TOPICS > Economy

Southern Hospitality: The South Attempts to Attract Auto Mmanufactures

October 14, 1996 at 12:00 AM EDT

ROBIN MINIETTA: South Carolina pursued BMW to land this assembly plant. Alabama successfully chased Mercedes, and Tennessee caught both Nissan and Saturn. These states as well as many others are using offers of cheap land, infrastructure improvements, and tax breaks to lure businesses shopping around for a new location. It’s been standard practice for decades, but as the competition between states grows more fierce, the increasingly generous financial incentives often amount to millions of dollars.

CARL RIST, Corporation for Enterprise Development: The reason incentives are such a, such an enticing option for states is that they do seem to make a difference on the margin, that when the location decision comes down to one or two places, incentives can be the thing to clinch the deal, to make a difference.

ROBIN MINIETTA: Carl Rist is a policy analyst for the nonprofit Corporation for Enterprise Development.

CARL RIST: On the other hand, there’s a lot of questions. A lot of academics have done research on this issue, whether taxes make a difference to location decisions, and their findings are that while they do make a difference on the margin that the costs are not always justified, that, in fact, cost effectiveness is a big question whether states are giving away too much.

ROBIN MINIETTA: This question arose when three states got into a ferocious bidding war over a Mercedes Benz manufacturing plant. In 1993, Mercedes Benz decided to build its first manufacturing plant outside of Germany. Company officials scrutinized dozens of possible locations in the U.S. Linda Paulmeno, director of communications, served on the site selection committee.

LINDA PAULIMENO, Mercedes Benz: We held a six month very intensive site selection process throughout the U.S. and finally narrowed it down to six states and then three states and then made our final decision to Alabama.

ROBIN MINIETTA: Competition to land the deal between the three finalists–Alabama, North Carolina, and South Carolina–was fierce. At stake were 1500 new jobs at the manufacturing site and an estimated 17,000 additional support jobs.

LINDA PAULIMENO: Alabama represented to us the best combination of the things we were looking for. Work force was first and foremost a priority to us because we will build a true Mercedes Benz with the highest quality, so work force was very significant. The infrastructure, proximity to suppliers, the overall business climate the presence of a university her in Tuscaloosa was also very important to us.

ROBIN MINIETTA: There were also financial incentives. The state of Alabama offered Mercedes a package that included approximately $300 million in various kinds of tax breaks. North and South Carolina offered similar types of incentives but neither matched Alabama’s offer.

DAVE PHILIPS. North Carolina Secretary of Commerce: We definitely wanted Mercedes and we’re sorry that they didn’t come here. We understand why they went to Alabama.

ROBIN MINIETTA: Dave Philips led the negotiations with Mercedes for North Carolina. He’s still amazed at the offer from Alabama.

DAVE PHILIPS: Their cash incentives were so incredible that I think everybody was very surprised and still are very surprised. Here we are three years later, and we’re still talking about it.

DENNIS RONDINELLI, University of North Carolina: This was a case where in the final bidding Mercedes was able to bid up the package of incentives that were provided. Secretary Of Commerce here revealed that in the final stages some of the engineers from Mercedes on the negotiating team asked if North Carolina, for instance, would pay the salaries of all the employees of Mercedes for the first year, which was calculated at $45 million.

ROBIN MINIETTA: Dennis Rondinelli, director of the Center for Global Business Research at the University of North Carolina, believes this kind of incentives battle is becoming a commonplace business practice.

DENNIS RONDINELLI: Incentives are coming to play in a more important role simply because more and more states in more and more locations are providing them.

ROBIN MINIETTA: According to research done by Carl Rist, Mississippi is the first state to aggressively recruit new companies.

CARL RIST: It was back in the 30s that Mississippi pioneered what was called balance agriculture with industry, sort of the first modern industrial recruiting program, and the idea back then was that Mississippi could use its lower wage structure as a competitive advantage against other states in the union and were very successful and other southern states followed them in drawing industry from the, from the rust belt, from the frost belt.

