incentives – The OM Blog by Heizer, Render, & Munson

OM in the News: America Now Has an EV Rust Belt

At first, North America’s biggest auto-parts supplier was thrilled to snag the job of making enclosures for the batteries in GM’ new electric pickup. The contract was so big—and promised to be for years to come—that Magna International built a new $575 million factory in a Michigan cornfield. And Michigan even offered a $44 million incentive package to draw the promise of new jobs–a topic in Chapter 8.

Five years later, that million-square-foot plant is mostly empty and losing money, a casualty of America’s messy breakup with EVs, reports The Wall Street Journal (April 1, 2026). It is one of dozens of now desolate EV parts plants across the country. It can take years to pivot a factory and supply chain from one type of vehicle to another. And it would take 4-6 months of higher gas prices for most Americans to reconsider more fuel-efficient vehicles– an unlikely prospect. Detroit automakers have scrapped their boldest EV dreams—and are looking beyond $50 billion in charges tied to broken supplier contracts and wasted investments.

The deserted Magna factory in St. Clair was expected to stay busy for years.

Magna, which has more than 300 factories around the globe and parts in nearly every car on the road today, has been left holding the keys to the St. Clair, Michigan building that is bigger than 20 football fields. The Canadian company needs to find a second life for the factory and the hulking rows of assembly-line robots. A few years ago, Magna had plans to build an entirely new business unit around EV battery enclosures.

The EV slide is reverberating through the automotive industry’s sprawling supply chain. Multinational companies such as Magna, Dana and BorgWarner slashed jobs and closed plants due to the EV pullback, while a string of smaller manufacturers shut down altogether. Last year, more than $20 billion in previously announced investments in EV and battery facilities were wiped out.

Smaller suppliers have little recourse to recoup costs when automakers cancel a vehicle program and stop buying parts. They typically absorb the upfront cost of setting up an assembly line with the expectation of recouping it over time as parts are shipped. GM’s supplier contracts were struck with the expectation that GM would be building one million EVs a year. By December, 2025 the company was selling around 8,000 a month.

Classroom discussion questions:

Discuss the typical incentives offered to attract a new plant.
Why has the EV trucking business been especially hard hit?

Guest Post: The Two Stories of Tesla’s Solar Panels

Temple U. Professor Misty Blessley provides interesting blog topics monthly.

In our 2023 OM blog, New York State Built Elon Musk a $1 Billion Factory, we learned that building a solar panel facility was “a bad deal” for NY. The state built a massive plant and provided solar-panel manufacturing equipment. Tesla’s end of the deal was to churn out enough solar-panel shingles by 2020 to cover 1,000 roofs on a weekly basis.

These solar panels are finally on the verge of materializing, and with this are two stories. One connects Tesla’s long game in vertical integration and the other is New York’s long-delayed economic vision.

Tesla’s Long Game in Vertical Integration
Tesla’s new residential solar panels fill the company’s missing piece. The firm was missing the energy generator (aka solar panel). Despite the solar factory in New York, Tesla spent years relying on third-party suppliers for its solar panels. Now, it can fully optimize performance across the entire home energy stack. Tesla can vertically integrate the full chain from generation (solar panels), to conversion (inverter), to storage (Powerwall), and to consumption (EV charging).

New York’s Long-Delayed Economic Vision
This pivot finally gives New York its payout. By bringing solar panel manufacturing in-house, Tesla is delivering the kind of industry and employment the state originally hoped for. The region, once defined by its industrial decline, gains a foothold in the clean energy manufacturing economy. The move aligns with federal and state incentives that reward U.S.-made components, strengthening the economic logic behind NY’s investment. Tesla’s shift toward a unified home energy ecosystem mirrors the vision that justified the state’s $1 billion bet. The factory, once criticized as a stranded asset, now becomes the manufacturing backbone of Tesla’s residential energy strategy.

Tesla didn’t just release new solar panels. It connected the car in the driveway to the sun, and in doing so may have finally delivered the manufacturing story NY was waiting for.

Classroom Discussion Questions:
1. How is vertical integration good for Tesla? For Tesla owners? To compare this to an internal combustion engine, it is somewhat like having petroleum, a refinery and a gas pump in the garage or driveway.

2. Knowing that Tesla’s occupation of the Buffalo facility is long overdue, what stipulations should a city or state impose on a firm when incentivizing a location decision to the tune of $1 billion?

