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APRIL/MAY 1998

The Strategic Art of the Deal:
SS's 1997 Top 10
by Jack Lyne

IllustrationSpanning four continents, 1997’s top 10 deals illustrate billion-dollar investments, multimillion-dollar incentives and savvy facility location strategy.

These 10 deals were chosen by Site Selection’s editorial team as 1997’s top facility location deals. Here are capsule looks at those 10 deals, described in greater detail in the April/May Site Selection.

Amazon: Seattle, Wash.: $3 million; 250 jobs

Few companies are sued for cost-effective real estate utilization.

Amazon was, in part because of its lean-and-mean Seattle headquarters, an Information Age location prototype requiring far fewer traditional physical assets.

"[Amazon’s] business model . . . has set a tone likely to be emulated," information technology guru Bob Duffy observed online in The Electronic Library. "Its operational model [has] three main segments: the . . . front-end online consumer network, a limited physical establishment . . . and various back-end networks."

The self-proclaimed "Earth’s largest bookstore" offers 2.5 million titles, evoking very pricey images of a huge network of distribution facilities.

Not so. Amazon stocks only a few thousand titles in two warehouses: one in Seattle, one recently opened in New Castle, Del. Its Seattle operation is networked to book wholesalers and publishers, who pay for the space from which Amazon’s orders are directly shipped to customers. Similarly networked banks handle Amazon’s credit transactions.

Amazon’s limited "actual" inventory spurred Barnes and Noble’s (BN) law suit (later settled out of court). Stocking 170,000 titles, BN charged that it was "Earth’s largest bookstore."

Ironically, traditional players may be the primary beneficiaries of Amazon’s spare model. Already, they’re working overtime to catch up in cyberspace. And some may emulate Amazon’s real estate model.

Boeing: Decatur, Ala., $450 million, 3,000 jobs

Boeing’s $400 million, 3,000-employee, 2-million-sq.-ft. (180,000-sq.-m.) rocket plant is big in ways transcending the obvious. Alabama’s largest project ever, the deal is also big in incentives and very big in risk.

Despite the industry’s rapid growth, new aerospace facility launches remain precarious ventures. Start-up costs are sky-high, with a minuscule customer base and cut-throat competition.

More risk was added with the Decatur plant, which appeared to hinge on Boeing’s landing a coveted $1.6 billion contract for the next-generation U.S. space launch vehicle.

Alabama offered Boeing $80 million in incentives for a project that may create 3,000 more jobs. Alabama development officials drew critical fire a few years earlier for the $253 million Mercedes-Benz incentive package. Neal Wade, Alabama Economic Development Partnership director insisted, "we won’t extend anything we can’t get back if it’s not built."

In April 1998, the Air Force split the $1.6 billion contract between Boeing and Lockheed Martin. But Boeing’s Decatur plant is proceeding due to skyrocketing commercial launch demand, including projects for Motorola, Hughes and Loral, says spokesman Walt Rice. Now, though, the Decatur facility is being built to be flexible enough to grow or contract as decisions are made.

Chrysler Corp.: Toledo, Ohio, $1.2 billion; 4,900 jobs

Jeep’s decision is a major U.S. auto manufacturing counter-trend.

Jeep had many reasons to relocate, and looked hard at other Midwest sites, particularly in Michigan. Clearly, Jeep had to build somewhere. Its 90-year-old downtown Toledo plant was a productivity nightmare, sprawling over 61 five-story buildings. After seeing the operation, Chrysler manufacturing head Dennis Pawley marveled, "I was amazed they could even build a vehicle here."

All other finalists were small-town greenfield sites offering lower facility construction costs, taxes and crime, better skilled-worker access, and no environmental headaches.

A $223 million incentive package was pivotal in Toledo’s keeping Jeep. However, during Jeep’s 10-year tax exemptions, its $2.8 billion payroll will generate $350 million in taxes.

Jeep’s Toledo urban brownfield site (beside its old plant) also bucks auto-location trends.

