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SOUTHEAST STATES
From Site Selection magazine, September 2010
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Right at Home

Foreign-domiciled companies continue to find
Southern hospitality to their liking.

SOUTHEAST STATES
An aerial photo of the Volkswagen manufacturing facility in Chattanooga, Tenn. (below), taken in July, shows the Volkswagen Academy training facility situated to the right of the main plant and the on-site supplier park to the upper left. Above, a photo taken in February 2010 shows the plant interior taking shape.
Photos courtesy of Volkswagen Group of America

by ADAM BRUNS
S

harp just made its 2-millionth solar panel in Memphis. CT&T is going to make electric cars in Spartanburg County, S.C. Mitsubishi Power Systems is on its way to making gas turbine components near Savannah, Ga. And Mercedes-Benz is locating a multifaceted corporate facility in Jacksonville.

The corporate project portfolio of the Southeast United States continues to possess a strong international inflection.

Analysis of all corporate facility projects in seven Southeast states from Aug. 1, 2009, through July 2010 revealed the influence of foreign-domiciled enterprises in the upper reaches of each state's economic development success.

For example, when sorted by investment amount, it only took 16 projects to find the top 10 foreign-firm projects in Alabama, and nine to find the top five. (The chart displays the top five from each state.) In Florida, it took 13 projects to find the foreign top five; in Georgia, only 15. And the incremental investment from those firms just keeps coming: Japanese automotive interior products maker VIAM Manufacturing provided recent evidence with its early August announcement of a US$4-million, 34-job expansion in Manchester, Tenn., where the company first opened operations in 1999.

An informal summer survey yielded the following information:

  • Of the 327 total projects worked by the Georgia Department of Economic Development during its 2010 fiscal year ending June 30, 46 (14 percent) were international projects representing direct foreign investment. "These 46 projects will create 2,160 jobs [12.7 percent of the total] and $717 million (28 percent of the total) in investment," says department spokesperson Alison Tyrer.
  • In 2007, total holdings in Florida by majority foreign-owned firms were $33.6 billion, ninth among U.S. states. Those firms employed 245,800 Floridians in 2007, sixth in the nation.
  • While nearly a quarter of the projects lacked dollar amounts, the cumulative capital investment of 44 of the 57 foreign affiliate facility projects tracked by North Carolina Dept. of Commerce officials since the beginning of 2008 is just over $859.4 million. Forty-eight of those 57 have created 3,686 jobs altogether.
  • According to the BEA FDI numbers from 2007 (the most recent available), South Carolina has 746 foreign-affiliated companies, with more than 100 of those from Germany. But South Carolina Dept. of Commerce spokesperson Kara Borie points out an anomaly: "This is an undercount because the BEA counts companies only once in a state, even if a company has multiple facilities," she says. "South Carolina actually has more than 1,200 foreign operations, of which more than 200 are German affiliates." South Carolina ranks second in the nation in the percent of its work force employed by foreign-affiliated companies (112,800, or 6.9 percent) and first in the percent of its manufacturing work force employed by them (54,400, or 21.6 percent).

Industry location, economic development and foreign direct investment are the primary research interests of Dr. Douglas P. Woodward, director of the Division of Research and professor of economics at the Darla Moore School of Business at the University of South Carolina. He says while there is evidence of more interest in the region from Chinese firms, it hasn't yet taken off like he expected it would a few years ago, though he is seeing an increasing presence from Chinese construction firms. Meanwhile, Korean firms are definitely on the move into the Southeast, even as the KORUS free trade agreement languishes. Woodward credits that country's stable macroeconomic environment, and says there is also a conservative culture match as well.

"Once they look at the south, they get comfortable with it fairly quickly," he says. Examples include the new car plant from Hyundai-Kia Automotive Group's Kia in West Point, Ga., and the cluster of Korean suppliers nearby. Hyundai-Kia in early August posted its highest U.S. market share ever, at 8.5 percent, boosted by the Sorento made in West Point.

Another Korean project is the new investment from electric car manufacturer CT&T, which announced July 1 it would invest $21 million and create 370 jobs in a joint venture with 2AM Group of Spartanburg, S.C., at a site in Duncan, S.C., in Spartanburg County.

"Upstate South Carolina is an ideal location for our first North American assembly facility," said CT&T CEO Young Gi Lee, a former Hyundai Motor Corp. executive. "We are very happy to be located in an area that provides automotive infrastructure, a skilled work force and proximity to markets that are prime targets for electric vehicle ownership."

The Hyundai connection continues over in Alabama, where a division of Hyundai Heavy Industries just announced a $90-million, 480-job plant in Montgomery that will build power transformers.

German Firms on the Move

Japanese and other Asian firms continue to build and to build interest. In fact, Mississippi, South Carolina and multiple entities in Georgia have established offices in Shanghai, and are among the leaders in the Shanghai-based Organization of American States in China. Georgia's Gwinnett County just opened an office in Wuxi, China, and in July celebrated a new R&D investment from Chinese electronics firm Hisense Company Ltd. at its headquarters in Suwanee, Ga., as well as an expansion from fellow Chinese firm Self Electronics in Duluth, and a new investment from Swiss firm Habasit America.

In South Carolina, investments from China-affiliated and owned companies employ more than 1,900 individuals. China was South Carolina's fifth-largest export market in 2009 with more than $867 million in goods sold to the country, an increase of nearly 10 percent from 2008.