OM in the News: New York State Built Elon Musk a $1 Billion Factory

The new Tesla facility in Buffalo was supposed to house a huge solar-panel operation, the largest one in the Western Hemisphere, but the project hasn’t turned out as planned. “It was a bad deal.” writes The Wall Street Journal (July 7, 2023).

But we have written about government incentives many times in this blog and discuss them in detail in Chapter 8 of our text, Location Strategies. When NY’s then-Gov. Andrew Cuomo, cut the ribbon in 2015, he proudly stated: “This is too good to be true.” It seems he was right.

New York paid to build a quarter-mile-long facility with 1.2 million square feet of industrial space, which it now owns and leases to Tesla for $1 a year. It also bought $240 million worth of solar-panel manufacturing equipment. Tesla said that by 2020 the Buffalo plant each week would churn out enough solar-panel shingles to cover 1,000 roofs. It is, however, averaging just 21 installations a week. The suppliers that Cuomo predicted would flock to a modern manufacturing hub never showed up. Auditors have written down nearly all of New York’s investment.

The state has agreed to amend the terms of its subsidy 12 times over the years, including by reducing the number of jobs to be created in manufacturing and shifting deadlines to accommodate the company. “In terms of sheer direct cost to taxpayers, this may rank as the single biggest economic development boondoggle in American history,” says a think tank founder.

Buffalo, once an engine of manufacturing, has stagnated for generations as industrial companies headed south. Previous efforts at renewal largely fell flat. In 2012, Cuomo said he wanted to spend $1 billion in state taxpayer money to turn Buffalo around.

America’s governors are swept up in an arms race of awarding packages of taxpayer money to attract industrial megaprojects. Last year, states gave each of eight company facilities more than $1 billion in tax breaks and other aid. In Wisconsin, a factory by Taiwan’s Foxconn that was to employ 13,000 workers in exchange for some $3 billion in state subsidies sits mostly empty. Suburban Virginia offered tax breaks to win a competition for Amazon’s “second headquarters,” but much of that project is on hold.

Classroom discussion questions:

What incentives do governments often offer companies to entice relocation?
What are the major factors that companies consider when making location decisions? (Hint: see Chapter 8 in your Heizer/Render/Munson text).

OM in the News: ‘War of the States’ and Lavish EV and Chip Maker Subsidies

States have long competed for big employers, writes The Business Journal (April 2, 2023). But now they are floating more billion-dollar offers and offering record-high subsidies, lavishing companies with grants and low-interest loans, municipal road improvements, and breaks on taxes, real estate, power and water.

“We’re in the second war of the states,” said one site selection consultant. “It is kind of a Wild West moment. It’s wild money and every state seems to be in on it,” added a U. of Texas professor. Georgia, Kansas, Michigan, New York, North Carolina, Ohio and Texas have made billion-dollar pledges for a microchip or EV plant, with more state-subsidized plant announcements by profitable automakers and semiconductor giants surely to come.

2022 set a record for the number of billion-dollar-plus incentive deals. At least eight were finalized, though that figure might be higher since such deals can be cloaked in secrecy and take time to come to light. More than $20 billion in public money was committed to subsidizing those known megadeals.

The subsidy offers are generally embraced by politicians from both major parties and the business elite, who point to promises of hundreds or thousands of jobs, massive investments in construction and equipment, and what they contend are immeasurable trickle-down benefits.

Still, academics who study such subsidies find them to be a waste of money and rarely decisive in a company’s choice of location. Studies conclude “they do little, if anything, to promote meaningful improvements in economic outcomes.”

The mounting cost of competing for the projects hasn’t dissuaded states from trying. On the contrary, they’re clambering to outdo each other. Michigan was stung by hometown Ford’s $11 billion commitment in 2021 to build EV and battery plants in Tennessee and Kentucky. It responded by pledging more than $2.5 billion for EV projects by Ford and GM and plants by makers of EV batteries and battery components. Pennsylvania has yet to lure a microchip or EV factory, and the state is sounding the alarm after watching neighboring Ohio land a $20 billion Intel plant. Texas promised to win passage of “economic development tools,” saying the state lost out on a massive Micron semiconductor plant because it couldn’t match the $5.5 billion in tax credits offered by New York.

Classroom discussion questions:

Financial incentives are just one aspect of location decisions. What other factors (a topic in Chapter 8 in your text) do firms consider?
What is driving the massive incentives states are offering?

