Wednesday, March 18, 2009

Flight Risk

Tom e-mails to relate some personal experience regarding my post on the perverse impact of government attempts to plunder the golden geese:

As a native Detroiter, I am always amazed at how government at all levels fails to recognize the dangers of killing the golden goose that small and medium sized firms are. In the 60's various mayors and the city council in Detroit treated every business like they were GM with lots of cash in the vault and their only worry limited to keeping market share at or below 55%.

During the next couple of decades, when small and medium businesses headed for the exits (the suburbs, Mexico, Canada, other states, etc), tax revenues dropped. Costs didn't go down, so tax rates were increased. The firms that were left had their shoulder to the wheel that much more until those firms decided they had had enough and went out of business or moved.

When I returned to Detroit in the late-eighties as an adult to work for a unit of GM, the City of Detroit was a wasteland with abondoned, burned out (thanks to Devil's Night - a much beloved Detroit holiday), stripped-of-copper homes, factories and buildings. Honda had established a facility in Central Ohio and Toyota was moving into Central Kentucky. Both Ohio and Kentucky offered plenty of incentives to get those facilities, but mainly they offered cheap available land, a motivated/educated work force and governments that welcomed not only final assembly but all of the related members of the supply chain which are usually small and medium sized company's.

Around the same time, Chrysler got all kinds of incentives to build an assembly plant close to downtown Detroit near their Jefferson Ave plant (called Jefferson North, it was finished in 1993) which closed in 1990. The Chrysler president at the time, Gerald Greenwald, said that this would be the last time Chrysler would build a major assembly plant in a major city because major cities offer an uneducated work force and an unfriendly environment for their suppliers (again, small to medium sized businesses) who are crucial to the just-in-time assembly processes that are the key to plant success (he caught a lot of flack about his comments, which were called racist).

I left the business and Detroit in 1990, but I have seen this pattern of raiding the local employers for cash to support top heavy local and state governments then carping and moaning when the businesses decide that they are closing and moving the factory/office because the facility is in the wrong place and the local government treats them like a pimp treats a whore. The company I work for now did all it could to keep a manufacturing operation (with about 100 employees at peak) in a state in the Northeast. Most of the customers for the products made by that plant were in the Midwest and West so shipping wise, they were always an extra day or two a way from a delivery standpoint. We invested 100's of thousands dollars for environmental requirements, put up with all manner of union required work rules and high employer related taxes. It took two years to wind that facility down and the local government types did plenty of bad mouthing of our company when they realized we were leaving and they couldn't get us to stay or stop us. Some of the work this factory did was transferred to a plant in Canada and some went to other facilities in the US. More than half though is now coming out of a facility in China. Even with the added warehouse cost and inventory investment, it is less expensive than keeping that facility in the Northeast open.

Since coming to Minnesota five years ago, I'm constantly disappointed by the hubris many government officials exhibit when they state rather matter-of-factly that taxes will go up and if you don't like it, tough. At some point all businesses hit the point of diminishing returns like the apple that was bound to hit Newton's head.

Minnesota is a unique place with lots to offer. However, with energy as costly as it will get with yet more taxes on it, a winter like this one past will get people thinking - why don't I move to a place where my utilities aren't quite as high; where transportation to the growth areas of the South and West are less; where ocean ports aren't so far away. I hope that our business will stay here. It's likely to based on where customers for our products are located and the fact that we have a facility that will allow us to expand without having to acquire more buildings or land, at least during my career here. I hope that your dad's former employer also stays, but at the end of the day, a business is a living thing that has to go where the best prospects for growth are and where the owners believe they can get the best overall return (including profits, lifestyle and other non-profit & loss related items) for their investment.

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