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From Site Selection magazine, March 2012

‘The Box That
Must Be Checked’

Gov. Mitch Daniels just made Indiana the 23rd right-to-work state,
a move that already is altering the Midwest location equation.
Companies near and far are taking notice.

Gov. Mitch Daniels joined executives from Exegistics, including founder Stephen Olds, a retired Marine Corps officer, in November 2011 to announce the company’s plans to open its first Indiana facility in North Vernon, creating up to 315 new jobs by the end of 2014. The Wheeling, Ill.-based company will invest $9 million to build and equip a rail-sided distribution facility on a 10-acre (4-hectare) campus in Jennings County. “While we evaluated other locations, Indiana and the city of North Vernon offered the best pro-growth partnership and access to a highly qualified and values-based labor market,” said Olds.

s this issue went to press in February, site selectors in the U.S. and globally were busy recasting their lists of finalist locations for manufacturing projects to include Indiana. The state may well have ranked high on some of those lists already — its business climate is considered robust by many evaluators of Midwest states, given its record of fiscal conservatism that includes a predictable and competitive tax structure among other measures.

But becoming the 23rd right-to-work state has energized Hoosier State efforts to escape the stigma, or at least perception, of Midwestern locations being less than business friendly to companies hoping to cultivate a work force free of union requirements their workers don't embrace.

The law making Indiana a right-to-work state was signed by Gov. Mitch Daniels February 1st (the Indiana Senate passed the measure 28 to 22; the House by a 54 to 46 vote), sending shock waves through a region at the heart of the unionization controversy, much of which is being played out on the public side. Corporate investors in projects that employ private citizens, meanwhile, are registering their interest in Indiana's efforts to separate itself from the Midwest pack with a notable upsurge in inquiries about locations for new or expanded facilities at a time when more manufacturers want to bring operations back to the U.S. from overseas — and from closer to home — due to shrinking labor and logistics cost benefits.

"I may have underestimated the immediacy of this law's impact," Gov. Mitch Daniels told Site Selection February 13th, not quite two weeks after he signed the right-to-work measure into law. "We'll have to see over time the dimension of its impact.

"During the debate, which was very contentious, I was urging both sides not to overreact or exaggerate," he relates. "I thought on the one hand folks opposed were grossly overstating what they thought would be negative consequences. I kept saying that no one's wages would go down and no one's benefits would go away, and the right to organize and bargain is completely intact. On the other side, I said we're not claiming this is some panacea, some magic solution.

"But I may have underestimated the impact," he reiterates. "We have had a flood of calls and inquiries, starting literally the day I signed the bill. We began hearing from companies we had not heard from. We're keeping a list, because this may be important information for experts in the site selection business at some point. We're in active conversations now with more than 10 companies with whom we had no contact just 12 days ago [prior to signing the bill]. They have communicated very overtly that they are in touch with us because of this new law."

Indiana's right-to-work status is turning heads outside the region, too.

"It changes to the positive my perception of Indiana's business climate," writes a site consultant in response to a question this writer posted on the Site Selection and Corporate Real Estate Pros LinkedIn discussion page. "My marketplace is north Texas. I can give personal testimony that my state has attracted many relocated facilities from the Midwest for two reasons: the absence of a personal and corporate income tax and Texas' right-to-work laws. I would expect Indiana to be able to keep more of their existing employers now rather than watch them leave for greener pastures."

Also weighing in on the LinkedIn discussion is Robert Price, director of Atlanta-based Herron Consulting: "This issue is also closely followed overseas," he notes. "Many of our offshore clients are aware of the implications of U.S. right-to-work laws, and the significance of these laws in the site selection decision process has not waned. Some states are exhibiting greater confidence in their ability to make difficult decisions as they come to terms with the 'new economy,' and the change in Indiana reflects this."

Business Climate Booster

Indiana's transition to a right-to-work state has nothing to do with being anti-union, or anti-worker, more pointedly, which are among the straw man arguments used most often by detractors of right-to-work laws. It has to with keeping the state competitive for capital investment on a global playing field, even if the state is deemed competitive by other measures. Indiana ranked 6th in Site Selection's Business Climate Ranking, published in the November 2011 issue, and 8th in the magazine's ranking of the Top Ten Competitive States, published in May 2011 issue. Every state ahead of Indiana in both rankings are right-to-work states, which was not lost on Gov. Daniels.