OM in the News: Countries Compete to Lure Manufacturers From China

China may be losing its place as the center of the world’s supply chains

Countries are jostling to grab a piece of China’s manufacturing action as tariff battles and worsening U.S.-China ties jolt companies into reordering global supply chains. Executives are circling the globe looking for factory space or local tie-ups to reduce their dependence on China—and governments are pulling out the stops to welcome them.

At stake for low- and middle-income countries eager to help is the chance to turbocharge economic development and create millions of new jobs, writes The Wall Street Journal (March 25, 2023). India, Mexico, Vietnam, Cambodia, the Philippines, and others are competing on subsidies, tax breaks and other perks to convince businesses that their country is the next best thing to the manufacturing machine that China has honed.

China cemented its dominance of global manufacturing over the past 50 years. It has also grown its share of higher-value manufactured goods, such as cars and complex electronics, at the expense of rivals including Germany and Japan. But this dominance risks being whittled away. Companies have been stung in recent years by the supply-chain disruptions caused by Russia’s invasion and the pandemic. Many are seeking to fashion more diverse supply chains in the hope that they will prove more resilient in future crises.

Foreign direct investment into China in 2022 fell 43% on the year to $190 billion. And China’s share of U.S. goods imports fell to 17% in 2022, from a high of 22% in 2017.

Rerouting global supply chains away from China won’t be an easy process. Would-be rivals need to overcome challenges such as higher transport costs, outdated equipment and processes and subpar infrastructure. In the competition for a bigger slice of global manufacturing, countries are competing not just on cost and geography, but on who can offer companies the choicest perks while meeting their own development goals.

Cambodia revamped its laws in 2021 in an effort to attract more foreign investment, pinpointing manufacturing in advanced technology, machinery and spare parts, and electronics. Vietnam offers tax holidays to companies willing to invest in poorer areas of the country. India announced $1 billion in incentives to persuade companies to make more computers and tablets in the country. Mexico’s big advantages are its proximity to American consumers and membership in the USMCA trade agreement, which we discuss in Chapter 2.

Classroom discussion questions:

What does this “reordering” mean for reshoring and nearshoring?
Who benefits most from the move to expand beyond china?

OM in the News: The New American Battery Plants

South Korea’s LG Energy Solution just said it would invest $5.6 billion in a battery-manufacturing complex in Arizona, the latest in a string of new plants by foreign companies as the U.S. transitions toward cleaner fuels. LG Energy’s new battery complex will mainly serve electric-vehicle makers in North America. The amount is four times larger than what the firm had initially pledged when it first revealed plans last year to manufacture the batteries in Arizona. LG Energy reassessed its investment options due to unprecedented economic conditions. Inflation has been driving up the costs of raw materials and other expenses for manufacturers worldwide.

The complex will consist of two battery plants and mark the largest investment ever for a stand-alone battery-manufacturing facility in North America. Battery makers have been pushing to build up a bigger production base in the U.S., which is looking to strengthen its local supply chains and reduce reliance on China while speeding up shifts to green technologies, writes The Wall Street Journal (March 27, 2023)

13 battery gigafactories coming to the US by 2025 – ushering new era of US battery production

The U.S. has offered billions of dollars in tax credits for EVs sold in the U.S., but it only applies if they have a certain value of their battery components assembled in North America. (The Arizona plant will meet the eligibility requirements of the EV tax-credits program.) The program has stoked complaints from foreign car makers, but has opened business opportunities for non-Chinese battery players including South Korea’s LG Energy, Samsung, and SK On, as well as Japan’s Panasonic, which have all announced plans for new manufacturing plants in the U.S., including many via joint partnership with auto makers.

When excluding China’s CATL, LG Energy is the top battery maker globally, accounting for 21% of the combined EV and energy-storage-system battery market by units sold. In addition to the Arizona complex, LG Energy is working to expand its battery-manufacturing base across North America. It has three plants it has built or is building across the U.S. with General Motors as well as one planned plant with Honda in Ohio and one with Stellantis in Canada.

Classroom discussion questions:

What factors discussed in Chapter 8 (Location Strategies) are chip manufacturers using in making location decisions?
Why are so many plants under construction?

