Expanded Bonus Web Edition
California
CALIFORNIA
From Site Selection magazine, September 2009

The Price of Success
For California companies, the cost of doing business is a trade-off.
P
aul Beach knows exactly how costly it is to do business in California. He also says he wouldn't want to locate his company any place else.
Quallion LLC in Sylmar, Calif.
At Quallion LLC in Sylmar, Calif., high-tech workers assemble lithium-ion batteries. The average annual salary at the plant in the Los Angeles area is about $100,000.

      An executive who runs a company that is the largest maker of lithium-ion battery cells in the country, Beach says there's no substitute for being near the people who buy your products.
      "It may cost us more to do business here, and there are definitely some handicaps to doing business here, but there is a tremendous upside to being near your customers," says Beach, whose Sylmar-based Quallion LLC recently announced plans to build a US$220-million manufacturing plant in Palmdale.
      Both communities are located in the greater Los Angeles area, which, according to a recent survey, ranks as one of the most expensive places in the U.S. to run a business.
      Despite the burdens imposed by high costs and extensive government regulations, Southern California provides the critical ingredients Quallion needs to succeed, says Beach.
      "There is a large body of people you can draw upon very easily in California," Beach, the firm's president, tells Site Selection. "All of the key engineers in our field are right here. We have hired 50 people in the past year without any stimulus money, and we are paying about $100,000 a year to our workers."
      Quallion had applied for a grant through the U.S. Department of Energy — funds the firm would have used to construct the plant slated to produce more than 20,000 batteries a year for hybrid cars and trucks by 2012.
      When the DOE announced the winners on Aug. 5, Quallion was not on the list. Beach tells Site Selection that his company plans to proceed with the expansion anyway; it will just take longer to raise the money, he says.
      Quallion was one of 250 entities vying to win one of the federal grants designed to stimulate hybrid vehicle production. While there are companies pursuing this work in places like Indiana and Florida, Beach says he wouldn't locate Quallion anywhere but California.
      "Despite the high costs here on the West Coast, we have been profitable as a company for each of the past six years," he says. "In fact, we are the largest maker of these batteries in the U.S. One reason for our success is our close proximity to the Ports of Los Angeles and Long Beach for shipping products in high volume. We have lower costs of transportation."
      Costs did play a role, though, in convincing Beach to build his company's factory in Palmdale, about a 30-minute train ride north of Sylmar — and that is a key part of the ever-changing chronicle of the Golden State's business climate.
      As California companies wrestle to compete on a level playing field with high-tech firms in the rest of the country, they are finding it necessary to swing deals with municipal governments that are eager to win the business.
      This intra-state movement of companies, typified by Quallion, will only intensify as the cost gap between cities in California grows wider, says one expert who tracks the cost of doing business in every major city in California and most large cities in the U.S.
Quallion is the largest maker of lithium-ion battery cells in the U.S.
Quallion is the largest maker of lithium-ion battery cells in the U.S., according to company President Paul Beach (inset). To ramp up production even further, the firm plans to build a new factory in Palmdale on the north side of Los Angeles.

      Palmdale provided an estimated $10 million in incentives, including free land, to secure the Quallion deal. Other such deals are becoming more common as jurisdictions farther from the coast square off to lure expansion projects.
      Places like Stockton, Fremont, Tracy, Victorville and Ontario aren't being viewed just as alternative destinations to San Francisco and Los Angeles anymore. In many instances, they have moved to the forefront of site selectors' wish lists.

Costs Driving Company Moves
      Larry Kosmont, president and CEO of the L.A.-based Kosmont Companies, has seen the impact of these business moves firsthand. He says to expect more.
      "It is a nascent trend," he says of the intra-state corporate relocations fueled by the growing cost gaps between California cities. "And the wolves are at Los Angeles' door. Adjacent communities view L.A. as vulnerable and are compiling strategies to move on L.A. companies as their leases expire."
      According to the 15th annual Kosmont-Rose Institute Cost of Doing Business Survey, released on July 20, Los Angeles, Oakland, San Francisco and Santa Monica received "Very High Cost" ratings, placing them among the most expensive places for doing business in the U.S. Los Angeles County continues to rank as the most expensive jurisdiction in California, with 11 of the country's 50 most expensive cities being in the county.
Larry Kosmont, president and CEO, Kosmont Companies
Larry Kosmont, president and CEO, Kosmont Companies

