Wall Street Journal, April 3, 2002

Headline: Big Incentives

Byline: Rick Brooks

VANCE, Ala. -- In 1993, Alabama persuaded Mercedes-Benz to build its first U.S. auto plant here by offering the luxury-car maker $253 million worth of incentives -- $169,000 for every job Mercedes promised the state.

Taxpayers considered the deal such a boondoggle that they voted Gov. Jim Folsom out of office long before the first Mercedes sport-utility vehicle rolled off the new assembly line in 1997. Today, the deal looks a little more like a bargain -- suggesting that the controversial practice of spending millions of taxpayer dollars to lure big employers can sometimes have a big payoff.

Here in Vance, DaimlerChrysler AG's Mercedes unit surpassed its pledge to create 1,500 jobs. The German company now plans to double the size of its Alabama work force to 4,000 within about three years.

Last fall, Honda Motor Co. opened a factory in Lincoln, 75 miles northeast of the Mercedes plant, to build its fast-selling Odyssey minivan. Toyota Motor Corp. has broken ground on a new plant near Huntsville, where it plans to start producing engines next year. Those companies also received incentives from the state.

Hot Reputation

And late Monday, in a decision that cements Alabama's reputation as the South's hottest auto-making center, Hyundai Motor Co. of South Korea picked a site near Montgomery for its first U.S. assembly plant. The factory is slated to begin production in 2005. It is expected to employ 2,000 and make as many as 300,000 sedans and SUVs a year when it reaches capacity.

For years, opponents ranging from state politicians to economists have criticized the practice of courting corporate giants such as Mercedes with big grants and tax breaks. They say the subsidies reduce the funds available for other state programs and services. And, because everyone wants the high-paying jobs that come with new corporate facilities or relocations, competition between states and municipalities can easily ignite bidding wars, escalating the cost of those jobs seemingly beyond reason.

In Alabama, the rise of a new southern Motown -- at a cost of close to $700 million in incentives over the past nine years -- is winning over some critics. For one thing, the incentives have helped Alabama reduce its traditional reliance on the shrinking U.S. textile and apparel industries. More than 13,000 of the state's 60,000 textile and apparel-production jobs have disappeared since 1997, according to the U.S. Census Bureau. And as Mercedes has revved up its plant here, other high-profile employers, including Boeing Co., have gotten more comfortable with the idea of being in a state long outside the mainstream.

C.C. "Bo" Torbert, a former Alabama Supreme Court chief justice, once argued that the money spent to bring Mercedes to the state could have been better spent on schools. Now, he says, he regards Mercedes' arrival as "Alabama's new day."

Social Woes

Though Alabama's incentives have fueled pride and optimism in the state, it's hard to tell whether the state has gotten its money's worth.

Alabama continues to suffer from serious economic and social woes. It ranks 43rd among U.S. states in per capita income, second-lowest in the percentage of adults that finish high school and worst in infant mortality. It has a tax structure that hits the poor disproportionately hard, and its state constitution, enacted in 1901 to reverse gains made by blacks after the Civil War, is a relic of the segregationist past.

Providing tax breaks for Mercedes and others cost Alabama some of the resources it might have used to address these problems. For example, the state gave Mercedes a 20-year exemption from state income taxes, sacrificing revenue that could have helped upgrade schools or fund other programs. And when the company decided to double the size of its Vance plant, it got another $115 million in incentives.

"They are giving away something they don't have," says Matthew Murray, an economist at the University of Tennessee. At least some of the jobs brought in since Mercedes arrived probably would have come to the state anyway, he adds. Others say the money the state has spent on a handful of auto companies might have been better spent to attract companies in a variety of industries.

For its part, Mercedes says it pays $1 million a year in sales taxes and local property taxes used for education. Mercedes employees and companies that do business with Mercedes generate another $14 million a year in state income and sales taxes as a result of the company's presence, according to economists at Auburn University at Montgomery who studied the issue for the industry-funded Economic Development Partnership of Alabama.

Some Alabama business and political leaders say the new car factories have increased the state's resolve to tackle some of its problems. In the past few years, the state has beefed up its high-school graduation requirements. Dozens of local governments also are improving training for workers who hope to jump to the better-paying jobs being created by new arrivals and existing companies.

Lester Garner, who pieces together seats for Mercedes at a Johnson Controls Inc. plant here in Vance, would have lost his job had he stayed at the underwear factory where he had put in 9 1/2 years. Instead, he now makes three times as much as he did at that factory, which shut its doors last year. He also has a 401(k) plan and is looking for a patch of land where he can build a house. "People see these shirts and ask us to put in a good word" to help them get jobs, the 34-year-old Mr. Garner says, pointing at his work uniform.

Alabama had never had an auto-assembly plant before Mercedes. Andreas Renschler, the company official put in charge of the plant, didn't even think of Alabama until his site-selection team persuaded him to take a look. What he found were leaders desperate to change the state's reputation as a racially divided economic backwater.

Paying 'a Little More'

He also found they were willing to outspend more than 20 other states in the competition. "We were like that fella that has a poor credit rating," says Marsha Folsom, the wife of the former governor and the head of Alabama's Democratic Party. "We had to pay a little more to get people to look at us."

DRIVEN TO ALABAMA

Large financial incentives have helped lure four auto-industry giants to the state.