Gateway 2000; Salt Lake City, $20 million, 1,350 jobs

Score this business-like deal as a victory for factual precision.

Directly selling custom-made PCs, Gateway 2000’s $5 billion-plus niche is as distinctive as its spotted-cow design. But its real estate network had a major gap, with no principal U.S. western manufacturing/distribution point. That was shaving precious margins in the commoditized PC market.

After scouring the West, Gateway’s search narrowed to Salt Lake and Reno, Nev. Nevada offered no state corporate income tax, a major location plus.

That’s when hard facts came to the fore, with the Economic Development Corp. of Utah’s (EDCU) in-depth pro forma comparing business costs. Citing extensive outside information sources, EDCU’s analysis showed lower costs at the Utah site for labor, workers compensation, unemployment insurance, property taxes, electric power and construction costs. And state offers of assistance in employee recruitment and training soothed Gateway’s initial concerns over tight local labor.

Salt Lake also offered distribution-friendly infrastructure, "quality labor, great quality of life, a recognized education system [and] Utah’s values," says Gateway Senior Vice President Robert Spear.

General Motors: Gravati, Brazil; $500 million, 2,000 jobs

Bullish demand, currency reform and low costs were three factors that led GM to Gravati in Rio Grade do Sul, Brazil’s southernmost state. A strategic departure for GM, the plant will offer South America’s most affordable vehicle ever, listing for $9,000.

The payoffs could be immense. Brazil’s 18 million vehicles, only one per 10 Brazilians, are expected to double by 2003, typifying demand in the Mercosur trade bloc.

"This is a major GM market," says Mark Hogan, GM small car division general manager. "In the next five years, car sales in both Brazil and Argentina will pass Germany, now GM’s second largest market."

Located at Mercosur’s geographic center, Gravati facilitates cost-effective distribution, with good access to Argentina, Chile, Paraguay and Uruguay. Rio Grade do Sul offers good electronic and physical infrastructure, and will cut labor costs to roughly half the $13,000-a-year industry average in Sao Paulo.

GM officials say President Fernado Henrique Cardoso’s Real Plan also upped Brazil’s appeal, dramatically slashing annual inflation. Brazil’s late-1997 austerity measures may slightly dampen demand. But high import duties ensure profitable growth, GM says, particularly with 90 percent of parts made at the Gravati plant.

Hankook Synthetics; Augusta, Ga., $1.2 billion, 1,800 jobs

South Korea did produce some bright economic news last year, when Seoul-based Hankook Synthetics (HS) announced Augusta as the site for the world’s largest polyester-fiber plant.

With plants in South Korea, China and Poland, Hankook wanted a major U.S. presence to increase North American market share and export to Latin America.

HS in part picked Augusta over other finalist sites in Alabama, Georgia and South Carolina for the area’s large existing network of chemical suppliers, critical in fiber manufacturing. HS also liked the area’s ready-made work force, with defense downsizing creating significant unemployment and underemployment. Georgia’s QuickStart program will provide free training for workers, with 500 daily turning out 800 tons of fiber when the phase-one plant opens in January 2000.

Other major state/local lures included only $1 million for site development and a free, 500-acre (200-ha.) site. With Georgia’s incentives limited by hotly contested constitutional prohibitions, other states offered fatter packages, says Gov. Zell Miller.

However, HS founding family member No-chul Park explains, "I did not want to gamble over small incentives with a $1.2 billion investment."

IBM: East Fishkill, N.Y.; wafer disks, new, $700 million, 3,290 jobs

When Gov. George Pataki took office in 1995, one of his first phone calls was to IBM Chairman Lou Gerstner. The governor’s fingers were doing the walking to try to keep IBM from walking. IBM seemed poised to abandon New York, then widely regarded as an anti-business location.

"I let Lou Gerstner know that the way New York does business was about to change in a big way," Pataki says.

New York hadn’t even made the initial site search for "Big Blue’s" 1,800-employee computer chip plant, considered the world’s most advanced.

"The plant was on its way to another state," Gerstner allows. "We even had the building picked out. These jobs could have gone anywhere."