      The Kosmont-Rose survey compares 411 cities nationwide based on the array of taxes and fees cities impose on businesses and that significantly affect business interests — such as sales, utility, income, property and other business taxes. Places are ranked in five categories from "Very Low Cost" to "Very High Cost."
      According to this year's survey, the 10 most expensive cities in California (in alphabetical order) are Berkeley, Culver City, El Segundo, Inglewood, Los Angeles, Monterey, Oakland, San Bernardino, San Francisco and Santa Monica.
      The 10 least expensive California locations, according to the study, are Costa Mesa, Hesperia, Moorpark, Roseville, Sutter Creek and the unincorporated portions of these counties: El Dorado, Lake, Merced, Orange and Santa Barbara.
      "California and many of its cities are now grappling with the triple witching hour of property tax losses, sales tax recession and income tax losses," said Kosmont, founder of the annual costs survey. "Even well-run cities are having a hard time fending off tax increases, particularly since the financially faltering state wants to take back local redevelopment money and gas tax from their local cities and counties. However, California should not raise any more taxes at a time when businesses are already suffering, unless we want to see the exodus continue of companies leaving the state to other more business-friendly locations."
Top Ten

      Not everyone agrees with Kosmont's assessment of California's condition. Brian McGowan, California's deputy secretary for economic development and commerce, tells Site Selection that rankings like this "may be interesting and help cities and counties understand how they stand against other cities, [but] they are not good for making business decisions. Focusing on just costs is somewhat short-sighted," he says. (In August, Brian McGowan was appointed by the White House as Deputy Assistant Secretary of Commerce and Chief Operating Officer of the U.S. Economic Development Administration. — Ed.)
      "You have to balance questions of costs with amenities — quality of work force, quality of life, access to capital, support systems for entrepreneurs, research institutions, quality and scope of infrastructure, and so on," says McGowan. "Bottom line is the tried and true fact: You get what you pay for. Low-cost locations typically have fewer amenities to support high-level business ecosystems. I think this study demonstrates that to an extent. Look at the high-cost cities. Many of them have leading high-tech business clusters."
      McGowan says that incentives are used by jurisdictions to cover up for inadequacies in their business ecosystems. He says he would rather see cities and counties spend public funds to "shore up" their weaknesses. "Once the weaknesses are dealt with, the level of required incentive should go down."
      Still, recent plant moves show that incentives are alive and well in many California communities. Kosmont says Lancaster and Cerritos are two cities offering creative incentives packages to lure firms from L.A., and others are following suit.

How Incentives Close Cost Gaps
      Danny Roberts, assistant executive director of the Palmdale Community Redevelopment Agency, says that in order to land Quallion, "we are putting in place a deal that is worth about $10 million." That deal includes selling Quallion a 9.6-acre (3.9-hectare) site for $1.
      "We will make sure that they get all the hiring tax credits and sales tax credits that are available to them through a California Enterprise Zone," says Roberts. "We are also granting waivers of traffic and drainage impact fees."
      Quallion is locating its operation in the Fairway Business Park in Palmdale near other high-tech tenants. Delta Scientific, E-Solar and U.S. Pole already do business in this growing technology enclave in the northern L.A. hills between Simi Valley and Lancaster.
      About 60 miles (97 km.) north of downtown Los Angeles, Palmdale provides transportation access to major population centers via train and State Highway 14.
      Roberts says Palmdale began pursuing Quallion after reading about the company and its expansion challenges in a local business journal. "We were able to offer them a location that is cost-effective and close to the aerospace industry," he says. "Boeing, Northrop Grumman and Lockheed operate R&D facilities here. The defense industry is one of Quallion's main clients, so a move to Palmdale allows them to be closer to several of their main customers."
      Quallion's Beach says he always knew the company would remain close to its home base in Southern California. It just needed the right fit.
TLA/Ontario International Airport
"They have done everything they can to build a good business location," says noted California writer, demographer and lecturer Joel Kotkin about the community of Ontario, Calif. "They have built the infrastructure." In addition to a thriving logistics scene, the environs of LA/Ontario International Airport also include such developments as the Ontario Airport Towers, above, developed by PGP Partners and Deutsche Asset Management.

