April 2005
  Incentives Deal of the Month
   from Site Selection's exclusive New Plant database

The Fruits of Research

Toyota R&D Project and Incentives
Critique Announced on Same Day
Toyota Technical Center USA, Ann Arbor complex.

by ADAM BRUNS, Site Selection Managing Editor

       April 12 dawned auspiciously in Ann Arbor, Mich., as Gov. Jennifer Granholm joined government officials and company executives to announce a new $150-million R&D facility in York Township from Toyota Technical Center USA (TTC). But by the end of the day, the joy was slightly tainted by a report from the Mackinac Center for Public Policy calling into question the state's incentive programs.
       The TTC project will create 400 direct jobs and 277 indirect jobs, and will benefit from an incentive package valued at more than $38.9 million. It also will benefit from the conveyance of 690 acres of land — property formerly occupied by the Ypsilanti Regional Psychiatric Hospital. In a generous deal worked out by Gov. Granholm and the state legislature, TTC got the parcel for US$11 million. It also received an adjacent 10-acre parcel for the low price of $1 — on the condition it be converted by the company into a public park.
       "We think the York Township property is large enough to give us the assurance of being able to plan for TTC's short term as well as long term growth," said Dr. Akihiko Saito, executive vice president, Toyota Motor Corp. "The North American growth in sales opened the door for Toyota to establish our manufacturing operations which in turn supported the localization of our R&D presence. The York Township property will provide adequate space to conduct our engineering and research for Toyota's core North American vehicle development programs."
       The company now enters the due diligence and approval process, which will include zoning changes and site plan approval by York Township. "The goal is to close on the property and begin facility construction in the spring of 2006 if all the due diligence activities are successfully completed," read a company statement.
       The closing might not be as smooth as the usual Toyota process however. When the actual conveyance of the land occurred in September 2004, Oakland County developer DPG-York LLC sued, saying it had offered $25 million. But the Michigan Court of Appeals ruled in February 2005 that the state could consider factors beyond the bid amount in deciding who got the land. DPG-York has appealed that decision.

Toyota's Progressive Process
       TTC first established a beachhead in Ann Arbor in 1977, driven primarily by the presence of the
Bruce Brownlee
EPA's certification headquarters nearby. But it's been the proximity of automotive engineering expertise that has led growth.
       Just last summer in an interview with Site Selection, Bruce Brownlee, general manager for corporate planning and external affairs for TTC USA, said the Ann Arbor complex's growth was characterized by a "steady progressive expansion," adding 25 to 50 associates every year since the early 1990s.
       "It's not something where we go out and hire 500 people at one time," he said.
       Apparently 400 is more like it. The project substantiates reports in The Wall Street Journal in May 2004 that said TTC wanted to boost employment from 550 to 1,000.
       The company had to go outside Ann Arbor to do it. TTC was bursting at the seams of its 106-acre (-hectare) campus in Ann Arbor. In May 2004, the company opened a 32,000-sq.-ft. design studio there for Toyota's California-based North American design subsidiary, Calty Design Research, Inc.
       TTC's R&D build-out occurs at the same time as recent technical center investments in the region from GM, Nissan, Suzuki, Hyundai and Kia.

