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September 1, 2011

Reel Them In

How states have worked to woo manufacturers and why short-term thinking doesn't win the day.

THERE ARE SIGNS of an important shift in the focus of manufacturing companies looking to expand to a new location. During recessions, decisions on where to build new plants are heavily weighted toward a calculation of total cost, with local and state governments competing for plants with tax breaks of one kind or another. Now, as manufacturing begins to recover, Ball State University, which regularly rates the states in terms of their manufacturing environment, expects a shift in emphasis that favors locations that are first rich in available, highly skilled workers.

On that basis, says Ball State in its recently released “2011 Manufacturing and Logistics National Report,” the highest ranking states are those that, in past years, had suffered some of the largest declines in manufacturing employment through plant closures or moves to Mexico or offshore: Indiana, Iowa, Kansas, Michigan and Ohio. But now, not only are those states hungry for replacement manufacturing, they have plenty of skilled workers looking for a job. The least-friendly states for manufacturing, on the basis of nine metrics used by Ball State, are Alaska, Hawaii, Nevada and New Mexico.

Michael Hicks, director of the university's Center for Business and Economic Research and associate professor of economics, says the scores are based on three factors that measure the size and complexity of manufacturing in each state: the share of total income earned by manufacturing employees in each state, the share of manufacturing employment per capita and the wage premium paid to manufacturing workers.

The additional eight metrics are factors that site selectors consider when making decisions about where to locate their manufacturing plants. They include global reach, human capital and the tax climate, among others.

NOW AND LATER

In the four years that Ball State has produced the report, several trends have developed.

Before the recession, the availability of highly skilled cheap labor was most important to site selectors. But with the national unemployment rate upward of 9%, these kinds of workers haven't been hard to come by. Additionally, because of the recession, high school dropout rates decreased while college enrollments increased. Students who previously might have dropped out to find jobs stayed in school because of slow hiring, so many states saw a boost in the availability of skilled laborers trained in statistics and computer technologies.

Because of the wide availability of skilled labor, taxes became increasingly important to site selectors, Hicks says.

“In 2007, when you saw places like California, Illinois and Massachusetts garnering a lot of manufacturing jobs, that was before unfunded liabilities and extreme fiscal pressures changed those states' [tax structure] dramatically,” he says. “Today we're seeing a lot more interest in manufacturing in places that have better fiscal environments, even if they have not traditionally had a strong labor pool.”

One example is Alabama, where ThyssenKrupp AG, the German steelmaker, has placed new carbon and stainless steel mills. Alabama—given a “B” in tax climate and an “F” in human capital by Ball State—was selected in 2007 because of the fiscal support of state, local and federal governments, and low energy costs. Although the labor pool was not as strong as other states, it was “trainable,” says Scott Posey, communications director for the carbon steel part of the project.

Texas also became an active business recruiter. The Texas Enterprise Fund serves as a deal-closing fund to attract jobs and capital investment to the state, says a spokesperson for Texas Gov. Rick Perry. The fund has been highly effective for the state, bringing more than 58,000 jobs into Texas since 2003. In May, General Electric announced it would begin building high-speed locomotives in Fort Worth.

Despite its recent manufacturing gains, Texas received a middling score from Ball State.

Hicks says that's because Texas isn't prepared to provide the laborers and supply chain network manufacturers typically seek after a recession; it has yet to build the deep supply network the Midwest has. Texas also struggles to train the laborers manufacturers need.

“The southern states have had a persistent problem with having the types of workers that manufacturers prize,” Hicks says. “What you're looking for as a manufacturer is someone who has graduated from high school, who is good at high-school mathematics, who wants to work with their hands but can still work on a computer and understands statistics.” A high rate of high school dropouts kills that, he says. “As much as [the South has] captured some big assembly plants, their high schools are not producing men and women who are factory-ready.”

When the nation recovers from recession, Hicks says accessibility to a supply chain and skilled laborers will again become a priority for manufacturers. Michigan is the perfect example.

“You don't have to be much of a wizard to appreciate that [Detroit] has seen better times,” says Hicks. But Detroit still has a strong supply chain in place. “If you want to make automobiles, you're not going to choose Idaho. All the component parts are made throughout the Midwest,” he says.

HERE TO STAY

Manufacturing continues to be a huge part of our national economy, Hicks says. Although manufacturing jobs have declined nearly 2 million between 2007 and 2009 because of the recession and increased efficiency, 2011 will be a record year for manufacturing output, adding an estimated $100 billion on top of last year's output.

Plus, manufacturing is one of the more “footloose” sectors in the economy. “Retail is going to go where the people are. Heath care is going to go where the people are,” Hicks says. “But you can change the share of manufacturing in your state based upon doing the right things.”

For now, the “right thing” is to lower the cost of doing business in your state, says Hicks. But, “at some point down the road, labor markets are going to get tight again and businesses are going to look very carefully to places that offer them the right type of employees.”

Michigan is keenly aware of this. “[Until recently,] we had a number of [tax] incentives that were largely targeted at helping in-state manufacturers and out-of-state manufacturers looking to locate here,” says Mike Shore of the Michigan Economic Development Corporation (MEDC). While that may have worked during the recession—Shore says dozens, if not hundreds of manufacturers have expanded in the state in the last few years—Michigan is beginning to recognize it has other, perhaps more sustainable assets to offer manufacturers: namely human capital.

Jim Staargaard, president of Plasan Carbon Composites, who opened a facility in Wixom, Michigan, in March, has found the work force in Michigan ideal for making and selling carbon fiber auto body parts. “[Wixom] is where all the car companies are, so that's where all the people who know about automotive engineering are,” he says.

The MEDC is making sure Michigan continues to be a state where manufacturers can find the right laborers. It hosts events in major cities around the country to encourage skilled Michigan natives who left during the auto slump to return.

“The economic value of manufacturing products—what it means in terms of jobs for people, what it means in terms of use of resources and what it means in terms of gross revenues to companies—is much more essential on an everyday basis than any number of other kinds of pursuits,” says Shore.