Saturday, June 15, 2024

Dell pickle

Dell Pickle

Though it has left a sour taste in some people’s mouths, officials insist the jobs it’ll bring make this a sweet deal.
By Irwin Speizer

Maybe the outcome was inevitable. On one side stood Mike Easley, governor of a state battered by the loss of tens of thousands of manufacturing jobs. On the other was Dell Inc., the world’s leading computer maker, famous for tightfisted cost control. Dell needed a new East Coast assembly plant to meet demand for its desktop computers. North Carolina was desperate to land it.

The result was a lopsided negotiation in which the Round Rock, Texas-based company dictated what the state would have to do to get the plant and the jobs it would bring. Industrial recruitment tends to be a subtle dance, with companies hinting at incentives and quietly trying to play communities against one another. Dell came right out and said what it wanted: exemption from state income taxes and about 150 acres of land, free of charge and ready to build on.

By pitting North Carolina against Virginia, then Triad communities against their neighbors, Dell got a package worth nearly $280 million. The state’s portion totals $242.5 million, including $225 million in income-tax credits over 15 years. Winston-Salem and Forsyth County anted up $37.2 million. The deal was rammed through the legislature and local government bodies in a matter of weeks after the November election, giving Dell a neatly wrapped Christmas present worth more than a quarter of a billion dollars.

State Rep. Paul Luebke is still steamed, first for having so little time to review the deal — about a day — and then being muzzled on amending it. “What none of us knew was that the governor was promising years of no corporate income tax,” the Durham Democrat says. “Those are huge subsidies. Those kinds of things should not be approved in a handful of hours.”

But that’s what happened, with proposed amendments summarily voted down on fears, voiced by the governor’s office, that any change would send Dell scurrying away. The state part of the package was introduced and adopted in the General Assembly on the same day. Local incentives followed, cobbled together in haste.

Not many years ago, North Carolina prided itself on being a state whose business climate, work force, education system and job training were so strong it didn’t need incentives. But its confidence faltered as neighboring states used multimillion-dollar packages to land new plants. With the Dell deal and other recent ones negotiated under Easley, North Carolina has transformed itself from one of the stingiest states for incentives into, critics contend, one of the easiest marks.

They complain that the state has gone too far, that the incentive system must be reformed — possibly at the national level — or challenged in court. But proponents point out that politicians have little choice if the state is to compete for new jobs. Depending on how you view it, Mike Easley is either one of the biggest patsies or the shrewdest visionaries ever to occupy the governor’s office. If he is right, the high price to get those relatively low-paying jobs — averaging about $28,000 a year — will look like a bargain years from now.

“It took him awhile,” Raleigh economic-development consultant Robert Leak says. “But all of a sudden he began to realize that we have got to really be aggressive replacing the jobs lost with the best jobs we can find. He has caught the fever.”

If the cost seems awfully steep, it’s a reflection of how badly North Carolina needs the jobs, says Dan Gerlach, the governor’s budget director and one of the chief negotiators of the deal. “Our objective was to recruit 2,000 jobs and a major investment and an outstanding name to the Triad and to do so in a way that makes economic sense to the state. We accomplished that objective.”

Winston-Salem Mayor Allen Joines, whose city beat out neighbors Greensboro and High Point for the plant, says the project is well worth the investment because of the jobs it creates, not just those at the plant but thousands of others at companies providing goods and services to Dell and to its workers. “You don’t get an opportunity to do this except maybe once in a couple of decades.”

No one understood that better than Dell.

The first thing that stands out is how mismatched the two sides were. A prolonged manufacturing slump had staggered North Carolina, home of the domestic textile and furniture industries, which are in the midst of an exodus overseas. The telecommunications shakeout also hurt the state badly. This wholesale loss of manufacturing jobs left Easley, who faced a budget crisis when he came into office in 2001, struggling to cut enough spending and raise enough revenue to keep the state afloat.

“No state has been hit harder than North Carolina in recent years,” Gerlach says. “You have a segment of the public in their 40s and 50s, many of whom have not completed high school, who are out of jobs. We can retrain them. But it takes time. In addition to a long-term economic strategy, you need to help those people where they are today. The Dell deal allows people in the Triad to replace lost income.”