OM in the News: The EV Supply Chain and Canada

International giants are investing billions of dollars in Canada’s EV and mining sectors

Multinational companies are pumping billions of dollars into Canada’s electric-vehicle manufacturing sector, lured by government incentives, access to raw materials and cheap renewable energy. VW just announced that it had chosen a site in Ontario to build its first battery-cell plant outside Europe, citing Canada’s natural resources as one of the reasons. VW’s plan follows recent EV and battery-making project investments by GM, Stellantis, Michelin Tires, Brazilian miner Vale, U.K. mining company Rio Tinto, and German chemicals company BASF, among others.

According to The Wall Street Journal (March 23, 2023), Canada is benefiting from a push by the U.S. and its allies to reduce their dependence on China for the critical minerals used in EV batteries and military equipment. In one example, Stellantis and South Korea’s LG are building a $4.1 billion battery plant in Windsor, Ontario, with 2,400 workers starting next year. As we discuss in Chapter 8 (Location Strategies), incentives are common and Canada has had to pay up to win the investments, scrambling to keep up with the U.S., which has unveiled a raft of subsidies meant to draw investment in its EV industry. Canada gave $732 million to land the Stellantis/LG venture.

Canada is among the most expensive countries in the world to build cars and the highest-cost market for car assembly in the North American free-trade zone. To save money, auto makers in recent decades moved thousands of manufacturing jobs and motor-vehicle assembly capacity to Mexico, dropping auto employment in Canada from 175,000 to 110,000.

The Canadian government is pitching itself as a counterweight to China in the race to develop EV technology. China leads the world in processing metals and minerals like nickel, copper, lithium and cobalt. It also is home to 78% of the world’s cell-manufacturing capacity for EV batteries. Helping Canada’s pitch: It is one of the few places in the Western Hemisphere with the raw materials companies need to make their EVs. Electra Battery Minerals Corp. is the only facility available in North America for processing battery-grade cobalt, a metal used in batteries. Rio Tinto is upgrading an iron-ore and titanium refining facility in Quebec with a $500 million investment.

Access to hydroelectricity was a key reason GM and others chose Quebec. The renewable power helps lower GM’s greenhouse-gas emissions. Quebec also offers the lowest industrial rates for power in North America.

Classroom discussion questions:

Summarize the reasons more companies in this field are looking to Canada.
What is China’s strength in the EV supply chain industry?

Guest Post: Location– Facility Repurposing Failures

Prof. Howard Weiss is providing Guest Posts while I am travelling.

Figure 8.1 of your Heizer/Render/Munson textbook lists 6 factors affecting the decision about what site to select at a local level. Another factor at the site level is whether or not it is possible to take over an already existing site. In two previous blogs I have discussed successful repurposing of facilities in general and repurposing of closed Kmart buildings. Unfortunately, not all repurposing decisions turn out well. One case below shows the problems to the organization taking over the facility while the second demonstrates the problems to the township in which the facility is repurposed.

Philadelphia Parking Authority The Philadelphia Parking Authority (PPA) decided that it could repurpose a decaying 16-acre Exelon steam regeneration plant into an administration building and an impound lot. In 2019 PPA signed a lease for this property which had been vacant since it was closed in 1985. The owner agreed to improve both the 500,000 square foot administration building and the parking lots. In 2021 workers were moved into the building. There were sewage and bathroom problems and in a few weeks PPA pulled its workers out of the facility. The parking authority has ended its lease and is currently in the course of creating a new headquarters at another location in Philadelphia. The PPA will be reimbursed over $2,000,000 for the project but even with the reimbursement the estimated loss to PPA, not including wasted time, for this failed location is over $1,000,000.

Lockheed Martin Site In 1995, Pennsylvania offered Lockheed Martin, a defense contractor, an incentive package of grants and loans worth $25 million to relocate employees to Newtown, Bucks County, PA. Your textbook notes, in the OM in Action box on “Iowa – Home of Corn and Facebook” in Chapter 8, that studies show that “incentives did not substantially contribute to economic performance”. Indeed, this was the case with Lockheed as it decided to close the facility by 2015. Closing cost the township roughly $560,000 in income tax from Lockheed’s 1,200 employees.

The drug company KVK Tech purchased the site for $12.5 million in 2015. Currently the site is barely used and the parking lots are nearly empty. In addition, local, state and federal officials have had difficulty with KVK using trailers instead of expanding, being in non-compliance on waste water and having flawed manufacturing processes.

Classroom Discussion Questions:

Name a facility that generally is not repurposed.
What incentives does your city or county or state give to companies for locating in your area?