But the strongest player by far throughout the Southeast is Germany. According to the German American Chambers of Commerce, whose staff play key roles in aiding many German firms with U.S. site selections, the more than 3,000 German subsidiaries in the U.S. employ over 650,000 American workers. Direct investments by German companies reached more than $200 billion as of year-end 2008.

Wilo, Mage Solar, RWE Group and ZF Group opened facilities in Georgia during fiscal 2010. Germany led all comers among the North Carolina projects between 2008 and today with 11. German companies have invested nearly $13 billion in South Carolina, which amounts to 46 percent of all European investment and 36 percent of all foreign investment in the state. In fact, spurred by its deepening ties to Germany, the state's commerce department moved its European office, established in Brussels in 1974, to Frankfurt in 1987, then to Munich in 2000.

In addition to headliners such as BMW, whose totals as of 2007 were 5,400 employees (triple its original jobs promise in 1992) and $5 billion invested, a bevy of new announcements have crossed the ocean to South Carolina this year:

  • Bavarian firm IMO will invest $47 million and create 190 jobs at a new plant in Dorchester County;
  • ZF Group will create 900 new jobs at a new transmission plant in Laurens County;
  • Behr Heat Transfer Systems will invest $3 million in an expansion that will create 70 new jobs in Charleston County, while toolmaker Gedore just opened a new headquarters and distribution facility in North Charleston.

South Carolina's exports to Germany (its top export destination) in 2009 were valued at just over $3 billion, down from 2008, but part of a 45-percent rise since 2005. Overall, the state's export value topped $16.5 billion in 2009, 18 percent higher than its 2005 total. Germany is also Alabama's top export destination; the state boasts 9,600 jobs at German-owned affiliates. However, in Florida, the country lags Canada, the Netherlands and leader the United Kingdom (41,300) in total employees of foreign-domiciled firms, and in Georgia its employment totals lag those of the U.K., Netherlands and leader Japan (25,100).

Tennessee's German connections continue to expand exponentially, as billion-dollar projects from Wacker Chemie and Volkswagen attest. The VW plant in Chattanooga in July celebrated the second anniversary of its project announcement, as it continued on track to produce its first mid-size sedans by early 2011.

"In this short time, we are over 90 percent complete with the building construction, we have installed more than 400 robots, and have built the first new midsize sedans, which are being tested now," said Frank Fischer, CEO and chairman of Volkswagen Group of America, Chattanooga Operations. "We have spent over $686 million in local and Tennessee contracts, opened a $40-million training academy and are investing more than $5 million in public education. We have hired nearly 900 employees and will continue the hiring process until we are fully staffed at more than 2,000 employees."

Still Make Stuff? Be Glad You Do

When the University of South Carolina's Prof. Woodward in August addressed the Southern Legislative Conference, a 15-state association of state legislators and staff, at their annual meeting in Charleston, S.C., he spoke of the three competitive development strategies famously invoked by Michael Porter: factor driven (cheap labor and land, low taxes); investment driven and innovation driven.

"The goal for every state should be to create an innovation milieu," he said, and while some areas of the Southeast have attained that kind of lofty reputation (e.g. the Research Triangle), most Southern states are firmly ensconced in the investment-driven manufacturing economy. Given the recent attractiveness of the U.S. for various sectors' manufacturing operations, that may be a very good thing indeed.

"We should not dismiss this," Woodward told the legislators. "We should be proud of it." Calling for a mix of cluster-based development and industrial policy, he contradicted the usual plea to not pick winners among industrial sectors. "I think you can pick winners," he said, based on the following factors:

  • Tradable or export potential;
  • High-wage skilled employment;
  • Total impact and multiplier effect;
  • State and local fiscal benefits;
  • Potential for deepening networks and clustering;
  • Extent of spillover benefits for other business;
  • No displacement of local business activity;
  • Reputation or "halo effect" for state.

Going back to his original study of the BWM deal, he praised the state's use of a fee in lieu of taxes, or FILOT, that provided BMW with significant property tax savings.

"The FILOT helped attract BMW," he said. "Without the South Carolina incentive, the local property tax was not competitive with [that of] other states. It was previously farmland, assessed at 2 percent rather than the 10.5 percent that a manufacturer faces. That's not money we have to give away. It made a lot of sense."

While some worry about the South's "promiscuity" with incentives, he said, straightforward cost-benefit analysis can ease the concern. A FILOT, for example, reduces the statutory manufacturing assessment ratio, and allows for the millage rate to be set at a fixed level without change over time. "It allows for predictability in tax payments over a long time horizon."

What counts is the net fiscal benefit, he said. "You need to evaluate incentives constantly." The gambit with BMW paid off in just a few years. Meanwhile, he said, states might do well to more closely examine whether film industry incentives costs, for example, outweigh their benefits.

"The multiplier effect of an automotive plant is much larger than any other industry you're going to find," he said. "Film has none. Automotive has about three to one."

And as multiple projects continue to demonstrate, even amid a general industry crisis, the Southern autobahn is alive and moving.


Story in Pictures

The Center for Manufacturing Excellence, scheduled to be completed in January 2011 on the campus of the University of Mississippi in Oxford, includes a 12,000-sq.-ft. (1,115-sq.-m.) factory floor that can be custom-configured to process a variety of materials including wood, metal, plastics and composites.
Image courtesy of Cooke Douglass Farr Lemons, Ltd.


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