The South Shall Rise…Still


Outsiders are flocking to the Southeast for its low-cost living and skilled technology work force.

November 1 2004 by Chief Executive


 

A few years ago, executives at GE Energy decided to move their corporate home from Schenectady, N.Y., where its 100-year history dated back to inventor Thomas Edison. In shopping for a new location, they considered Austin, Tex., and Chicago, both major technology centers with decent transportation.

But the company ended up choosing Atlanta and, as a result, President and CEO John Rice is now happily whistling Dixie. The pool for recruiting new workers is bigger and better than in other U.S. locations, Rice says. Add to that a pleasant climate, affordable housing and the fact that Atlanta is close to many of the electric utilities that are major buyers of GE Energy’s turbines. Another plus is that Atlanta’s Hartsfield Airport, the busiest in the nation, is a “tremendous time saver,” says Rice. “You can pick up half a day on an international trip. I am very, very pleased.”

The Southeast has been attracting investment for decades. But CEOs considering new corporate headquarters or expansions are now eyeing the swath of states from Virginia to Texas with renewed interest. As before, the South boasts cheap land, labor and utilities, but today it offers new advantages, such as diligent, technology-oriented work forces, proximity to two-thirds of the markets in the U.S., and transportation hubs for travel to global destinations.

In recent years, Atlanta lured not only GE Energy from upstate New York but also UPS from Connecticut. Charlotte bagged Bank of America in the 1990s and has just picked up the newly merged Wachovia and a large unit of TIAA-CREF. Charlotte’s growth as a financial center has been so explosive that it is now No. 2 in assets in the U.S., after New York. Memphis claims an expanded FedEx, and Richmond is now home of relocated Prudential Securities and Philip Morris USA. (See maps, page 55.)

Non-U.S. firms are also heading to the American South. Germany’s BMW makes its Z series in South Carolina, while Daimler-Chrysler assembles the Mercedes-Benz M class in Alabama. Japan’s Nissan churns out Altimas, Maximas and pickup trucks at its plant in Tennessee, which has become the No. 2 state in Japanese investment after California. European and Asian equipment makers, telecommunications firms and special chemicals plants dot the rest of the Southern landscape.

Just how and why CEOs choose the South varies. For some, the choice is motivated by personal preference. For others, a great deal of thinking and data gathering, including input from consultants and head hunters, goes into the decision process. TIAA-CREF, for example, considered Tampa and Raleigh-Durham, N.C., when it was narrowing its choices in the late 1990s. Executives worried that the then-booming tech market would make labor too tight in Raleigh, so they jumped when Charlotte came up with opportunities to expand its labor pool by working with a local university. It took GE Energy six years of study before it chose Atlanta. “Economic decisions are relevant,” says Rice. “But most states compete, so it really doesn’t make a difference at the top tier.”

Reaching the “top-tier” category has been a long pull for the South, which seems to be perpetually fighting negative images of racism and poverty. One way around it has been to promote the idea of a “New South,” a pitchman’s sell that’s been around ever since Atlanta newspaper editor Henry Grady hawked it more than a century ago. In 1886, he told a New York audience that the region once torn by civil war and slavery had been transformed and that “the light of a grander day is falling fair on her face.” For decades following, tough anti-union stances and easy tax and environmental policies helped hard-eyed Southerners decimate the New England textile industry and snare chemical, aircraft and machine tool plants from all parts of the U.S. and the industrial world.

Yet this “New South” is different from decades before, thanks to the powerful and growing forces of global economics. Like all parts of the U.S., the vulnerable South has lost several million textile and apparel jobs to overseas locations in the past 20 years and stands to lose more in such manufacturing sectors as tire production and furniture. Even software production, long touted as a panacea to local economic ills, can now be easily outsourced to Bangalore. In the region’s erstwhile capital, Atlanta, old-line stalwarts are faltering. Coca-Cola is in trouble and Delta Air Lines, employing hundreds locally, is close to bankruptcy.

