Dean Barber

Alabama Zen: The Ways of Nick Saban and Toyota

In Corporate Site Selection and Economic Development on January 14, 2018 at 9:54 am

There were problems to be overcome. But in the end, the systems were the solutions. Two belief systems, both focused on continuous improvement and with roots in Eastern philosophy, made national headlines last week.

And Alabama was the big winner as a result.

For Nick Saban, the University of Alabama’s football coach, there is “The Process” – a core belief that players should focus solely on execution and the immediate task at hand and not be distracted by past events or future outcomes.

And last Monday night, the Process prevailed. The Crimson Tide, a team utterly void of any superstars, rolled and won its fifth national championship in the 11 years that Saban has been its coach.

Two days later, there was evidence of another, not unsimilar process at work when Alabama edged out North Carolina as the winner in a multi-state contest for a prized Toyota Motor Corp. and Mazda Motor Corp. joint car factory worth $1.6 billion.

The Nature of An Assembly Plant

To understand the problem facing the Japanese automakers and why a 2,400-acre site near Huntsville was chosen, you must understand what an automotive assembly plant is. Add to that backdrop one of the main pillars of the Toyota Production System, which is Just-in-Time production.

It means transporting only what is needed, when it is needed, and in the amount needed.

In some respects, today’s automotive production line is not that much different from when Henry Ford installed the first moving assembly line for auto production in 1913.

Then as now, vehicles are mechanically moved to the workers at individual work stations where parts are added in sequence. Those interchangeable parts have been acquired and shipped in from other companies, which are the suppliers.

By the time a car or truck reaches the end of the production line, all the parts, almost all of which have been manufactured offsite by the suppliers, are fastened and attached, resulting in a brand new ready-to-drive vehicle rolling off the assembly line.

The Toyota Way

The fact that Toyota already has a substantial number of suppliers near the general vicinity of North Alabama, serving its other assembly plants in Blue Springs, Miss., and Georgetown, Kentucky, was probably the difference maker as to why North Carolina was not chosen.

Much of “The Toyota Way” is about conserving resources and eliminating waste. Had North Carolina been chosen for the assembly plant, it would have required building entirely new supply chains and an array of supplier plants. Such a move would not be conserving resources.

Which is probably why at the end of the day, when North Carolina was offering $1.5 billion in incentives, Toyota instead choose Alabama, which offered a state and local incentive package totaling about $700 million.

Of course, I am assuming that Toyota, the largest automotive company in the world, was, in effect, the managing partner with Mazda in choosing the site. The future Huntsville plant will be Toyota’s 11th assembly plant in the United States. Mazda currently does not manufacture in the U.S.

Back to Fundamentals

So what can we learn from this?

In some ways, it should be very reassuring to economic developers everywhere, including North Carolina, that basic business principles trumped (no pun intended) the financial incentives that were offered. While substantial, the Alabama incentive package was less than half that of North Carolina’s.

Two things stand out in my mind. First, incentives cannot make a bad location decision good. That is something that all companies truly should understand.

Second, logistics, the art and science of moving resources and which began as a military precept, is very much a basic business principle and certainly a major cost factor that should be understood by all manufacturers. But curiously it is often not given proper due consideration in the site selection process.

We know, for example, that a relatively short distance between two competing sites can mean millions of dollars in reoccurring transportation costs on an annual basis.

So Toyota’s choice in Alabama was a nod to the fundamentals, something that Saban stresses with his Alabama teams.

Chop Wood, Carry Water

It is interesting to note that both in Saban’s Process and in The Toyota Way, there is a consistent, ongoing emphasis on team, respect and getting the fundamentals right. It’s all about focusing on becoming the best that you can be, knowing that there is always room for improvement.

“The key to the Toyota Way and what makes Toyota stand out is not any of the individual elements…But what is important is having all the elements together as a system. It must be practiced every day in a very consistent manner, not in spurts.” — Taiichi Ohno, Japanese industrial engineer and considered to be the father of the Toyota Production System.