For Dell — which did not respond to requests for interviews with company officials for this story — things could hardly get any better. The company spent the last two years raking in profits, snatching market share from competitors and plotting how to extend its dominance. Michael Dell, 39, started the company two decades ago in his college dorm room. He figured how to outsmart the rest of the fiercely competitive computer industry by bypassing middlemen and selling custom-built computers directly to buyers.

Dell builds computers to order in its own plants using a highly refined just-in-time manufacturing system, then ships them to customers’ homes and businesses. The system works so well that today Dell is the last major computer maker with U.S. production. Hewlett-Packard outsources its computer assembly, primarily to Asia. So did IBM until late last year, when it sold its PC business to Lenovo, a Chinese computer company.

Dell, on the other hand, is expanding domestic production. In 2000, it added a new plant in Lebanon, Tenn., to its existing operations in Texas.

In April 2002, the company announced an ambitious plan to double annual sales to $60 billion in five years. Analysts were skeptical, but the goal seems to have been modest. Sales soared to $41.4 billion the next year, putting Dell ahead of schedule. Through the first three quarters of its last fiscal year, Dell reported $35.8 billion in revenue, up 19% from the previous year. Net income hit $2.4 billion, up 25%. Sales are growing not just in the United States but also in Europe, the Middle East, Africa, Asia and the Pacific Rim. Cash keeps piling up — $12.4 billion as of the end of the third quarter.

Dell needed more manufacturing capacity, particularly near the heavily populated East Coast, where its gets about 70% of its U.S. sales. One option was to expand in Tennessee. The other was to build from scratch, preferably in a strategically located Mid-Atlantic state. North Carolina, with a long manufacturing history and tens of thousands of laid-off factory workers hungry for jobs, was a natural candidate. So was Virginia, for many of the same reasons. Discreet inquiries went out from the company in late 2003 to both states. The race was on.

The project began in typical fashion. Dell contacted the N.C. Department of Commerce, asking for information on possible sites. The company identified itself to state officials but asked that its name be kept confidential. At first, Dell referred to the project as a sales and support center, later revealing that it was an assembly plant.

Regional industry hunters, including those in the Triad, heard that a company was shopping for a site that same month. All they knew was that a company had made a fairly standard request for information on regional demographics and makeup of the labor force, including availability of workers, average wages and how far they were willing to drive to work.

Penny Whiteheart, senior vice president of the Piedmont Triad Partnership, says the unidentified client began describing itself in January 2004 as a Fortune 100 company. More details emerged the next month, including the tantalizing tidbit that the project would employ more than 1,000. Economic developers realized that they were chasing a major project by a top tech company. Some even speculated it might be high-flying Dell.

They found out in March, when nondisclosure agreements arrived, barring those who signed them from revealing the company’s name or any details of the project. Dell moved quickly, dispatching four- to eight-member scouting teams on tours of potential sites. They visited the Triad three times in March and April, sending local officials scrambling to accommodate them and put together presentations.

One particularly intense visit in April started with a series of presentations by regional economic developers in a meeting room at Piedmont Triad International Airport, followed by a helicopter tour of sites arranged by Commerce. Making presentations were industry hunters from Davidson and Rockingham counties, along with representatives from Greensboro, High Point and Winston-Salem. All the attention left Triad officials convinced that they were among the front-runners for the project.

“Feedback we got from company officials was very exciting,” Whiteheart recalls. “We had been given to understand that there was not competition inside the state. We believed they were comparing operating costs of the Piedmont Triad with the two existing U.S. manufacturing facilities and other Southeastern options.”

The primary other option was Virginia, which was going through a similar process and was equally jazzed about the chance to land Dell. Both sides wondered what the other was doing, but the nondisclosure agreements required secrecy. “The big problem is, you are playing poker,” Virginia Secretary of Commerce and Trade Michael Schewel says. “Like any poker game, you are not seeing the other players’ cards.”

Any state trying to land a manufacturing plant today, Schewel adds, has to assume that Asia figures into the formula, the wage differential making it difficult for companies to select a U.S. site. Indeed, officials in both states say that a key reason they showered Dell with incentive proposals was fear that the company might find it cheaper to build overseas. But because of the way its business works, Dell is a special case. Selling custom-built computers means it needs to have plants close to customers for quick turnaround and shipping. It can’t load a boat with standardized models, and it’s too expensive to ship individual orders from Asia to customers in, say, New York. “I believe Dell is committed to American production,” Schewel says. “They want to be close to their customers.”