      "It was extremely important in my decision-making process to remain close to home," he says. "I have 125 people here who already know how to do this work really well. I can't move them to Detroit or New York.
      "We needed a local plant, and I wanted to pick some place that was business friendly," Beach adds. "I wanted an industrial manufacturing environment, and it had to be conducive to transportation and close to my customers. Palmdale provided all of that."
      Beach admits that he "dabbled very briefly with some out-of-state options." Texas, Michigan and West Virginia all made generous incentives offers, he says.
      "A more serious consideration was given to Nevada because of the business climate there," he notes. "They have a better regulatory climate. We toyed with that."
      In the end, two cities made the final list: Santa Clarita and Palmdale. According to the Kosmont-Rose survey, Santa Clarita is listed as a "Low Cost" city, while Palmdale is ranked as "Average Cost." Sylmar is a neighborhood inside the "Very High Cost" city of Los Angeles.
      "We had a lease in Santa Clarita. Palmdale was our secondary site at first," Beach says. "We were able to lock down an executable plan in Palmdale, however, and that became our choice."
      Beach says his company will expand even without the DOE grant. The project is "shovel ready," he says. But he admits that DOE funds would have expedited his firm's growth. "We are prepared to move forward," he says. "If we had won the grant, we would have moved forward immediately. But we lost, so now we have to sit back and consider our options for funding the project."
      Beach says he will continue to operate his existing R&D plant in Sylmar. "We will keep that operation here," he says. "We can't stop that or move it. We have too much infrastructure here. So we plan to grow both here and in Palmdale."
      Contracts with University of California at Santa Barbara, University of Southern California and Cal-Tech in Pasadena all play a vital role in Quallion's growth, notes Beach. "It is conceivable that we would expand all of those university alliances," he says.
TLA/Ontario International Airport "California companies are not leaving the state in droves. Last year, we lost only 1,000 businesses, which is not statistically significant in a state our size."
— Brian McGowan, California deputy secretary for economic development and commerce [On September 15, McGowan was appointed U.S. Deputy Assistant Secretary of Commerce for Economic Development and Chief Operating Officer for the U.S. Economic Development Administration in Washington, D.C. -Ed.]

Stop ‘Poaching,' Says California Official
      McGowan says that, in the final analysis, that is why most California-based corporate executives choose to do business in the Golden State. "We have more national labs than any other state, and our university system is the model for the U.S.," he says. "Tesla Motors just got a $400-million loan guarantee from the federal government for battery technology. We are seeing a huge influx of venture capital; a lot of the stimulus money is going to go through our universities and our national labs."
      McGowan says he wishes more business executives and site consultants would recognize California for what it is. "California is an expensive place to do business and highly regulated, but people should understand that California has not dropped off into the ocean," he says. "You have to separate the budget crisis from the state of our economy. Our state GDP actually grew last year while that of Nevada and Arizona shrank."
      McGowan also disputes those who contend that companies are fleeing the state as part of a mass exodus seeking cheaper locations elsewhere.
      "California companies are not leaving the state in droves. Last year, we lost only 1,000 businesses, which is not statistically significant in a state our size," he adds. "At the same time, workers in California made 12 percent more in wages than the national average. For states to be poaching each other is a disservice to the national economy. If they really want to grow their economy, they should emulate California and spur innovation."
      According to the Conway New Plant Database, California still produces a significant number of corporate facility expansions each year, but the pace has slowed. From 2004 through 2006, California registered 471 facility deals that meet the criteria for inclusion in the project-tracking database of Site Selection ($1 million or more in investment; or at least 50 new jobs; or at least 20,000 sq. ft. of new space). Since the start of 2007, the state has recorded 205 projects.
      Whether it's poaching or not, many California communities offer incentives in an effort to lure intra-state relocations and expansions.
      In Northern and Central California, several large deals garnered headlines in recent weeks. Among them was a play by California to keep the New United Motor Manufacturing Inc. plant in Fremont in the San Francisco Bay Area. NUMMI, which employs 4,500 workers and supports another 35,000 supplier and other jobs indirectly, has been on the bubble since June, when General Motors pulled out of its 25-year alliance with Toyota.
      The state incentives package offered to NUMMI to keep the plant operating in Fremont would top $70 million. In addition, the deal would let NUMMI apply its current losses to offset future profits for as long as 15 years. [On Aug. 27, Toyota's board of directors voted to no longer make cars at NUMMI, which will close on March 31, 2010. — Ed.]
      In Stockton, General Mills is taking advantage of State Enterprise Zone and Foreign Trade Zone designations by locating in a new 735,000-sq-.ft. (68,282-sq.-m.) distribution facility in the Opus Logistics Center.
      The location enables General Mills to pay lower shipping costs and reap faster processing of international shipments. The five-year lease, which begins in early 2010, allows the company to pay market rates that have dropped more than 10 percent in recent months. Published reports peg the deal at around 30 cents per square foot per month.
      In Sacramento, Nestlé Waters is investing $14 million to convert a warehouse in the Florin Fruitridge Industrial Park into a water bottling plant. The 214,434-sq.-ft. (19,921-sq.-m.) facility, the company's first in the state capital area, will employ about 40 people upon full production.
      "For us, it was all about our network strategy," says Chris Kemp, plant manager for Nestlé Waters. "Transporting water from Southern California to the Bay Area costs quite a bit. We needed a facility of adequate size near our customer base, and we needed to keep our operating costs low. We looked at about a 50-mile [81 km.] stretch up and down the Central Valley corridor."
      The Sacramento Area Commerce and Trade Organization was instrumental in closing the deal, Kemp says. "They were very welcoming and easy to work with. That was a key part of it. We felt that we would have a nice, ongoing relationship."
      Stockton, Roseville, Auburn, Vacaville and Tracy were considered during the site search, but Sacramento's overall location advantages and available building proved to be deal closers, notes Kemp.
      "We looked at the building specifications and all operational aspects — truck docks, doors, parking, layout, etc. We wanted an employee talent pool and good highway access," he says. "That is why we landed in Sacramento."