"We know from a large base of experience that when we get a chance, Indiana is winning two thirds of the time — sometimes this is a multi-state competition," says Daniels, referring to the thousand-plus projects completed by the Indiana Economic Development Corporation, established in February 2005. "We also know, from site selection experts that have told us this for years, that many of their clients have right-to-work as a box that must be checked.

"In seven years and a thousand-plus transactions, I am not aware of any company that has come here to Indiana and been involuntarily unionized," states Daniels. "I might have missed a couple, but I don't know of any. A couple had unions when they came, but it didn't make any difference. This was simply a criterion they had established. That led me to believe ultimately that we needed to take this step. We had taken so many others reflected in rankings like Site Selection's and others. We often referenced Site Selection, showing that the states ranking above ours were right-to-work states. This was a very common pattern in terms of who was assessing the economic attractiveness of states."

Staying on Defense

Why move forward with this legislation now?

"We've taken so many other steps over the years with respect to tax and regulatory policies, building infrastructure — all the things we know are important," says Gov. Daniels. "We still are far from where we want to be. Second, it's the growing body of evidence that says we aren't getting enough shots on goal, at least in a weak economy like this. We need all the opportunities we can get. Our win rate is very good. Give us a shot and people find a lot to like — a very low cost structure, a great location with great infrastructure to amplify that and a very stable fiscal situation with the assurance that state taxes will stay under control. Property taxes we have capped constitutionally — we've lowered the property tax of the business class of property significantly. Our problem was there simply weren't enough targets, at least in this economy. So that's why we decided to do this now, which we knew would not be easy."

One area likely to benefit from Indiana's new right-to-work status is Muncie, where the Electro-Motive Diesel Inc. subsidiary of Caterpillar may relocate its locomotive assembly operation from London, Ont., where it had been embroiled in a labor dispute with the Canadian Auto Workers Union. Caterpillar is closing that plant. Meanwhile, Caterpillar's Progress Rail Services Corp. unit opened a locomotive manufacturing facility in Muncie in October 2011, in a 740,000-sq.-ft. (68,750-sq.-m.) facility formerly occupied by ABB Power T&D Co., which closed in 1998. In addition, the company plans to build a locomotive test track on the facility's 75-acre (50-hectare) campus. This facility could well assume the Canadian production. Progress Rail had predicted a work force of about 650 by 2012 when the $50-million project was announced in 2010.

Game Changer

How that scenario plays out remains to be seen. The dust is still settling from Indiana's new status, and when it does settle, the Midwest will not look quite the same.

"This really puts pressure on the other states in the Midwest," says site selection consultant Bob Ady, president of Mount Prospect, Ill.-based Ady International Co. "Site selection is a question of differentiation, and this is a major differentiator for Indiana and its neighboring states and throughout the Midwest, especially with respect to international companies that are leery of unions — not that they think they're wrong, it's more about their concern with the unknown. They read about strikes now and then, but they don't often see the rest of the picture, which is that most labor contracts are amenable. That doesn't get reported as often. It brings uncertainty into the equation for some of them," says Ady, which right-to-work will alleviate.

Look for companies in bordering states and elsewhere to begin weighing their options, adds Ady, and for companies supplying OEMs to give Indiana a closer look. Plenty of companies, including Caterpillar, still exert influence over where their suppliers establish operations, he points out.

All things being equal, would Ady steer a client to an Indiana site today — or higher up on a finalist list of Midwestern states? "Yes," he says, "though we just make recommendations. It's up to the companies in the end. I'm working right now with an international company that is now specifically considering Indiana, where it wasn't previously. Right-to-work has already had an impact."

Story in Pictures

Governor Daniels talks with Lance Harris, CEO of NetShape Technologies, at the company’s headquarters in Campbellsburg, Ind., following the announcement that the parts manufacturer will consolidate part of its operations from Illinois and create up to 63 new jobs by 2014.
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