That’s why the region’s commerce strategists are focused on winning sustainable jobs that won’t be exported in 10 years, says Jim Fain, the commerce secretary of North Carolina. CEOs prospecting for new locations will get a warmer reception if they fit this bill. “We’re looking at financial services, pharmaceuticals, bio-manufacturing, automotive components and specialty chemicals,” says Fain.

A Pool of €˜Knowledge Workers’

Low cost is still an attraction, but having a strong and willing pool of workers trained in knowledge industries matters even more, notes Matt Kisber, commissioner of Tennessee’s Department of Economic and Community Development. He oversees a state “Fasttrack” program to respond within three days to corporate inquiries and have state-supported worker-training programs in place no later than five days after a new plant or office opens. Speedy responses aside, states are loath to undercut their workers in pay and benefits as they traditionally had done for years. “We’re not a low cost, €˜giveaway’ state in terms of incentives,” says Gregory H. Wingfield, president and CEO of the Greater Richmond Partnership, which recruits businesses to the Virginia capital region. “We have one of the best educated and most productive work forces.”

Access to so-called “knowledge workers” was the principal reason Manhattan Associates, a software logistics and solutions firm, decided to relocate from its birthplace, Manhattan Beach, Calif., to Atlanta, where it now has 700 people. “Manhattan Beach is a nice place, but it was getting harder to find people who had the background we needed in technology and supply chains,” says Peter F. Sinisgalli, CEO and president. Lower-cost leases and salaries were also factors, but trained people clinched the deal for Manhattan, which had a net income of $21 million on sales of $196 million last year.

One of Atlanta’s more promising growth areas is in logistics support to help maintain supply chains. The presence of UPS is obviously important. So too is having large technology schools such as Georgia Tech. But some of the local talent base dates back to before the Civil War, when Atlanta emerged as the rail hub of the South. Today, thanks to Hartsfield Airport and a network of major interstate highways and rail lines, Atlanta retains its transportation prowess, and it’s moving in new directions, technologically speaking.

One of the new areas, which Manhattan Associates is helping to develop, involves radio frequency identification (RFID), small radio transmitters that are expected to replace bar coding as a way to track goods globally with far greater accuracy (see related story, page 32). Mass retail behemoth Wal-Mart is driving the switch to RFID by requiring most of its primary suppliers to use it by early next year. Manhattan Associates is so involved with RFID that it has placed advertisements at the airport in Bentonville, Ark., Wal-Mart’s headquarters, touting its wares to retail vendors.

Getting a jump on logistics technologies such as RFID is one way the region can keep its jobs secure for years. Investment in biotechnology is another. Leveraging its nationally known St. Jude’s Hospital, Tennessee is investing heavily in biotech in the Memphis area, and Atlanta is taking advantage of Emory University and the other 40 colleges located nearby. Florida is luring venture-capital firms to drum up life sciences companies and has earmarked $1.2 billion to prepare an entry-level work force for biotech. North Carolina, which began its famed Research Triangle Park in the Raleigh-Durham area back in the 1960s, seems to have a leg up since it incubated biotech about 20 years ago and has an established infrastructure in the field.

Another area of opportunity is the automotive industry, albeit with a twist. Joerg Matthiessen, a managing partner at the Atlanta office of The Boston Consulting Group, notes that the trend among automakers is to achieve a “regional production model.” The effects of globalization vary from industry to industry, he says, and the smart way to keep jobs is to carefully recruit in those industries that have a sustainable advantage.

Automotive is one such sector, since companies need to minimize costs in logistics, production and transportation, as well as keep currency exchange rates predictable and stable, says Matthiessen. So they tend to make major investments on a regional basis and once they do, the investments and work forces tend to remain.