OM in the News: Why Tennessee Hits the Electric Vehicle Sweet Spot

Tennessee is emerging as a leader in a national scramble to develop electric-vehicle and battery production, as states compete to woo multibillion-dollar investments from auto companies pivoting away from the combustion engine. Ford and South Korean battery maker SK Innovation recently said they plan to develop a large complex to make EVs and batteries there. That follows similar investments made by GM and VW to add EV production at their Tennessee assembly plants.

Ford’s real-estate scouts began their search early this year by looking at 85 potential locations across more than a dozen states. Ford’s checklist included a large empty property, so Ford could move quickly without having to clean up or retrofit an existing facility; cheap and reliable energy derived from renewable sources; access to rail and interstates; and reasonably close proximity to Ford’s other assembly plants– all factors we discuss in Chapter 8 of your text.

Tennessee has stepped out in front in large part because of yearslong efforts by the state and the Tennessee Valley Authority, which provides power to the region, writes The Wall Street Journal (Oct. 16-17, 2021). The state promoted its extensive workforce-training programs, a right-to-work law, and proposed $500 million in incentives. The TVA offered inexpensive, reliable energy and at least $100 million in power upgrades and other incentives.

Energy costs are a big consideration for the battery factories because of the immense amount of electricity they use: 5 times more than in a typical auto assembly plant. TVA charges some of the lowest industrial energy rates in the country.

Tennessee made its mark on the auto world in 1983, when Nissan opened its first U.S. plant in Smyrna, Tenn. This was followed by large manufacturing operations for GM and VW. Hundreds of suppliers followed. Today, many thousands of Tennesseans are employed in vehicle manufacturing.

Auto makers are spending more than $300 billion globally by mid-decade to transition their lineups, including on massive battery factories and on new and revamped assembly plants. VW is nearing completion of an $800 million expansion of its decade-old assembly plant in Chattanooga, where next spring it is scheduled to start production of its new ID.4 electric SUV. GM in the past year decided to double down on Tennessee as a base of EV production, spending $2 billion to overhaul its assembly plant in Spring Hill, for electrics, starting with a plug-in Cadillac SUV.

Classroom discussion questions:

What is a “right-to-work state” and why was it a factor here?
Discuss the incentives offered to auto makers. Are they reasonable?

OM in the News: Can the Incentive Wars End?

State Line Road is the 12 mile north-south street that divides the part of the region between Kansas and Missour

States and local governments spend $45 billion annually on various economic subsidies for businesses. Concerns have mounted in recent years about the wisdom of competing for business using tax incentives. Research has shown that economic incentives make little difference in where a company ultimately chooses to locate. Despite that, localities can end up engaging in bidding wars, pushing up the cost of new jobs.

Now Kansas and Missouri are nearing a truce in an economic border war that has cost hundreds of millions of dollars and created barely any new jobs, writes The Wall Street Journal (June 26, 2019). The neighboring states would agree to cease using one of the most popular tools in the economic-development toolbox: lucrative tax breaks in exchange for a promise of investment and jobs. Politicians regularly tout the number of new jobs created under such programs.

Companies in the Kansas City region have long been able to take advantage of its unique geography, where the Kansas and Missouri border runs right through the metropolitan area. Companies could receive tax incentives for moving from one side of town to another, even if they just moved jobs from one spot to the other and didn’t create net new jobs.

Since 2011, 5,526 jobs have moved from the Kansas side to the Missouri side, with Missouri paying $151 million. In that same period, 6,729 existing jobs moved from the Missouri side to Kansas for a cost of $184 million. In total, $335 million has been spent on such company relocations. Can the Kansas City truce work elsewhere? “There are opportunities for broader regions to work together,” said one local CEO. “But at the end of the day, people want to attract companies and jobs and prosperity for the part of the country they’re responsible for.”

Classroom discussion questions:

Suggestions for solving this thorny problem?
Discuss some of the recent massive location incentive packages.

OM in the News: Amazon’s Un-Location Decision

Protesters held signs during a protest at an Amazon store in Manhattan

When Amazon announced plans for a second headquarters in 2017, it promised 50,000 high-paying jobs and billions in investment for a community that would be coequal to its home in Seattle. The company, which outgrew the number of people it could hire in the Pacific Northwest, set off a nationwide frenzy, with more than 200 cities making bids. (We in Orlando even thought we had a decent shot for being selected. But I guess when Amazon listed cultural opportunities as a criteria, they didn’t count Disney World). In the end, Amazon decided last fall that no one city could provide the number of tech workers it needed and split the headquarters in two. The “winners”: Arlington, VA., and NYC.

