Montgomery Business Journal

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A GOOD PLACE TO DO BUSINESS

January 2015
Interview by David Zaslawsky

Dennis Cuneo is a managing partner in the Washington D.C. law firm of Fisher & Phillips and runs his own firm, DC Strategic Advisors.

Montgomery Business Journal: As a site selection adviser, what are the key things companies in general are looking for?  Cuneo: If it’s a manufacturing facility, first of all, you have to have the appropriate space. It depends on what the project is, but for an auto assembly plant you need a site with at least 1,000 acres and probably more. You look at the logistics of the site. Does it have access to interstate? If it’s an auto assembly plant, it needs rail to ship cars out. If it was a melting mill it would probably also need a barge because you’re bringing in scrap metal.

What other factors? • You look at the labor force. You look at the skill levels. You try to assess the work ethic. You would probably talk to some local employers to find out what their experience with the workforce has been. You look at the state training programs to help you fill skill gaps; to help you recruit workers. The site has to have infrastructure and if it’s not already available, that it can be brought to the site quickly, and that’s electricity, natural gas, water, wastewater and fiber optics. Often times, that is the hardest part because the site is in a remote part of town or remote part of the county, where there are no water lines, no sewer lines – that type of thing. It costs a lot of money to get that site ready. You look at the regulatory side of it. What are the timelines for permitting? Is this a friendly community? Do you have the kind of business that would fit well in this community and would you be a welcomed member of this community? You look at the tax structure. If you’re heavily capital intensive … let’s say you’re an area that has heavy property taxes; you would be at a disadvantage unless they provide incentives. You put this all together and you come down to what is going to be your net cost doing business there for 20 to 40 years. Usually there are two or three sites that are roughly equal then you start looking at more of the soft factors.

What are the soft factors? • The housing stock.

Do companies look at the medical community and public education? • Yes, medical and education. We call those soft factors, but they do matter and they matter especially when you’re down to two or three sites that are roughly equal then you starting looking at those kinds of things. Sometimes it becomes a personal decision because sometimes the person leading the site selection might become the plant manager. He has to move his family there, so you look at the schools and he is looking at the medical. He is looking at the other amenities. A lot of times you have to bring a team of managers in to run this thing at least in the beginning.

How important are incentives? • Incentives are important because they go to the bottom line cost and often incentives are used to (make a site) that would otherwise be non-competitive. For example, if a state that doesn’t have a state income tax, it is relying heavily on property taxes to fund its government services. If you’re a heavily capital intensive business, a state with a property tax is going to be a lot higher, so unless they are willing to incent that would take it out of the mix. I’ll give you another example here in Reno. We announced the new Tesla gigafactory. Nevada does not exempt sales and use taxes on equipment used in the manufacturing process. They had to agree to waive that and that was $700 million. That wouldn’t even be factored in an incentive package in Alabama because you already exempt it, but it wasn’t exempted (in Nevada). When you saw the Nevada number of $1.25 billion – more than half of that consisted of a tax abatement that most states already give and don’t even count in the incentive package. I compare it to free agency in baseball. If you don’t play the free agency market – you don’t have to play like the Yankees, but if you don’t play at all like the Pittsburgh Pirates until they started playing – you’re going to have a lot of losing years.

You spoke at the Economic Development Association of Alabama Winter Conference last February about expanding the automotive supplier base in Alabama and attracting projects with new automotive technologies. • The disadvantage the South continues to suffer in automotive is that you don’t have a robust base of tier 2, tier 3, tier 4 suppliers. That means those materials and parts have to be imported from other places and that causes a logistical disadvantage. It adds to the costs of an auto assembly plant in the South. To the extent you can get a more robust supplier base, including tier 2, tier 3, tier 4, you reduce that logistical disadvantage. One of the reasons in the past why Southern states have had to heavily incent auto assembly plants to get around some of these cost disadvantages and when you start (reducing) some of those cost disadvantages then incentives don’t play as nearly a significant role. This is all bottom line. What it gets down to its operating costs over 30 years.

In an Area Development article you wrote about the site selection process, you talked about meeting community leaders and businesses to understand the business environment. Please talk about the role community leaders play in site selection. • Above all, you’re going to make a big investment in the community, you want to make sure that you’re going to be welcomed; that you’re a good fit for the community and it’s going to be mutually beneficial, because if it’s not, you’re going to have a lot of problems. When it comes down to two sites that are very competitive and you’re making your final decision most companies will do an extensive due diligence in the community meeting with business leaders, community leaders, etc. You get a sense of what the community is about and how well your business would be accepted and if you would be a good fit. It varies from company to company, but for Toyota that was a very important part of the process. It’s an important factor. You’re looking at the overall business climate and you want to make sure this is a place you’re going to be able to thrive.