“Eliminate the clutter and all the things that are going on outside and focus on the things that you can control with how you sort of go about and take care of your business. That’s something that’s outgoing, and it can never change.” – Nick Saban.

“Before enlightenment, chop wood, carry water. After enlightenment, chop wood, carry water.” — Zen proverb.

Both Saban and Toyota subscribe to the idea that no matter how big or small the task may seem, the focus should be on the task at hand, which will help you develop a habit of always doing your best. Do your work, do it well, and when you find success, do it again and always strive to improve.

This is very much rooted in Zen doctrine. A worker on the assembly line in the Toyota Production System can stop the entire line if a problem is detected or to introduce change and improvement.

Go to the Source for Facts

At Toyota, as part of its “Chie to Kaizen” continual improvement mindset, there is this concept of “Genchi Genbutsu,” which means “going to the actual source and getting the actual facts” so as to make the correct decisions. Decisions should not be based on data alone, but one must have a deeper understanding of the problem at hand.

For Toyota and Mazda, the problem was picking the right site for the joint assembly plant. It was enshrined by the news media nationwide and opining consultants like myself who were not involved in the project. We voiced our opinions with little knowledge of the facts.

And whether they knew it or not, the Japanese managers and the assisting JLL team practiced Genchi Genbutsu as they did go to the competing megasites in North Carolina and Alabama to get the facts.

I do not know of any site selection consulting firm that would not take corporate client to the finalist sites under consideration to get the facts and gain a deeper understanding. In that sense, we’re all Zen.

Learn from Loss

“The best things come to those who wait” was a slogan used in an advertising campaign by the H. J. Heinz Company in the 1980s to promote its ketchup. However, that is not a truism in business.

What may be a truism is that good things happen to those who prepare. In 2008, Volkswagen passed over the very same Huntsville site in rural Limestone County that Toyota and Mazda chose in favor of a site in Chattanooga.

“When Volkswagen came, we weren’t ready,” Huntsville Mayor Tommy Battle said Wednesday night. “”… We didn’t have the soil compaction, we didn’t have the environmental, we didn’t have the utilities to the site. We didn’t have plans on roadways. We didn’t have everything necessary to make those sites a success. We took a learning lesson off of the loss of Volkswagen.”

But this time around, the Limestone County site was ready. The prerequisite work had been done for it to be certified in 2016 as a TVA megasite, meaning that all the basic infrastructure to accommodate a large manufacturing plant was in place.

At a press conference in Montgomery last week, Toyota President Akio Toyoda, grandson of the company’s founder, said he had fond childhood memories of spending time in Alabama as a Boy Scout.

And we all know the Boy Scout’s Motto, “Be Prepared.”

I’ll see you down road.

Dean Barber is principal of Barber Business Advisors, LLC, a location advisory and economic development consulting firm based in Dallas. Mr. Barber is available as a keynotes speaker and can be reached at dbarber@barberadvisors.com. Visit us at Barberadvisors.com

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The Times They Are a-Changin’

In Corporate Site Selection and Economic Development on January 6, 2018 at 7:40 pm

On August 16, 1964, Lowell Eggermiers walked into a San Francisco police station, and announced, “I am starting a campaign to legalize marijuana smoking. I wish to be arrested.” Whereupon he fired up a joint, and his wish was granted.

In 1964, possession of marijuana was a felony crime in every state. A first conviction for a minor possession could result in up to a year in prison, which is about what Eggermiers served.

James R. White III, a libertarian attorney who described himself as “to the right of Barry Goldwater,” organized the original marijuana reform advocacy group, LeMar (Legalize Marijuana) in 1964 to support Eggermier’s defense.

Also in 1964, Dr. Raphael Mechoulam, a Bulgarian-born Israeli chemist at Hebrew University in Jerusalem, identified delta-9-tetrahydrocannabinol (THC) as the active psychoactive compound in marijuana.

