Regional Report: Southeast
September 11 2013 by Warren Strugatch
Airbus Comes to Alabama
Airbus’s decision to build a $600 million manufacturing and assembly plant in Mobile, Alabama, makes little sense in P&L terms. The company will ship components across the ocean to Mobile, pay local workers to assemble them into jets and then reship them back. While non-unionized U.S. labor costs will be lower, any benefits will be wiped away by shipping costs.
Lowering costs, clearly, was not the reason parent company EADS made the investment. It’s all about being close to the customer—U.S. commercial airlines and, potentially, military procurement bosses. With a foothold in the market of archrival Boeing, Airbus now sees itself as better positioned to compete in the U.S., a key market where its share lingers around 30 percent. Over the long term, Airbus plans to increase the percentage of local parts, scoring local points and reducing its costs, as well.
The roots of the Mobile deal are in Paris, where in June 2011 Alabama Governor Robert Bentley scheduled a meeting with EADS chief Tom Enders. EADS had just lost a $35 billion Defense contract, after Boeing had successfully challenged the deal on the grounds of unfair subsidies. Although Airbus had picked out a site in Mobile in preparation for executing the contract, the two men had never met. When they sat down two years ago in Paris, apparently there was much to discuss. When the conversation ended, the governor had committed, in principle, to offer significant accommodations; the CEO had committed to reviving his plan to manufacture jets in Alabama.
Ultimately, Alabama agreed to provide $158 million in financial and logistical support in exchange for a promise to hire 1,000 Alabamians. The deal was not hard to sell at home. Explaining it in Europe was a different matter. “The perception at Airbus, as you can imagine, was skeptical,” recounts Allan McArtor, who founded Legend Airlines in Texas and held a series of Washington posts before being appointed executive chairman of Airbus Americas. “For Europeans without much experience in America, Alabama was something they knew about from movies, if at all. Perceptions were decades old. Many didn’t realize what industrial and technological capabilities exist in the Southeast.”
The New Incentives Game
The first thing to know about incentives is: they’re the last things you should discuss. “Incentives are relative to final-stage relocation negotiations,” says Gregory Burkart, managing director of the Detroit office Duff & Phelps, a financial advisory firm. Burkart, a specialist in structuring and negotiating government-sponsored economic development incentive packages, suggests focusing your search on availability and cost of labor. Don’t bring up subsidies, grants or other forms of government give-backs until you’ve narrowed your choices down to two or three finalists.
Your costs will typically entail real estate, utilities, transportation, architects, building services, professional fees, labor and more; government negotiators, on the other hand, are concerned primarily with job generation. “The more jobs you bring to the table and the more the jobs pay, the more value the deal will have to the officials across the table,” says Burkart. “That’s your leverage.”
While cash incentives are often discussed first, they also become headline fodder and are politically risky. Increasingly, cash incentives are deployed as closing-round deal sweeteners budgeted to the “governor’s discretionary fund.” For years, cash grants were often effectively traded for job-creation commitments. In the face of public backlash in situations where those commitments were not honored, government negotiators now seek to avoid cash deals. Executives who press for cash may find their best bet is a loan with a forgiveness covenant pegged to new jobs.
Many other incentives are available—some listed publicly, some stored in the memory bank of the government negotiating team. Often, incentive programs are renamed from year to year in an effort to avoid backlash from soured deals. The most advantageous incentive packages, from the executive’s point of view, are generally those negotiated across multiple levels of government.
Look into—and ask your negotiating partner to do the same—what subsidies, grants, loans, refunds or waivers might be available on other levels, including federal, county, municipal, industrial development authority, port authority or business/industrial zoning authority. When it comes to negotiating incentives, don’t wait for offers. Ask for what you want.