COMPANY	LOCATION	PRODUCTION START	FUNCTION	NUMBER OF EMPLOYEES
Toyota	Huntsville	2003	Makes engines	350
Honda	Lincoln	Nov. 2001	Makes minivans	2,015
Mercedes-Benz	Vance	1997	Makes sport-utility vehicles	1,900
Hyundai	Montgomery	2005	Makes sedans and sport-utility vehicles	2,000

Source: the companies

Tuscaloosa County officials agreed to buy the plant site and turn it over to Mercedes for $100. Gov. Folsom won legislative approval for a package of tax concessions that allowed the German auto maker to pay for construction of its plant with money it would have spent on state income taxes. On top of matching North Carolina's offer to build a $35 million training center at the company's plant, Alabama agreed to pay employees' salaries while they were in training, at a cost of $45 million.

At the time, rival states blasted Alabama for encouraging escalating corporate demands for incentives. Businesses already in the state complained that the newcomers were getting unfair advantages without having to prove their loyalty to the state. After using the controversy to help defeat Gov. Folsom, new Republican Gov. Fob James scaled back the use of tax breaks and put the brakes on aggressive industrial recruiting.

But things started to change as newly trained Mercedes workers started cranking out M-class vehicles in 1997. Many of those workers were hired from desk jobs or from textile factories and other facilities where they had had nothing to do with cars. There were early quality problems to iron out, but that didn't seem to hurt sales.

Mercedes has expanded the plant twice since then, increasing annual production to 80,000 cars from its original goal of about 60,000. Now construction cranes are piecing together the steel-beam skeleton of a third expansion, which is set to double vehicle output and put the equivalent of 47 football fields under one roof. Mercedes says one reason it decided to keep growing in Alabama is that employees there work hard and are easy to train.

Paid about $25 an hour, Mercedes assembly workers, who aren't unionized, earn more than twice Alabama's average hourly production wage of $11.81, and they get a full range of health and retirement benefits.

Like other Southern states that have lured auto plants in recent years, Alabama offers lower costs than the industrial North for everything from utilities to construction. And because they are staffed by new hires, unlike older auto plants in the North, Alabama's plants aren't burdened by benefit costs for retirees.

Mercedes has erased doubts about whether the vast auto-industry supply chain would ever reach as far as the Deep South. Eight of its suppliers have set up shop in Alabama to meet the company's requirements for just-in-time delivery, creating at least 1,600 jobs and making everything from axles to gas tanks to bumpers. The latest expansion will lure other Mercedes suppliers that haven't moved in yet, and Hyundai is expected to help attract even more. The suppliers pay their workers about half as much as do the auto-assembly plants.

The Auburn University study found that the Mercedes plant and its suppliers have helped create nearly 10,000 jobs in the state, paying a total of $354 million a year. Mercedes itself spends more than $1 billion a year on parts, supplies and services from Alabama companies. Those figures don't include what Mercedes is spending on its current expansion.

In Tuscaloosa, a city of 83,000 about 20 miles west of the plant, Mercedes-related economic growth is changing daily life. Rush hour is busier, there's a new Target discount store, and sushi is available at a Bruno's supermarket next to a modern shopping mall. Made-in-Alabama SUVs zip around town, about 300 of them driven by assembly-plant workers.

Lynn Simmons, 36 years old, was a Pizza Hut manager before he joined the Mercedes assembly line. Since then, he has been able to move out of his one-bedroom apartment and buy a three-bedroom house in one of Tuscaloosa's best neighborhoods. "I used to wonder why [Mercedes] would want to come to Alabama," he says. Now, he says he tells his nieces and nephews "to get the best background" they can so they have a shot at a job like his.

Frankie Thomas, a retired school teacher and librarian who serves on the Tuscaloosa County School Board, says the jury is still out on what impact the car plants will have on the quality of local education. "Right now, we're at the stage where we're just hoping."

Shelley Jones, a retired teacher and principal who is chairwoman of the Tuscaloosa city school board, says Mercedes and its suppliers have forged partnerships with local schools, brought in a more diverse population and provided jobs for graduating seniors. Mrs. Jones adds that even if Mercedes hadn't received the big incentive package, she doubts that the additional state money would have gone to education.

Rolling Billboard

Mercedes has become a rolling billboard for Alabama's continuing economic development blitz. Dozens of companies, including Honda and Toyota, have met with Mercedes officials in deciding whether to come to Alabama. "If the state has a prospect, they come and see us," says Linda Paulmeno Sewell, a Mercedes spokeswoman. The Economic Development Partnership tells the Mercedes story all over the world, including at Mercedes-sponsored golf tournaments, where it woos site-selection consultants.

In 1997, Boeing decided to build a rocket plant in Decatur after finding out about state-funded employee-training programs that took off when Mercedes arrived. The auto maker "caused all of the site consultants to come into Alabama and see what Mercedes had done," says Mike Bunney, the rocket plant's general manager.

Mississippi has taken note of its neighbor's success. In late 2000, it outbid Alabama for a new Nissan Motor Co. assembly plant. "Mercedes broke the barrier for deep southern states," says Mississippi Gov. Ronnie Musgrove, who won over the Japanese auto maker with a $295 million incentives package.

More important to some than all the jobs and money, the string of economic-development prizes that started with Mercedes has spread optimism that things in Alabama are slowly getting better. Eating lunch Tuesday at a Montgomery restaurant, Mark Turner, who works at a nearby water-heater factory, said his colleagues already were talking about applying for work at the new Hyundai plant. "Alabama is getting a reputation for good-quality people who care about their jobs," he says.