Still, by the start of summer, officials in North Carolina and Virginia had learned that Dell would not come cheap. Though both states have industrial-development grant programs that can be worth millions to companies, Dell wanted more. Schewel says the company was upfront about what it expected at the state level: a free ride on corporate income taxes. That was necessary, Dell told officials, because of the tight margins and highly competitive nature of the computer business, which required it to cut costs wherever it could. Schewel says Dell put it to him like this: “We don’t want to pay corporate income tax at the state level, and we want to know that it is a certain situation as far as we can see.”

Both states tax corporate income, but Virginia’s rate is lower — 6% versus 6.9%. Exempting all or most of those taxes in either state jacked the total value of any incentive deal from tens of millions of dollars to hundreds of millions.

Virginia could try to accommodate Dell by putting the plant in in a special enterprise zone within which it could avoid paying most, but not all, state corporate-income taxes for a number of years. If Dell didn’t like the state’s existing enterprise zones, the governor could create a new one, Schewel figured. But even within a zone, Schewel couldn’t erase the tax burden completely, and he couldn’t guarantee that the enterprise-zone tax breaks would last for 15 years. He could probably match what North Carolina offered in cash incentives dollar for dollar, Schewel says. “But on tax incentives, within the limits of what we could do, we couldn’t get where we needed to be.” That left him wondering how far Easley would go toward meeting Dell’s demand.

In North Carolina, the tax break became the key stumbling block. Easley had pushed other incentive packages through the General Assembly and probably figured that by dangling the prize of 2,000 jobs he could get legislators to go along once again.

The question was: How high did he need to go to beat Virginia? Dell pressed him for a quick decision, saying it wanted to start construction in early 2005. Whiteheart says she got word from company officials that Dell expected to choose a location by the end of last April. When that deadline passed, she heard that the decision would come by the end of June.

The drawn-out secret negotiations finally sprang a leak. The Winston-Salem Journal broke the story June 15, reporting that Dell and the state were talking about a plant site and that the Triad was a prime candidate. One unnamed official gave the first hint of what was to come, telling the newspaper that the project would cost the state “an arm and a leg.”

Just how tough the negotiations became is clear from 4,000 pages of documents related to the deal that the state released in January. Among them are notes and memos from June indicating that the state had offered to cut Dell’s corporate taxes in half.

Dell flatly rejected the offer, insisting that it wanted an exemption from all state income taxes. Knowing that Texas has no corporate income tax, Commerce Secretary Jim Fain feared Dell might decide simply to build another plant in its home state. He wrote a memo to his staff that posed the question: “What are the impediments to getting to zero?”

Summer arrived without a deal. Triad officials, who had sensed they were close to winning the project, began to worry that it was slipping away. “There were a couple of times where we understood negotiations with the state had reached an impasse and Dell was considering that it wouldn’t work,” Joines, the Winston-Salem mayor, recalls. The company gained new allies when he and other nervous officials began pressing the governor’s negotiators to close the deal. But it was still not clear just how much Easley was being asked for — or what local communities would have to pitch in.

August came and went. Then September. Still no deal. By now, the election campaign was in its final sprint. Senate President Pro Tem Marc Basnight says Easley had the deal pretty much wrapped up but figured it was too close to election day to call the legislature back into session. Announcing he had bagged Dell would have given him quite a trophy to show voters, but Easley was so far ahead of Republican challenger Patrick Ballantine that he didn’t need the extra juice.

Dell apparently felt secure enough about the agreement that it didn’t mind talking about it. In mid-October, President and CEO Kevin Rollins told CNET that the company would announce a new plant within the next two months — and that it would likely be built in the Triad.

On Oct. 27, Easley announced that he wanted the General Assembly to meet to consider a new incentive package. He called the special session for the following week, two days after the election. Though President Bush carried the state, as did Republican U.S. Senate candidate Richard Burr, Easley won handily, capturing 56% of the vote.

He planned to lay out the deal to lawmakers the morning of Nov. 4 and get them to vote on it the same day. Frustrated by the lack of information about the package, Luebke, who as chairman of the House Finance Committee would be one of the first to review the measure, asked for and got a meeting with Gerlach Nov. 3. Luebke gathered several of his Democratic allies in his office at 8 a.m. Gerlach passed out copies of the bill. Luebke says he and other lawmakers were stunned by how much the gover-nor had given up.