When asked why he chose to do research on marijuana, Dr. Mechoulam replied, “Well, a scientist should try to find topics of importance.”

New Horizons

About two weeks after Eggermier’s arrest, on Aug. 28, 1964, Bob Dylan introduced the Beatles to marijuana. It was also in 1964 when Dylan wrote and released the title track of an album by the same name, “The Times They Are a-Changin’,” an anthem for change.

Fast forward to today, in doing the research for this blog, I came across the website of the 1964 Supply Company, which describes itself as “a cannabis lifestyle brand run by a collective of craft cannabis artisans and industry pioneers.”

According to the company, 1964 “marked a time of change and new horizons.”

Pot’s Gone Mainstream

Certainly, times and attitudes have changed. A Quinnipiac poll in August found that 94 percent of Americans support legalized medical marijuana and 75 percent oppose the government enforcing marijuana prohibition in states that have chosen to legalize.

That coincides with an October Gallup Poll discovered that 64 percent of Americans favor the legalization of marijuana, and that only 20 percent of support the federal government enforcing federal laws in states that have already legalized the substance.

Certainly, it would appear that legal marijuana has gone mainstream. According to the United Nations Office on Drugs and Crime (UNODC), cannabis is used by 16.2 percent of the population of the United States, the second highest, no pun intended, in the world. (Iceland is the highest at 18.3 percent.)

California was the first state to legalize the use of medical marijuana in 1996 via a ballot initiative. So it was not surprising that it became the eighth state in the nation to allow for legal and regulated recreational marijuana, again approved by a ballot initiative on Nov. 8, 2016.

A Huge Economic Impact

By virtue of the fact that California is the most populous state in the union, approaching 40 million, and has the world’s sixth largest economy, the market for marijuana there will be very large.

A study by the Agricultural Issues Centre at the University of California, Davis predicts that sales from recreational cannabis will eventually reach $5 billion a year. The state already sells marijuana worth more than $2 billion a year for medical purposes. For comparison, Colorado sold $1.3 billion in total, for recreational and medical use, in 2016.

The UC Davis study coincides with forecasts by Green Wave Advisors that California should reach $5.3 billion in retail sales in its first year. But there are plenty of other predictions, all of which agree that this is a big and growing industry.

The recently released Green Market Report forecasts sales in California at $9.1 billion to $11.5 billion to $11.5 billion, with the creation of 160,000 new jobs, while ICF International estimates the California market could reach between $15.9 billion and $20.2 billion per year.

According to cannabis research firm ArcView, the North American legal marijuana industry grew by 34 percent in 2016 to $6.9 billion, and is expected to grow by an average of 26 percent per year through 2021.

“The total economic output from legal cannabis will grow 150% from $16 billion in 2017 to $40 billion by 2021,” Arcview said in a statement. “U.S. consumer spending on legal cannabis in 2021 of $20.8 billion will generate $39.6 billion in overall economic impact, 414,000 jobs, and more than $4 billion in tax receipts.”

In its report, “US Legal Cannabis: Driving $40 Billion Economic Output,” Arcview states that the legalization of adult-use sales in California will lead to the creation of nearly 99,000 cannabis industry jobs and 146,000 indirect jobs in the state by 2021.

About $1 billion dollars in wholesale, excise, and cannabis-specific sales taxes were taken into state treasuries during 2016. Arcview forecasts that number to grow to nearly $2.8 billion by 2021. Adding local sales taxes, the 2021 figure could jump to $4 billion and $4.7 billion.

ICF projects California to earn between $2.4 billion and $3 billion a year in tax receipts from sales of marijuana. The state’s current budget deficit is $1.6 billion.

But Hold On There

By me quoting all these economic impact guesses, and that’s truly all they really are, you might think that I am a proponent of legalization.

Actually, I am quite torn on this subject. Mind you, I view myself as a live and let live kind of fellow. For example, I have no problem with gay marriage. To quote that great Texas icon Kinky Friedman, “I support gay marriage. I believe they have a right to be as miserable as the rest of us.”