New York provided $178 million in incentives, $135 million in investment tax credits, part of IBM’s three-in-one deal involving 3,290 jobs. IBM Credit, which also was considering leaving the state, will occupy IBM’s vacant former headquarters in Armonk (which had been on the market). And IBM’s new global services center will be in nearby East Fishkill in Duchess County. A creative sales/leaseback of the headquarters and chip plant also provides IBM with off-balance-sheet financing.

Says Gerstner, "Gov. Pataki and his team’s commitment to improve the business environment cemented our decision."

MCI: St. Louis, $43 million, 1,200 jobs

St. Louis may not immediately spring to mind as a Midwest high-tech mecca.

But the Missouri city’s techno-base, with 1,000-plus high-tech firms, was a major factor in landing MCI’s 240,000-sq.-ft. (21,600-sq.-m.) Information Technology Center, which will run on brainpower.

The center’s 1,200 employees, most electrical engineers and computer programmers and scientists, will develop customer solutions and new products, including software linking long-distance, cellular and paging services and innovative calling card applications.

MCI looked at 20 U.S. sites, including other finalists Chicago, Detroit and Minneapolis-St. Paul. St. Louis got the nod, even with a comparatively modest $12.5 million incentive package.

Development officials also convinced MCI that local-area colleges and universities could produce the necessary pool of technological talent. MCI officials also praise the area’s regional cooperation, which expedited its assessment of the several St. Louis sites.

"These are the kind of jobs of the future we want to attract," says Gov. Mel Carnahan.

Toyota: Valenciennes, France, $1.6 billion, 2,000 jobs

Currency questions swirled around Toyota’s late-1997 siting of its new $1.6 billion auto plant in northern France’s Valenciennes: Would it locate inside or outside the European Union’s (EU) "Euro zone," the nations adopting the EU’s common currency?

Toyota located its first European plant in Deeside, Wales, in 1990. In January 1997, though, President Hiroshi Okuda warned that Toyota might site new plants elsewhere if the UK opted out of the first-round Euro adoption.

The UK did opt out, but Toyota’s location message is mixed. Almost simultaneously, it announced the Deeside plant’s doubled capacity to build engines for the French small car plant. "The [Euro]-related issue has nothing to do with [this] decision," Okuda declared.

Apparently, Toyota is striking a delicate political balance. "Our first son is Britain, and our second son is France," says Akira Yokoi, a Toyota executive vice president. "We want our second son to grow like our first son."

The currency hubbub overshadowed Valenciennes’ considerable advantages: an ideal 500-acre (200-ha.) greenfield site, a wealth of nearby suppliers, a quality labor pool and a central location in northern Europe’s industrial heartland.

UPS: Taipei, Taiwan; $400 million, 2,000 jobs

UPS gets 1997’s damn-the-torpedoes award. Unlike many firms, it refused to make like Chicken Little in the face of Asia’s currency crisis.

"Our [Asian] strategy is to hold the course and weather this storm," says Ron Wallace, UPS international chief.

The express mail giant continued its rapid international expansion, opening its Asian regional hub at Taipei’s Chiang Kai Shek (CKS) International.

The hub was essential for UPS’ Asian expansion strategy. "This is the first Taiwanese hub to offer 24-hour, 365-day customer clearance service, providing faster clearance, earlier worldwide deliveries and later pickups," says Ed Schroeder, international operations senior vice president. The new facility also allows UPS to fly its own planes, increasing package volume.

The Taiwan hub is only part of UPS’s huge Asia-Pacific expansion. For example, a pending Indonesian joint venture links UPS with a Suharto-connected firm. And in India, UPS World Wide Logistics entered a three-way joint venture with three local operations to provide nationwide transportation and warehousing services.

1997’s intrepid Asian expansion paid off, with $44 million in fourth-quarter international business pretax profits. That international surge, says CEO Jim Kelly, fueled most of UPS’s 42 percent fourth-quarter increase, signaling recovery from ’97’s Teamsters strike. SS

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