Impact Measurements
Depend on Who's Measuring
       A University of Michigan economic analysis estimates that the project will generate more than $1.2 billion in personal income for Michigan workers over the life of the tax credit, in addition to the other long-term benefits accruing to the state's employment profile and tax base. But the Mackinac Center says the whole picture needs to be assessed.
       Having just completed a 127-pp. study of the 10-year-old incentive program administered by the Michigan Economic Growth Authority (MEGA), Michael LaFaive, director of fiscal policy for the center, testified on April 19 before the Michigan House Commerce Committee. He led off by noting that, between the creation of MEGA on April 18, 1995 and the end of 2004, more than $1.8 billion in tax relief has been offered in more than 230 deals. Non-MEGA incentives in those deals — in the form of training and infrastructure grants, as well as locally offered incentives — amounted to $1.2 billion.
       However, that was just what was offered. Of the 127 projects in that bunch expected to have reached their "direct" job targets by the end of 2004, only 56 have actually claimed the credits. While LaFaive went on to note that only about 38 percent of the direct jobs projected as part of the 127 projects have been created, he failed to note that, indeed, the tax credits did not kick in with the companies that came up short.
       Nevertheless, the study presents a time-series econometric model that attempts to analyze the broader impact of such targeted tax incentive programs. It concludes that MEGA has not improved per-capita personal income or employment rates at the state or county level, and that even the bump in construction jobs has come at a price of $123,000 in MEGA credits per temporary construction job. Among the recommendations is canning the "spin-off" impact projections — something that LaFaive says in many cases amounts to "glorified guesswork" — and measuring only direct job creation.
       However, David E. Cole and Sean McAlinden, chair and chief executive, respectively, for the Center for Automotive Research in Ann Arbor, noted in a recent column for The Detroit News that even the direct-job spin-off could be considerable.
        "The longer-term prospects are most worth celebrating," they wrote, noting the size of the new parcel. "In describing the new center, Toyota Technical Center President Yasuhiko Ichihashi said, 'We anticipate multiple phases of development.'"

‘Fair Field’ Feasible?
       Supporters of MEGA and other similar programs point to the fact that it is indeed performance-based. In addition, in the bigger picture, retention of operations — while not demonstrating "improvement" -
TTC's most recent outgrowth is an expansion of the Calty Design Research studio.
nevertheless could be considered positive development in an extremely competitive global economy. In fact, the state has made a point of shifting focus to retention of corporate operations over the past several years.
       One point made by LaFaive, however, paints a larger picture — one that is also currently getting scrutiny in Ohio and other states: Why not find a way to broaden the availability of tax relief through more general tax reform? While more than 105,000 companies in Michigan are subject to the Single Business Tax, only slightly more than 200 have received MEGA incentives.
       "This is what we call the 'fair field and no favors' approach to economic development, where tax, regulatory or labor reform is broad-based and improves the business climate for all of the state's businesses," LaFaive told the legislators.
       That question, like the Court of Appeals appeal, is under further review. But part of Gov. Granholm's tax reform proposal this year does call for cutting not only the Single Business Tax, but also reducing the alternative tax paid by many small businesses. In addition, the tax burden on payroll would be shifted toward profits.
        In the meantime, projects happen, with MEGA and without, and their long-term impact has yet to be fully felt or measured. And as long as 49 other states and hundreds of countries still have favors to offer on the crowded field of economic development, MEGA lives on too. The program currently is scheduled to sunset in 2009, but the continued support of the state legislature and administrations indicate the likelihood of future extensions.
        That holds promise for even further development, write Cole and McAlinden, alluding to the current hunt by Toyota for at least one more North American assembly plant.
       "With both suppliers and talent here, Michigan is a logical choice for such a facility, a decision that would mean many thousands more good-paying jobs," they wrote. "While some may find it difficult to imagine that Michigan would be in the hunt for such a plum project, Toyota President Fujio Cho has stated ours is one of several states under consideration.
       "Toyota has two affiliate companies — Denso and Aisin Seiki — operating successfully in Michigan," they continued. "Aisin is expected to open its first North American proving ground facility near Fowlerville later this year."
       In any case, Michigan has Toyota's attention. And when Toyota's watching you, good things tend to happen. Case in point: The second-place finish of Marion, Ark., in the race for the company's Tundra plant has eventually resulted in good news, with Toyota affiliate Hino Motors locating a plant there last year.
       As it happens, both Denso and Aisin Seiki were assisted with tax credits to encourage the new growth in Michigan. If those companies' tangible presence in the state turns out to be one of those intangibles that helps snare a major Toyota plant, well ... some might measure that as a success.

©2005 Conway Data, Inc. All rights reserved. Data is from many sources and is not warranted to be accurate or current.