern economy, expanded markets, generated significant external economies, increased rates of return to large scale manufacturing, and encouraged a subsequent investment stream. These improvements helped create the conditions that allowed the region to break free from its low-income, low-productivity trap and embark on its rapid postwar industrialization.

This paper deals with the break from the South's poverty trap. The sustained nature of the South's postwar economic recovery has been covered by other studies: Connolly (2004) looks to improved human capital formation, Cobb (1982) points to industrial policy, Beasley, Persson, and Sturm (2005) finger increased political competition, and Glaeser and Tobio (2008) discuss the merits of the climate or Sunbelt effect. (I will also note I have seen somewhere the advent of air conditioning did wonders for development in the South).

In short, this paper tells an interesting and under reported story of 20th century U.S. economic history. In so doing, it also provides what appears to be a good example of the 'Big Push'. Read the rest of the paper here.

No time to bail out on marketing

The rules of business are simple.

First rule: Provide a great product or service.

Second rule: Tell people about it.

Third rule: Provide great customer service.

Recessions, however, make even smart business people nervous about the second and third rules because marketing and customer service cost money, which can be scarce in economic downturns like the one the U.S. and the Wood River Valley are experiencing.

The downturn is making the cities of Sun Valley and Ketchum so nervous that Sun Valley just cut its economic development and information services budget by 38,000, or 13%, despite the fact that the city projects a 3% increase in local-option sales tax revenue.

Last year, the city of Sun Valley spent $338,000 on marketing and visitor services contracts with the Sun Valley Ketchum Chamber of Commerce. The cut likely will mean a reduction in marketing or services at the Visitors Bureau.

Ketchum is considering similar cuts.

While that may be music to the ears of people who would like to roll back the valley's economy to the days when dogs could sleep in the middle of Main Street, it's a serious matter for businesses. Cuts might produce ripples that could affect other companies that are critical to the valley's success—companies like airlines.

The move to cut marketing flies in the face of well-established research. A landmark study by McGraw Hill Research that looked at advertising investments during the 1981-82 recession found that in the six-year period following the end of the recession, companies that did not reduce spending on advertising during the recession increased sales by between 16 percent and 80 percent. The increases remained for years after.

Investment in marketing is as important as any product or service. Customers cannot buy if they don't know a product exists or can't distinguish it from others.

Getting noticed in the noise is always a struggle for Sun Valley and Ketchum. New research by the chamber's marketing consultant shows that just 28% of a national sample of people with incomes over $100,000 were aware of Sun Valley, with 55% awareness by those living in the Northwest.

That's chilling.

Reduced marketing is likely to compound the problem and to create a negative feedback loop. Fewer visitors will produce fewer local sales taxes that could require more cuts, not only in marketing, but in city services as well.

This is clearly not the time to reduce a marketing budget that is already pitiful compared to Sun Valley's competitors'.