But I have qualms about the legalization of marijuana. While I do not want to see a person’s life ruined on a minor possession charge (and therefore favor decriminalization), my reservations about legalization are rooted in the workplace.

Workforce Concerns

In my capacity as a consultant to industry, if I were representing a company in a site search for a location for let us say a future manufacturing plant, and if that site search area were to include a state or states where recreational marijuana was legal, it would behoove me to voice concerns to my client about absenteeism, productivity and workplace safety. As workforce is a primary factor in a corporate site search, those are, in my mind, proper considerations.

I would also advise a corporate client that the possibility exists that they could face legal challenges to drug-free workplace rules in jurisdictions where marijuana is legal. I’m merely saying that this is something to take into account, and I would not be serving my client well unless we did have that conversation.

The bottom line is this: In states where recreational marijuana is legal, is there a greater chance or frequency of some workers being impaired while on the job? I’m not sure we know the answer to this.

But Paul Bittner, partner and vice chair of the Labor and Employment Group at the law firm Ice Miller, contends that that legalization of marijuana can have many ramifications on the workplace, including:

  • It will affect a company’s current drug policy.
  • It may impact the overall safety of a company’s employees, suppliers and customers.
  • It could affect a company’s hiring procedures.
  • It can affect a company’s standing with the federal government.
  • It may affect a company’s insurance policy and rates.

A Possible Indicator?

And while it is by no means a perfect comparison, The Denver Post reported in August 2017 that the number of drivers involved in fatal crashes in Colorado who tested positive for marijuana has risen sharply each year since 2013, more than doubling in that time, federal and state data show. (The legalization of recreational marijuana in Colorado began in late 2012.)

Colorado transportation and public safety officials, however, say the rising number of pot-related traffic fatalities cannot be definitively linked to legalized marijuana. But if more people are hitting the streets impaired, might they be doing the same at work?

An article in the Journal of Occupational and Environmental Medicine in May 2015 concluded that there is a likely statistical association between illicit drug use, including marijuana, and workplace accidents. While some studies suggest that marijuana use may be reasonably safe in some controlled environments, its association with workplace accidents and injuries raises concern.

And therein lies my concern. I believe that data in forthcoming years will give us a better picture of the effects of legalization of marijuana on the workplace. In other words, we shall see.

Jeff the Moralist

Having said all that, I believe decriminalization of marijuana nationwide makes sense and that Congress should act to do just that. Decriminalization means that a given activity no longer qualifies as criminal conduct and can only be treated as a civil infraction, if that.

Criminal convictions can have devastating consequences on a person’s life, making it difficult for them to obtain employment, bank loans and housing. So I have to think that decriminalization is needed to repair the damage done.

But we have an ill-informed attorney general in Jeff Sessions who has made claims that have been dispelled by science, such as cannabis’s gateway effect and the idea that marijuana is “only slightly less awful” than heroin.

Furthermore, having last week rescinded a trio of memos from the Obama administration that had adopted a policy of non-interference with marijuana-friendly state laws, Sessions takes a moral stand, saying “good people don’t smoke marijuana.”

I live in Texas, and anybody who says that Willie Nelson is not a good person is just wrong. To quote former Texas Governor Rick Perry on Nelson’s long-time use of marijuana, “You gotta love Willie.”

I’ll see you down the road.

Dean Barber is principal of Barber Business Advisors, LLC, a location advisory and economic development consulting firm based in Dallas. Mr. Barber is available as a keynotes speaker and can be reached at dbarber@barberadvisors.com or at 972-890-3733.

A “Trillion-Dollar Blunder” in the Making

In Corporate Site Selection and Economic Development on December 17, 2017 at 9:48 am

A year ago, I wrote a blog entitled, The Big Business Story to Come, about the incoming Trump administration’s plan to cut corporate taxes in a drastic manner to spur economic growth. At the time, I thought it was a dandy idea.