While most of the incentives were in the $225 million income-tax credits, about $18 million came from existing sources such as the Job Development Investment Grant program and William S. Lee act. But those grants would be especially generous as a result of changes to boost the amounts Dell could get.

One change exempted it from a rule requiring recipients pay prevailing wage rates. In the Triad, that would have meant Dell needed to pay $31,000 a year per job to qualify, Luebke figured, rather than the $28,000 the company estimated. Even the $28,000 figure appeared to be inflated, the legislator says, because it includes some supervisory jobs. Another rule doles out higher cash incentives for companies that locate in poorer, rural counties. The Triad contains some of the state’s wealthiest, most urbanized counties. The bill exempts Dell so it can claim the higher amounts.

Existing grant rules also require companies to pay a minimum of 50% of the cost of health insurance. That’s well below the 70% to 80% that most large companies pay, and some lawmakers wanted to boost the requirement for Dell. Luebke and other members of his group wanted to roll back some of the concessions and add requirements such as the higher health-care minimum. Would the governor’s office be willing to consider amendments? Gerlach said he would ask. The answer came the next day when hearings got under way. Each proposed amendment was met with the same response: Any change to the bill would scuttle the project and had to be rejected.

Gerlach wasn’t alone in urging the bill’s passage. The Piedmont Triad Partnership set up shop in a borrowed legislative office, coordinating an estimated 200 business and government officials who converged on Raleigh to lobby for the deal. The Triad had about 10 people speak for the package at each key committee meeting throughout the day as the bill moved toward approval. At the end of the day, the bill the General Assembly handed Easley to sign was exactly as he had submitted it.

Basnight says the legislation represents a solid economic-development victory for North Carolina because it snagged Dell. And while the incentive cost is high, the payback will be much higher according to projections that suggest that the project will result in more than a billion dollars of new revenue to the state — a net gain of more than $700 million over costs of the incentives. Those projections have been challenged by critics as overly optimistic.

But aside from questions about how much benefit the state will get out of the deal is the procedural issue of how it was accomplished. Inside the General Assembly, there is lingering resentment over being bullied by the governor into a rushed decision. “It came too quick,” Basnight says. “I don’t believe that would happen again.”

Dell executives joined state and local officials in Raleigh at a news conference Nov. 9 to announce that the computer maker had agreed to come to North Carolina. Then came a twist: The company said it had not decided exactly where.

On Nov. 16, the company sent its chief site-selection representative and the project’s architect to Grandover Resort in Greensboro to spell out to local officials what it would need. The request for proposals — RFP — was heavy on details of what Dell intended to build: a 500,000-square-foot factory on about 150 acres with numerous transportation and utility requirements. And it again made clear exactly what it expected to get.

“One of the things Dell wanted was a free, graded construction site,” says Andy Burke, president of the Greensboro Economic Development Partnership. “At no cost. I would say that is very bold.” The RFP was about 150 pages long, and there were questions to answer on each one. Responding to such a detailed document, Burke says, could take 30 to 60 days. Dell’s deadline: two weeks, which included the Thanksgiving holiday.

Local officials scrambled against the clock and against one another, squeezing local budgets to try to outspend their neighbors and make Dell happy. High Point bid $8.8 million, including $5 million in land costs. Greensboro and Guilford County came up with $12.6 million, then took the unusual step of tapping local businesses to pledge $3 million more toward land costs. Davidson County came up with $23.1 million of cash incentives and land costs.

But Winston-Salem and Forsyth County topped them all with a package worth $37 million, including 189 acres valued at about $7 million. Dell selected the sweetest deal, announcing Dec. 22 that it would build in the Twin City. “We tried to hit their minimum requirements,” Joines says. “We may have embellished the offer a little — but not much.”

Earthmovers arrived at the site in January and began flattening the ground for construction. About the same time, Joines and other local officials hopped a flight to Texas for a meeting with Dell executives to talk over the final deal. By all indications, they got home without further damage to the city’s bank account.

Despite what some say it lost, the state came out the winner in this deal, Fain insists. “The Dell jobs are going to be in North Carolina, not Virginia.” And the Easley administration, he adds, is prepared to do it all again for the right company with the right jobs.

For 40 years, sharing the stories of North Carolina's dynamic business community.

Related Articles