What are Montgomery’s top assets for companies looking to come to Montgomery? • You now have a very established industrial base that’s been growing rapidly for the past 10 to 15 years. That in and of itself tells site selectors like me there must be something going on in here that’s very good because you look to see what other companies have done. The community has a nice feel about it. I really like what you’ve done downtown. That tells me something about a community. Your mayor (Todd Strange), who I’ve known for several years, is a very good economic developer. When we had Montgomery on our list of sites – we do the due diligence – we found out that the businesses are happy to be there; the community was supportive; and as issues came up, the community worked quickly to get those solved. Just in general, a good place to do business.

What are some areas Montgomery needs to improve to become a more complete player when competing for companies? • For automotive, it’s get in some of these lower tier suppliers, would be one point. Number two, is skilled trades and it’s not just Montgomery. There is a dearth of skilled trades across the country, but it’s more pronounced in the South. We talked to some companies and attracting skilled trades was difficult and often times how to import people from the Midwestern states to come down. In time, you can grow your own through apprenticeship programs, but when you’re a brand new company on the block you’re looking for existing skilled trades. I know that you’ve set up a work skills center (Montgomery Regional Workforce Training Center) and Ed Castile (director of Alabama Industrial Development Training) really does a good job of training. They recognize some of these deficiencies and that is why they provide robust training resources.

You talked earlier about downtown Montgomery, and at the Economic Forum at Wynlakes Golf & Country Club, you talked about the city’s vibrant downtown matters to companies considering Montgomery. Why is that important in the site selection process? • It matters because to attract young talent and retain young talent … these millennials – that’s what they want. They want downtowns where they can live and go and that type of thing. The downtown of a community always leaves an impression. A downtown is like the wrapping paper on a community and does leave an impression.

Also at the economic forum, you said the South has very few research and development firms in the automotive sector. What does Montgomery need to do to change that?• That’s actually what we’re going to address in the Southern Automotive Research Alliance. You have research universities in the South. Part of this is networking and making those resources known and available to top automotive and other kinds of companies. This would require regional cooperation. Every school has some (area) of excellence. Instead of trying to be all things to all people, my sense is what the South should be trying to do is add these universities’ networks and present the strengths. If I have a nanotechnology issue, I come to Montgomery. The South in general has to start thinking more as a region, because you have a serious competitor southwest of you called Mexico.

In Southern Business & Development, you wrote an article about clean tech projects in the South. Are those type of projects viable in Montgomery? • Clean tech is still viable, but it depends on the project. For example, all of sudden solar, which was down for several years, is hot again. We are going to end up with more clean tech (projects) down the road. The cost curve of solar power and wind power keeps going down and pressure to use renewable energies will continue unabated. You see that across the globe. Clean tech has a bright future, but we’re still in that beginning phase so you have winners and losers. There is probably a higher risk of failure in some of these companies than maybe the more traditional industries.

You told Bloomberg that Nevada’s $1.3 billion in incentives to land a Tesla manufacturing plant “was a bargain” considering 6,500 jobs and a $5 billion investment. Why is it a bargain? • First of all, most of that incentive package is not cash up front – it’s performance based. Tesla has to invest $3.5 billion or they don’t get any incentives. The only cost up front is the cost of the highway right of way, which was exchanged for land and is about $41 million. The direct fees are tax abatements and incentives based on the number of jobs or amount of investment. That’s one point. Second point, remember I told you about the $700 million, so you take away and now you have roughly $600 million NPV (net present value) on that and now you’re down to about $500 million. Five hundred million on a per-job basis wouldn’t even rank in top 100 projects. As a site selector, we try to get as much cash as possible up front. Tesla in Reno is going to have to pay their own site prep; they are not getting much in terms of training – a typical $20,000 to $30,000 per employee of training and there will be a training center.

It does sound like a bargain when you say those things. • A lot of it is community-specific. Reno is desperately trying to convert itself from a former mini-Las Vegas into a center for advanced manufacturing. It is not often that a project of this magnitude comes along. Texas was willing to offer much more incentives for this project. This is the kind of thing that can transform a community like Hyundai transformed your community.

You told the Tahoe Daily Tribune about how automotive plants have successfully selected rural sites, where there were concerns about the workforce. You said: “With the right kind of training, on-the-job training, it can be done and has been done throughout the South.” Are you saying that the workforce may not be a critical factor in the site selection process because it can be overcome with strong job training programs? • Absolutely. That’s exactly what I’m saying. If the work ethic is there, absolutely, and that’s what happened in all these plants in the rural South, places that had no manufacturing skills, but training was provided, and a good work ethic, and these plants are doing very well. Having said that if you look at these communities and say maybe you’re not an automaker – you might be a parts supplier or something else – you still look at the level of skills. If you can’t get those training dollars in incentives then you’re going to go someplace else. If you have more of the skills then you don’t have to do as much training.

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