How Costs Affect Expansions
      Industrial deals like these are critical at a time when manufacturers face increasing pressure to relocate to cheaper places. According to a recent Milken Institute study commissioned by the California Manufacturers and Technology Association, the state lost 25 percent of its total manufacturing employment between 1990 and 2007.
      Today, some 1.3 million Californians work in manufacturing, about 9 percent of total state employment. In 2000, nearly 13 percent of Californians held manufacturing jobs.
      Noted California writer, demographer and lecturer Joel Kotkin, author of "The City: A Global History", tells Site Selection, "The big issue is not company movement. The issue is that the company does not expand here. It chooses to expand and grow jobs elsewhere. I see more California companies being lean at home and expanding in other locations."
      When companies do relocate or expand within the state, says Kotkin, it is usually in more affordable markets like Palmdale and Ontario. "That is the saving grace of California. There are still affordable options in the inland areas," he notes. "We are definitely seeing a movement of people to these inland places. That has saved California over the last 10 years. Look at Ontario. They have done everything they can to build a good business location. They have built the infrastructure." As a result, the 90-million-sq.-ft. (8.36-million-sq.-m.) industrial market in Ontario has a vacancy rate of just 6 percent.
Joel Kotkin
Joel Kotkin, writer, demographer and lecturer

      At the state level, Kotkin says, two major reforms are needed: "Streamline the regulatory process, and lower the very high personal income tax."
      Kotkin says California penalizes high-income earners (people who make $150,000 a year or more) with an excessively high income tax rate. "When you are paying income taxes to the state of $10,000 to $15,000 and you are still relatively young, you are going to move to Texas, where you won't have to pay any income tax," he adds. "In California, the young income earner cannot be grand-fathered in under Proposition 13, so they cannot afford to own a house. For people in their 20s and 30s, this is a big issue."
      McGowan says relief is coming for companies in the form of a "new hire" tax credit of $3,000 per worker and a 24-percent R&D tax credit. For firms that employ Californians and have operations in California but conduct a significant amount of their sales outside the state, another tax break is on the way.
      "By establishing a permanent, elective, single sales factor — allowing companies to choose to weigh only sales made in a state, not property or payroll, to determine corporate taxes owed — we will level the tax playing field between California companies and those in other states," he says.
      This incentive is scheduled to take effect Jan. 1, 2011.
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