The recent announcement by the Dell Corporation that it was planning to sell its factories to cut costs should have come as no surprise. Today’s new global economy is characterized by a frantic effort by business in thousands of market niches to offer the cheapest, fastest, and/or best product available. Any competitive advantage is short-lived. Even keeping up requires you to stay ahead.
This fast-paced change, however, makes things hard on state government recruiters who seek to lure new businesses to North Carolina. Just a couple of years ago, our state was showering all kinds of goodies on Dell. Now, we’re left to wonder whether Dell will even be there to receive them.
Here are a few things we should know about the latest Dell developments and some lessons we should carry into the future.
The first thing to know is that Dell is making money. The problem is that it’s not enough to please stockholders. Add to this the fact that the company is being beaten in the notebook computer market (in part, because it was so focused on selling to other businesses rather than the household that wants an easy and fast retail product in a close-by mall) and you understand some of the company’s problems.
Getting rid of the $2.6 billion in property, plant, and machinery that Dell currently owns will not raise their profits very much. The real improvement of its margins would occur over time by out-sourcing the product and completely eliminating the approach often taken by Dell to build its computer product in two steps, using two separate factories.
So, the best scenario for North Carolina would be for United States-based firms to buy the site, plant, and equipment and continue producing computers for Dell. This includes the much discussed and debated Dell site in Winston-Salem.
This may not, however, be that easy. There are “contract” manufacturing firms that specialize in producing almost anything and wringing the costs out. But a North Carolina address means higher labor costs than a manufacturer would pay in China, let’s say. The contract firm also has its own targeted return on investment.
So, given the large incentive package that the state of North Carolina provided to Dell, what lessons should we learn from these developments as we contemplate future state economic development policy?
First, the state needs to get its “return on investment” in a hurry. In general, we should plan on requiring that the return to taxpayers (i.e. the new growth and added tax revenue that will ideally materialize as the result of the new business) take less than a decade. This is particularly true in light of how accelerated the product cycle has become, as well as the time frame for depreciation of the machinery and equipment.
Second, economic development policymakers and professionals must recognize that we live in a different era from that of the “branch plant period” or the “conglomerates era.” Today’s cutting-edge business model (not just Dell’s) no longer features the massive and vertically integrated company that does it all – for example, provided parts, arranged business financing, and built the cars.
Given today’s competitive conditions, each part of the production process is performed by the company (usually smaller) that’s the very best in its niche – whether it’s janitorial and security tasks, or creating a key part for a jet engine. In this brave new world, companies seek to stay close to their “core competencies” and the production process can become a “nexus of contracts” or a kind of “virtual corporation.” The process has even a name – it’s called, “modularization” or the “fragmentation” of production. Off-shoring and out-sourcing are just elements in this revolution.
In light of the rapid pace of change, the bottom line for policymakers and economic developers is clear: the always tricky and assumption-driven calculations that have gone into the practice of providing large publicly funded incentive packages to new and relocating businesses are rapidly getting a lot more complicated.
As a result, economic developers will have to be on their toes. Not only must they seek more diversity and balance in the kinds of facilities they woo, they must also find out about the state of each targeted industry and the nature of its corporate strategy and business model.
In short, as they go forward, state leaders must drive harder bargains than ever before if they want to retain the economic incentives tool as a viable practice.
William Schweke is Vice President of Learning and Innovation at the economic policy think tank, CFED.