December 1994. With an incentive package estimated at more than $85 million, Virginia enticed Motorola to build its $3 billion semiconductor plant at the West Creek business park in Goochland.
December 1994. With an incentive package estimated at more than $85 million, Virginia enticed Motorola to build its $3 billion semiconductor plant at the West Creek business park in Goochland. Watts Carr, director of business and industry development in North Carolina, a competing location for the plant, said part of the reason the West Creek site was chosen was due to the Richmond Times-Dispatch being “less controversial, less ‘nosey’ about the project and more of a booster,” in comparison with the North Carolina dailies.
Governor George Allen, pointing to the ever-expanding demand for semiconductors, said that this was “the best Christmas present in the history of Virginia.”
I can imagine a couple of other economic development scenarios from the past: What if in March, 1991, the city announced that they were giving Generra Sportswear maker of the famous Hypercolor line of fashion shorts and tshirts a $10 million incentive package to open a factory in a long vacant tobacco warehouse.
I can hear former Councilman Chuck Richardson, now, saying “I’m stoked. Have you seen how cool this stuff is? What could go wrong?”
Or maybe in June, 1997, the Greater Richmond Partnership might have announced that the Eastman-Kodak Companies, with 1996 revenues of $18 billion, will be opening a new manufacturing plant in South Richmond in an effort to meet the demands of supplying 2/3 of the world’s photographic film. “Kodak is ranked fifth in brand value worldwide,” the press release would read. “It is poised to augment its growing film sales with income from the development of digital photography, an area in which it has cornered the market with its patents.” The incentive package would not be disclosed, of course.
While only the Motorola announcement actually occurred (the West Creek plant was never built), it is scary to think of all the “can’t miss” businesses and trends that have sputtered over the past 25 years. Yet Richmond, with its $30+ million package of grants and financing to lure Stone Brewing to the city, some tricky number work and a lot of optimism, is making a 25-year bet that customers tastes won’t change.
The Fulton area project is a great re-use of a fantastic asset in a long neglected part of town. If all goes as planned, this project will break even sometime in the mid 2030’s. Based on current tax rates, depreciation schedules, published projected lifespans for brewing equipment and numbers mentioned by Stone and Richmond Economic Development staff, Stone will be paying about $5,000,000 on machinery taxes in the first decade, and about the same again, if they need to replace their entire brewing system. The majority of their meals and sales taxes won’t kick in until around year 6, according to published reports, but if they have a great year and pull $4,000,000 in sales every year (twice the amount needed to meet the paltry incentives offered to a local investor in 2004), it will result in an additional $2.5 million in the first decade, and roughly $250,000/yr afterward, if they can keep up the great business.
This means, that if everything works out perfectly, Richmond will get about a 2.5 – 3% annualized return on its investment over 25 years. That’s just barely above our current super low rate of inflation.
The Stone Brewing deal requires everything to go as planned for two decades to pay any dividends. As illustrated by the examples above, it is hard to see what technical advances and changes in fickle tastes (literally, in this case) five years or a decade can bring, much less 25 years.
Think about 1990. Had you ever used a laptop or a cell phone? Did you have an email address? Where you still playing cassettes, or were you an early adopter of CD’s? The DVD wasn’t invented until 1995 and it is now almost completely obsolete.
Are you still craving Sunchips with your Pepsi Crystal? Seriously, just look at the rise and fall of American Apparel over the past decade. The Saturn auto brand wasn’t launched until 1990 and it has been defunct since 2009. Dell Computers lost 90% of its inflation adjusted value in 14 years. Only about half of the Dow Jones Industrial components remain from 1990. But somehow, we are sure that Stone Brewing is going to be Chipotle instead of Boston Market.
And it very well could be wildly successful. It has a good product with good brand identity.
But what happens when a competitor out markets them? What happens when a freak flood wipes out parts of their operations? What happens when our collective taste changes and we all want Natural Light again? Or, more likely, what happens when Stone Brewing is bought up by a competitor like Boston Beer or Brooklyn or even a foreign company like Anheiser Busch InBev or a Chinese company we’ve never heard of and that company wants to consolidate operations?
Do we eat the investments or do we follow our sunk costs with more giveaways to the new corporation?
Then there is the opportunity cost of these funds and the financing. Even if the Stone project goes as planned and the city recoups all its money in under 20 years, we are still 20 years from seeing a profit. What other uses could $30 million go to during that time? A new school in which 5,000 students would have a better experience?
More parks, soccer fields and working recreational equipment? An expanded BRT than connects Fulton with Stony Point and North Side with Southside Plaza?
The risks involved in making this 25-year investment, one in which every single decision maker, from staff to elected officials, will have moved on by the time the investments pays off, if it pays off, are simply too great.
*These assumptions do not include the potential $3.5 million in cost overruns recently disclosed. I have asked the administration for the terms of that financing and if the repayment would push back the other financing repayments or be doubled up with those payments, causing a negative cashflow. At this time I have had no response.
** From the projections provided by Davenport & Company in November it is unclear whether the $7.8 million in infrastructure improvements are included in the $31 million incentive and financing package. It looks as if it is not, increasing the total cost to more than $40 million and delaying profit by several years, but the administration has not confirmed this item, either.