Beware of the Sweetheart Dell?

In 2004 my hometown of Oklahoma City was all excited about being selected for a new Dell “customer contact center” to be located on 60 acres near downtown. Around the same time, Dell announced plans for a similar center in Edmonton, Canada. Everyone in Edmonton seemed excited, from a Business Edge article from January 2005:

“With 475 of the initial 500 positions now filled, Dell said it will hire another 250 people and hopes to have a total staff of 750 working in its Edmonton customer-contact centre by July.

Dell’s entry into Edmonton was first projected to create economic benefits pegged at $600 million over a 20-year period. That figure now rises to $900 million.

“The new jobs could mean another $300 million over the 20-year period,” said Edmonton Economic Development Corp. (EEDC) president and CEO Allan Scott, who added that these numbers may have to be revised upward once more.

The EEDC inducements included lease incentives valued at $1.1 million – equal to five years of property taxes during the first five years of the 20-year agreement – and assistance in helping Dell to locate a permanent site for its customer-contact centre. Further, land for Dell’s permanent Edmonton home will be leased to Dell for 20 years at the rate of $1 per year. Dell will pay all school and business taxes from the beginning of its operations in Edmonton. Over the first five years, those taxes are valued at about $750,000.

In return, Dell agreed to provide and maintain at least 500 full-time positions within its first six months and to begin construction of a permanent facility on the leased land within 18 months.

According to Scott, the incentives were necessary to level the playing field with highly competitive prospects in the U.S. Dell was considering a total of 153 locations, and that also included Calgary.”

Time for Edmonton’s EEDC to recalculate — Dell today announced the closing of the facility. In Oklahoma City another 200-300 employees got pink slips, 1,200 in total between the two locations. Did the deals with Edmonton and Oklahoma City include any type of clawback in case Dell backed out before the end of the deal? Given the competition among cities, probably not.

So what happened? Many things beyond the control of the respective governments of Edmonton and Oklahoma City. HP passed Dell to be the #1 supplier of computers in the world (or was that US?, doesn’t really matter), Dell’s quest to offer the public a $400 computer didn’t really leave room for a profit. While computer sales have been growing, Apple’s sales have far outpaced the growth of the overall market. Microsoft released Vista upon the world and many ordered new computers with XP instead — the sales boom that makers like Dell expected never happened. Finally, Dell’s delivery method — a very efficient system —- has saved every penny it can. I should disclose that I am a major Mac fan — logo tattoo and all.

Interestingly, as I’ve gleaned from my professors, companies often do not select a city based on the incentives offered. Other factors such as a workforce skilled for the proposed work, availability of a suitable site (which could play into incentives) and such are the bigger forces. Of course, if offered, the companies are not going to turn them down.

So what does all this have to do with urban life in St. Louis? Plenty.

St. Louis’ RCGA (Regional Commerce and Growth Association) does business much like all the other cities out there. Local governments do the same. Centene’s decision to locate in downtown St. Louis at the delayed Ballpark Village comes to mind. We’ve all seen the reports — x-number of jobs to be created, generation of so many hundreds of millions of dollars — yadda yadda yadda. In all the excitement we lose track that markets can change quickly.

One day Enron is a wonderful corporate citizen and the next it is bankrupt because of mismanagement by owners. The St. Louis region has some great long-term companies — those that haven’t cashed out yet. Small to large, longevity is more important than flash and show for the short term. If they want incentives here is one — on the 20th anniversary of a facility with an average of x-number of employees over the years then the company will get a refund of Y. Break it up in five year increments or whatever. We need to know more about these sweetheart deals that companies like Centene are getting and what happens if they are bought out, go under or just decide to move?

Edmonton’s Dell center was only open just over 3 years. It probably took the city a year to put the deal together. Certainly not a good return on their investment.