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Source: The Tennessean (Nashville, Tenn.) Author: G. Chambers Williams III 5/19/2008
(Tennessee, Alabama) Can Tenn. outbid Ala. for VW plant? Original Article
NASHVILLE, Tenn. - Tennessee could be at a competitive disadvantage in a battle with Alabama over a proposed Volkswagen plant if government financial incentives turn out to be the key factor in the automaker's decision on where to build the facility. Volkswagen said in April that it would decide in July whether to build a U.S. assembly facility, and that if it does, the plant would be built in Tennessee, Alabama or Michigan. The company has not commented on the deal since. Analysts and economic development experts believe that Michigan is an extremely long shot to win the plant, and that the real battle will be between a site in Chattanooga and one on Interstate 65 in north Alabama about 60 miles from the Tennessee line. But if incentives are the key, Alabama might have the upper hand because that state has a history of pledging hundreds of millions of dollars in cash and other incentives to automakers and other industries on single projects to persuade them to build plants in the state. Tennessee does offer incentives, but overall has spent just of fraction of what Alabama has to lure industrial prospects. Both states have racked up successes, but Alabama has the edge on auto plants, having lured three major assembly plants and a Toyota engine factory since winning the Mercedes-Benz facility near Huntsville in 1993. The others include a Honda minivan plant east of Birmingham in 1999 and a Hyundai plant in Montgomery in 2002. For the Mercedes-Benz, Honda and Hyundai plants, Alabama initially spent a combined $664.5 million in public funds for such items as site preparation, roads, rail spurs, utilities and tax breaks. In comparison, Tennessee has attracted two auto assembly plants: Nissan's Smyrna facility in 1980, followed by General Motors Corp.'s Saturn plant in Spring Hill in 1985. Together, those two projects received just $95.6 million in state incentives. Nissan also operates an engine plant in Decherd, Tenn. Tennessee's biggest package of incentives for an auto company so far has been the $197 million pledged to Nissan to entice the company to move its North American headquarters to Nashville in 2006. Most of that total will come from tax breaks, though, rather than a direct cash outlay. And this year, Tennessee is spending up to $35 million to retrain workers at the former Saturn plant so GM can build a new Chevrolet crossover utility vehicle there, bringing back 2,400 workers laid off when the Saturn plant closed in March 2007. But to show how far Alabama will go to attract a major new industry, the state put up $811 million $314 million in cash to land the German steel maker Thyssen-Krupp near Montgomery last year. both states hurt for cash In the battle for the Volkswagen plant, which could employ up to 2,000 people initially and represent a $1 billion investment by the German automaker, Alabama is ready to "do whatever it takes to win," Alabama Development Office Director Neal Wade said. "Volkswagen has not yet told us what they need" in the way of incentives, he said. "But when they do, we're ready to give them what they ask for." Neal added that Alabama Gov. Bob Riley has told the development office that its top priority this year is to bring Volkswagen to Alabama. "The governor's instructions are that we be competitive, aggressive and creative in dealing with Volkswagen, and it is our intention to win this project," he said. But the current economic climate could make it hard for either state to provide large cash outlays. Alabama and Tennessee are wrestling with budget crunches this year. Last year, the Alabama legislature gave the governor a $400 million fund, provided by a bond issue, to bring new industries to the state, although much of that has already been spent or pledged, Wade said. The state has a projected $783 million budget shortfall for fiscal 2009, which could limit attempts to add to that fund. Tennessee Gov. Phil Bredesen has included $100 million in a discretionary fund in the state's 2009 budget, now under consideration by the legislature, which could be used to provide incentives such as site improvements and job training to bring new jobs. Tennessee isn't worried about Alabama's zeal in the effort to attract Volkswagen, particularly when it comes to providing incentives, said Matt Kisber, commissioner of the Tennessee Department of Economic and Community Development. "When Volkswagen announced the three finalist sites, it was obvious that this is the top economic development project at this time, and the three states are fierce competitors. All have their strengths and challenges," he said. Nevertheless, Kisber said Tennessee will "compete vigorously" to convince Volkswagen that Tennessee is the place where it find longterm success. "The governor has taken a great deal of flak for setting aside the $100 million to ensure that projects of this type will be funded," he said. "But that is a very significant public demonstration of his commitment." other factors drive deal Kisber said incentives function as a deal closer not as the ultimate factor in luring a company to invest in a state. "They keep you in the game," he said. "But decisions are not based primarily on incentives. Other factors are of greater significance. The level of skills in your work force is much more important than any individual incentives." University of Tennessee economist Bill Fox, who studies economic development issues and the effects of incentives, said he supports that view. "Incentives are usually not the driving factor," he said. "Companies usually focus more on such issues as the available labor force, transportation access and other factors related to the specific site." While companies have come to expect states to provide some incentives to avoid being viewed as unfriendly to business, Fox said Tennessee's taxes are so low it doesn't need to offer the same kind of incentives as Alabama. In cases where states do put forward unusually large incentive packages, there should be a justification that goes beyond the jobs a company will bring, Fox said. "When you look at incentives versus jobs created, some deals are questionable," he said. "But in the case of Nissan's headquarters, the justification is that Tennessee receives incredible national visibility from that." There are many examples where other states offered far more money than the state that landed a significant new project, said Sujit CanagaRetna, senior fiscal analyst for the Council of State Governments and an expert on the growth of the auto industry in the South. Tennessee might have the edge over Alabama in the competition for Volkswagen, based solely on the attributes of the proposed Chattanooga location, the former site of the Volunteer Army Ammunition Plant, CanagaRetna said. That site, known as Enterprise South, came in second last year in competition for a new Toyota plant that instead went to Tupelo, Miss. In that competition, Alabama was not a player. The final decision came down to one factor: Tupelo had a ready force of laid-off furniture factory workers that Toyota could tap for its plant. "I think it's going to be a pretty tough competition," CanagaRetna said. "Alabama has a real sense of what it takes to attract an auto plant. But the site in Chattanooga, with proximity to Atlanta, has some real competitive advantages." Although Alabama has been able to attract a number of auto plants, Tennessee has a great reputation among the automakers, CanagaRetna said. "Nissan has been a real success story for Tennessee," he said. Tennessee's contribution to the retraining of GM's workers in Spring Hill is also "a good indication to Volkswagen that this is an industry the state takes very seriously," he said. But it's not likely that Alabama would beat Tennessee just over incentives, CanagaRetna said. "Alabama, Tennessee and the other Southern states are on an even keel, toe to toe, on incentives," he said. "That makes Volkswagen's decision more complicated."
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