Celebrated by Republicans and scourged by Democrats, a bill that drops the corporate tax rate from 35 percent to 21 percent, is now expected to be voted on and passed this week.

But I’m not so sure this legislation is the cure-all that it is being billed as. Indeed, it may come back to bite us. Just last month, business leaders attending the Wall Street Journal CEO Council were asked for a show of hands if they planned to increase capital spending in the coming year should corporate tax cuts become a reality.

Few responded, prompting President Trump’s top economic adviser, Gary Cohn, to ask, “Why aren’t the other hands up?”

A surprising number of chief executives have said they will use the extra cash to pay shareholders more, and not grow jobs and wages.

No Talk of Tax Cuts

A little more than a week ago, I attended a conference in New Orleans, bringing corporate site selection consultants, like myself, together with economic developers from around the country. The purpose of Economix 2017 was both educational and networking.

Curiously, there was virtually no talk of massive tax cuts for businesses and how that might affect the economic outlook for communities. Now granted, the final details of the Republican Party’s plan were only hammered out on Friday, but the fact that there was little or no discussion about it had me puzzled.

After all, wasn’t this tax plan going to have broad ramifications on us all? Wasn’t it ostensibly designed to spark more corporate investment, more jobs, and higher pay?

For my part, during short, revolving small group sessions, I told economic developers that cutting the corporate tax rate from 35 percent to 21 percent will make the United States a more attractive place for new business ventures, will stimulate investment and create American jobs.

Most of the economic developers nodded in agreement, and I puffed up like a damned blowfish.

Apparently Not

Soon after I returned home from the conference, the Institute for Supply Management, came out with its semi-annual forecast indicating that capital investment and hiring would grow at a slower pace in 2018.

What’s more, only a small share of the factory purchasing managers surveyed said the proposed tax cuts would be driving their capital-spending decisions.

In hindsight, the ISM forecast was in line with what another consultant told me across the dinner table on my last night at Economix, an event sponsored by my friends at Consultant Connect. This particular consultant, who primarily works with European manufacturers, said a lowering of the U.S. corporate tax rate would mean very little to most of his clients.

In response, I think I said something very deep. “Really?”

I’m All Wet

So let us recap. Though far from being scientific surveys, it would appear that CEOs and factory purchasing managers are saying that a dramatic tax rehaul, the biggest since 1986, will have little impact on capital spending.

Furthermore, the subject of tax cuts were are largely ignored at a conference that I attended of corporate site selection consultants and economic developers. And a fellow consultant said his clients could really care less about the federal corporate tax rate.

Now if I am being totally objective, this would indicate that I might be all wet by holding onto the common belief that reducing marginal tax rates will spur economic growth.

To further my self-humiliation, I have learned that the Bureau of Labor Statistics has collected 25 years of data showing that high income earners spend much less for every tax dollar saved, than low income earners — 86 cents versus 48 cents respectively.

And a study by the Congressional Research Service showed that economic growth over a 65-year span was largely unaffected by how much tax the wealthy pay. Indeed, growth is more likely if lower income earners get a tax cut.

Now that was something to ponder right there. And I did so over a glass of bourbon.

Compared to the Rest of the World

There has been this long-running assumption, certainly I have subscribed to it, that our corporate tax rate of 35 percent has been unreasonably high in comparison to the rest of the world and that doesn’t even include state taxes. Faced with that prospect, companies have been compelled to invest in facilities and jobs in offshore locations with lower taxes.

The United States has the third highest corporate income tax rate in the world, exceeded only by the United Arab Emirates and Puerto Rico, according to the nonpartisan Tax Foundation. We also have the highest corporate income tax rate among the 35 industrialized nations of the Organization for Economic Co-operation and Development (OECD).

“The U.S. tax rate is 16.4 percentage points higher than the worldwide average of 22.5 percent and a little more than 9 percentage points higher than the worldwide GDP-weighted average of 29.5 percent. Over the past ten years, the average worldwide tax rate has been declining, pushing the United States farther from the norm,” according to a Tax Foundation report in August 2016.