But, as the whole world knows, Amazon last week canceled its plans to build the expansive campus in NYC after facing an unexpectedly fierce backlash from lawmakers, progressive activists and union leaders, who contended that a tech giant did not deserve nearly $3 billion in government incentives that the state and city had offered in their confidential bid package. The backlash in New York showed no sign of abating and risked tarnishing Amazon’s image beyond the city.

“Amazon, one of the richest companies in the world, run by the richest man in the world, had held a nationwide contest in which governments scraped together enough entitlements to satisfy it, even as those same cities struggled to fortify corroding infrastructure and stave off a housing crisis that has pushed the middle class to the brink and forced the poor into homeless shelters,” wrote The New York Times (Feb. 15, 2019). Our current system of location incentives, in which powerful corporations can pry billions in tax benefits out of cities and states to locate facilities, without any added investment in infrastructure, schools and other benefits, is one worth a class discussion.

Classroom discussion questions:

How important are incentives, in the final analysis, in location decisions?
What was the “final straw” for Amazon, in deciding to pull out of NYC?

OM in the News: Amazon’s HQ2 Spectacle Ends

The Amazon HQ2 saga is finally over. Fourteen months ago, Amazon announced a beauty contest, in which cities could apply to win the honor of landing the 2nd headquarters. The prize: 50,000 employees. The cost? Just several billion dollars in tax incentives. Then last week, Amazon announced it would split the prize between Arlington VA, and NYC. So the question, writes The Atlantic (Nov. 12, 2018) is: “Did the world’s smartest company really need 13 months, and applications from 238 cities, to reach the striking conclusion that it should invest in New York and D.C.?”

When covering Location Analysis (Ch. 8), you could also ask your students: Why are U.S. cities spending tens of billions of dollars to take jobs from one another in the first place? (Recall the “Border War”, in which the Kansas and Missouri sides of Kansas City have spent $1/2 billion dragging companies back and forth across state lines, within the same metro area, creating no new jobs.)

Every year, American cities and states spend about $90 billion in tax breaks and cash grants to urge companies to move among states– more than the federal government spends on housing, education, or infrastructure. These deals take resources from everything local governments would otherwise pay for, such as schools, roads, police, and prisons. In the past decade, Boeing, Nike, Intel, Royal Dutch Shell, Tesla, Nissan, Ford, and G.M. have each received subsidy packages worth more than $1 billion to either move their HQs within the U.S. or, quite often, to keep theme right where they are. New Jersey and Maryland offered $7 billion for HQ2, which would have been the biggest corporate giveaway in history.

And companies don’t always hold up their end of the deal. Consider Wisconsin, which lured Foxconn with a subsidy plan that will end up costing over $4 billion. Foxconn said it would build a large manufacturing plant that would create about 13,000 jobs. Now the company is building a much smaller factory with just 1/4 of its initial promised investment, and much of the assembly work to be done by robots.

Classroom discussion questions:

Money aside, why did Amazon select the D.C. suburb and NYC as co-HQ2 winners?
Make the argument for and against the giant incentives being offered to companies.

OM in the News: Amazon, Incentives, and Electricity

When officials in Montgomery County responded to a FOIA request on their bid, they delivered a 10-page document of incentives — with **every line of text redacted**.

We have blogged a few times about Amazon’s quest for incentives in locating its new HQ2, promising a potential of 50,000 jobs. The few bids that have become public are breathtaking financial packages that indicate just how much states are willing to pony up to woo Amazon. Maryland put together an $8.5 billion bid, and New Jersey got legislative approval to offer $7 billion in tax credits and incentives to pick Newark.

Others are not as forthcoming with how taxpayer’s money will be spent. “We are not releasing documents related to Amazon HQ2. We are not subject to F.O.I.A.,” said Miami-Dade Beacon Council. Requests by the New York Times (Aug.5, 2018) to Austin, Atlanta and Indianapolis met with similar responses. The photo reflects the response from Montgomery County, Md.

But today’s post is not about HQ2. It is about Amazon’s cloud computing business–its fastest growing and most profitable division. Data centers come with a lot of ongoing expenses, the biggest of which is electricity. Over the past 2 years, Amazon added dozens of new data centers with vast fields of servers running 24/7. In at least 2 states, it’s also negotiated with utilities and politicians to stick other people with the bills for millions of dollars of electricity.