ROBIN MINIETTA: The strategy of offering cheap land, cheap labor, and sizeable tax breaks has worked well for the southern and southeastern states, but it is getting expensive. In 1980, landing a new Nissan plant cost Tennessee $11,000 per job created. In 1985, recruiting the Saturn Corporation cost the state $26,000 per job. In 1992, it cost South Carolina more than $68,000 per job to bring in a BMW plant, and the estimates range from $150,000 to $200,000 per job for the Mercedes Benz plant in Alabama.

NEIL WADE: We’ve been criticized by states for paying what we did for, for Mercedes, and I think our motives and our long-term goals have been somewhat misunderstood. We had to get Alabama to a level playing field as best we could with other states that are getting the site visits. And Mercedes has helped us do that.

ROBIN MINIETTA: Neil Wade was instrumental in negotiating the Mercedes Benz deal. He shrugs off criticism that it was financially imprudent, arguing that it bought Alabama more than just a new manufacturing plant.

NEIL WADE: A lot of companies don’t consider Alabama. That’s our biggest problem in getting a company to select Alabama. We don’t lose at the decision point; we lose in the middle of the process because they don’t put us on the list to even visit. Out of the ten southeastern states; they may decide I’m going to go visit three, well, seven are not going to be picked. Alabama was normally one of those seven. What Mercedes has done has gotten us on more lists, which allows us then to compete.

KIMBEL PRICE, Alabama Arise: I don’t think we had to give away the store to get that.

ROBIN MINIETTA: Kimbel Price is the director of a coalition of religious and community groups called Alabama Arise. Like a growing number of citizens, Price is uncomfortable with the whole idea of industrial incentives or “corporate welfare”, as he calls it.

KIMBEL PRICE: It’s a matter of corporate citizens paying their fair share of taxes and for the state to have enough money to educate its children and provide the services it needs to provide. The good corporate citizens need to be paying their way like the rest of us.

ROBIN MINIETTA: The Alabama incentive offers are also drawing fire from some homegrown businesses. This mill, which employs 1850 people, has been in operation in Gadston, Alabama, since 1907. Employees here are worried about losing their jobs to a competitor, Tri-Co Steel, which was recruited to the state with the help of incentives.

JOHN LEFLER, CEO, Gulf States Steel: Our big issue on this is not so much the fact that there is an incentive package and a reasonable incentive package but that it be a fair package and fair to existing industry.

ROBIN MINIETTA: Gulf States Steel filed a lawsuit against the State of Alabama to try to stop the Tri-Co deal.

JOHN LEFLER: The ability for anyone to build a business in the United States should be free to go in and be competitive, sell whatever products they want to make in a competitive market. Our objection is to the subsidy of that business to the detriment of the existing businesses. The advantage that that gives to a new company, we feel, is unfair and illegal.

ROBIN MINIETTA: Gulf States Steel dropped the lawsuit only after the Alabama legislature gave them an estimated $2 million annual tax break to help the company expand.

Alabama is not the only state to face a lawsuit over its use of financial incentives. North Carolina faced a similar legal challenge, and in Georgia the state attorney general raised questions about the use of a forgivable loan program that allows companies to keep state loans. But the challenges are not stopping states from moving ahead with new deals and business recruiters like Neil Wade see no end to the practice of offering incentives.

ROBIN MINIETTA: Would you be able to attract new businesses to the area without incentives?

NEIL WADE: No, you would not, not in this day and time. You would attract maybe some because of some reason someone had to be here to service some particular client. You may have some very rare situations, but if you’re going to try to move to another level of competition, if you’re going to go after the Mercedes Benz or BMW’s or United, you’re going to have to have some set of incentives to be competitive.

ROBIN MINIETTA: Critics and supporters of incentives agree on one point. As states continue to make generous offers to land big projects, the debate will just get louder.