Loopholes and Deductions

Clearly, it would seem that the U.S. is out of kilter with the rest of the world. However, the real kicker here is the amount actually paid in taxes relative to taxable income. It varies wildly because of an abundance of loopholes and deductions.

A U.S. Government Accountability Office found in a 2016 study that among large corporations that met that $10 million in assets threshold, 42.3 percent paid no federal income taxes after tax credits in 2012. Among profitable large companies, 19.5 percent paid no federal income taxes. The average effective tax rate among the profitable large corporations was 16.1 percent.

That might be worthy of another glass.

Flush With Cash

Probably the reason why so few CEOs raised their hands at the Wall Street Journalmeeting when asked if lower rates would indeed result in more investment, is that corporations really don’t need the money. In fact, they are flush with cash, sitting on nearly $2.3 trillion of cash reserves, double of what it was in 2001.

Which begs the question (or the answer) as to why they aren’t spending more of their liquid assets on capital improvements, such as building more new factories around the country.

“CEOs aren’t waiting on a tax cut to ‘jump-start the economy’ — a favorite phrase of politicians who have never run a company — or to hand out raises,” wrote former New York Mayor and billionaire chief executive Michael Bloomberg in an op-ed piece. “It’s pure fantasy to think that the tax bill will lead to significantly higher wages and growth, as Republicans have promised.”

A Core Belief

Cutting taxes has been a core belief of the Republican party since Ronald Reagan. The thinking goes that giving corporations and most Americans tax cuts will result in them spending their tax savings on buying stuff and hiring more workers, which generates more economic growth, more jobs, and incomes to rise.

This theory, which I have long subscribed to, has been derisively called “trickle-down economics.” The phrase originates with American humorist Will Rogers, who mocked President Herbert Hoover’s Depression-era recovery efforts, saying that “money was all appropriated for the top in the hopes it would trickle down to the needy.”

Never mind the aforementioned studies by Bureau of Labor Statistics and the Congressional Research Service, if Rogers, who once quipped, “I am not a member of any organized party – I am a Democrat,” were around today, he would have plenty of material to work with. The bill will likely not garner a single Democratic vote.

With the passage of the bill, most impartial observers agree the gap between the haves and have-nots is likely to grow. And while most middle-class families will get sizable benefits (at least until the tax cuts for individuals expire in 2025), they are unlikely to see nearly as large of a benefit as the top.

Makes Problems Worse

Declaring the Republican bill a “trillion-dollar blunder,” Bloomberg says it does nothing to address the nation’s biggest economic problems.

“The largest economic challenges we face include a skills crisis that our public schools are not addressing, crumbling infrastructure that imperils our global competitiveness, wage stagnation coupled with growing wealth inequality, and rising deficits that will worsen as more baby boomers retire.”

Bloomberg says the tax bill makes each of these problems worse, achieving four main things:

  1. It takes money away from schools and students.
  2. It restricts our ability to invest in infrastructure.
  3. It does nothing to boost real wages while making health insurance more expensive.
  4. It makes it harder to control the costs of Medicare and Social Security without cutting defense and other spending — or further exploding the deficit.

It would probably take me four additional blogs to explore each of those points in detail to determine if Bloomberg is right. But if he is, and I suspect that he is, those aren’t much in the way of achievements. Nevermind this bill adds $1 trillion to $1.5 trillion to a $20 trillion deficit. Where are the deficit hawks in the GOP?

Could we see an uptick of corporate investment with lower rates? Probably so, but who will benefit and at what cost? I’m not so sure we are going to like the answers when it’s all said and done.

I’ll see you down the road.

Dean Barber is principal of Barber Business Advisors, LLC, a location advisory and economic development consulting firm based in Dallas. Mr. Barber is available as a keynote speaker and can be reached at dbarber@barberadvisors.com or at 972-890-3733.