Amazon stands out for its success in offloading its power costs and also because it dominates America’s cloud business, writes BusinessWeek (Aug.27, 2018). It has gone from nonexistent to using 2 percent of U.S. electricity! Although data centers typically yield few new jobs, politicians desperate to make up for fading manufacturing businesses have worked closely with utility companies to land Amazon data centers. In Virginia, where Amazon operates at least 29 such centers and is planning 11 more, the company’s 78-page application for a special rate agreement has two versions—a heavily redacted public one and another under seal with state regulators.

This is certainly an interesting topic for classroom discussion when covering Chapter 8.

Classroom discussion questions:

What are the plusses and minuses of providing such incentives?
What is the alternative?

OM in the News: When the Location Incentives are in the Billions

The incentives offered by Wisconsin and its municipalities to Taiwan’s Foxconn Technology Group since it announced a $10 billion megaplant in the state have gone up by nearly $1 billion, writes The Wall Street Journal (June 29, 2018).The company broke ground this week, almost a year after the deal was announced as a success in the president’s efforts to bring manufacturing jobs back to America. The Apple supplier promised to open a 20 million-square-foot complex that would build liquid-crystal display panels and committed to creating 13,000 jobs in the state.

Foxconn Chairman Terry Gou with President Trump at the signing

In return, Wisconsin offered $3 billion in financial incentives. In an effort to land the plant, municipalities added their own sweeteners. The town and the county where the facility will be built offered a $764 million incentive package. And Wisconsin added another $134 million to the tab to improve state highways and local roads in the area around the Foxconn site. The state is on the hook for 40% of the public bonds that finance the local expenses if the project flops. If all goes well, Wisconsin taxpayers would recoup the investment in the 2042.

Ballooning costs underscore how expensive and unpredictable such projects can become for states and cities eager to attract new investments and jobs. Currently 20 states and cities are vying to win Amazon’s second headquarters, which promises a $5 billion investment and 50,000 well-paying jobs. New Jersey and the city of Newark have offered as much as $7 billion in tax incentives, while Maryland has offered $5 billion. But unexpected costs can often creep up with large projects that receive money from multiple government entities.

A professor at the University of Texas said negotiating a state deal separately from a local deal is particularly “bad practice.” It can put pressure on a locality to offer a large incentive package and also pits local communities against each other after the state has already had its own bidding war with other states.

Classroom discussion questions:

What would be a better way to provide incentives from the government point-of-view?
Provide an example of how massive incentives have, indeed, paid off in the past.

OM in the News: Is Bidding for Amazon’s HQ2 Worth It?

When New Jersey just announced a $7 billion package of tax incentives to try to lure Amazon’s 2nd headquarters to Newark, local officials saw a chance to jump-start a city that has long struggled with poverty and joblessness. But from an national perspective, this may be a failed development strategy, writes The New York Times (Jan.27, 2018). Tax incentives are little more than corporate giveaways that divert money from education, infrastructure and other priorities that ultimately do more for a region’s economy.

Several locations, like Chicago and DC area’s Montgomery County, have offered Amazon their own 9- and 10-figure incentive packages. Columbus, Ohio would waive all property taxes for Amazon for 15 years, and give back a share of the income taxes paid by Amazon’s employees to the company in cash. More than 200 North American cities submitted bids for HQ2, and the enthusiasm is hardly surprising. Amazon said it plans to invest as much as $5 billion in the project and to hire up to 50,000 workers, most earning high salaries.

But accommodating Amazon’s thousands of workers will require hiring more teachers, widening roads and building more housing. The costs for those upgrades will fall on residents. “The stakes are getting higher and the deals are getting worse for the taxpayer,” says a Brookings exec. Plus, incentives rarely work. Companies will play cities and states off one another to save money, but ultimately base location decisions on other factors: A talented work force, which requires good schools and colleges, and amenities like affordable housing, parks and public transit that make a place desirable.

Local officials say that refusing to offer incentives, though, is the equivalent of unilateral disarmament. “We’re not going to be outbid on Amazon doing business here,” states the mayor of Dallas.

Classroom discussion questions:

So which location criterion is more important? Incentives–or a quality city?
Use factor-rating to evaluate the 20 finalists on the 1/2 dozen most important factors Amazon has named. A good team exercise.