The South has grabbed more than its share of automotive sectors. French tire maker Michelin’s U.S. headquarters is in South Carolina, while Bridgestone-Firestone is in Nashville and German and Japanese carmakers are located in Alabama, South Carolina, Tennessee and Kentucky. Interstate 65, running from Kentucky south, and I-81, running along the spine of the Appalachian Mountains, have spawned parts makers of all types, including customs control maker Teleflex in Lebanon, Va., and automotive parts maker Duramax Tokai Rubber Tennessee in Tazewell, Tenn.

Still, the manufacturing industry has seen its share of troubles recently. Textiles, for example, are the poster child for the dangers of old mill-style operations, and many have gone out of business. One way to deal with that is by focusing on retraining. While there’s a limit to what can be done, given the enormity of lost jobs in sectors such as apparel, blue-collar training for higher-end manufacturing jobs is entirely possible. BMW, for instance, is building a new research center at Clemson University’s Greenville, S.C., campus to advance methods and tools used in its car production in the Palmetto State where it has invested $2.5 billion and employs 4,700. Another German firm, equipment maker STIHL AG, boosted its training in the U.S. when it opened a production facility in Virginia Beach. “Within five years, we had Virginia workers who were on the same skill level as workers in Germany,” says Hans Peter Stihl, former head of the STIHL AG advisory board.

By-Product: Suburban Sprawl

While the South seems ahead of the curve in developing tech-savvy work forces, it is in danger of spoiling other historically winning attractions. Quality of life, for example, is being threatened by traffic congestion, which has become a major issue in metropolitan Atlanta and along the stretch from Raleigh to Charlotte. The cause is unchecked suburban sprawl spurred by growth-hungry local officials who have overloaded the region with cookie-cutter subdivisions and strip malls. Some commuting times are approaching the levels of Los Angeles or New York€¦quot;the very places some CEOs want to leave for their overcrowding.

While the region has many nationally ranked universities, its primary and secondary educational system lags. “The K-12 system doesn’t stack up well against other states,” acknowledges Jeff Humphries, director and economist at the Selig Center for Economic Growth at the University of Georgia’s Terry College of Business. “We rank near the bottom and it’s an attitude problem. Georgians haven’t given it the priority they should.”

Large areas of the South are still getting hammered economically. Some parts of the Appalachians continue to see double-digit unemployment as the coal industry downsizes further and call-center jobs, considered a major employment solution, are outsourced to low-wage countries. Coastal areas, while booming with real estate developments for retirees, have seen their manufacturing jobs move offshore and tobacco, a major cash crop from Virginia to Florida, is in decline. Things are so bad in eastern North Carolina, an area the size of New Jersey, that some have proposed creating an emergency Southeast Crescent Authority to drum up replacement jobs.

But officials say things are better in the larger cities. After a brutal downfall in 2001, “Atlanta is on a very strong rebound,” says Sam Williamson, president of the Metro Atlanta Chamber of Commerce. “We have netted 60,000 new jobs.” Some of those are the 2,000 workers at GE Energy. CEO Rice says his company didn’t move to Atlanta from New York just to save money, because they were well-entrenched at an old building in Schenectady. The big attractions were a strong crop of technology workers, developed by schools such as Georgia Tech, and pure location. “For us to get overseas from Schenectady,” says Rice, “we’d have to spend time getting to airports in New York City or Boston.”

The quality of life€¦”cheap housing, good recreation, good cultural events and climate€¦”were such big draws that “not many workers turned us down when they were offered transfers,” says Rice.

The South, in many ways, has shed some of its uniqueness by becoming a microcosm of the broader U.S. economy, which is experiencing similar pressures from globalization and the march of technology. What may be different, however, is that the South appears to have put the fundamentals in place for elevating itself from being a low-end, manufacturing-driven economy to one that is focused on technology and higher-value services such as logistics. It is not a seamless transition, to be sure. But for the foreseeable future, the region appears likely to command the attention of CEOs looking for more fertile economic pastures.