Dean Barber

Escape From California

In Corporate Site Selection and Economic Development on May 10, 2014 at 8:12 am

Will Rogers said he never met a man he didn’t like. I wish I could say the same. But it is true that I never met a state that I didn’t like. Every one of them has certain attributes which could fall into favorable play in a site selection project.

Even California.

So I should preface my remarks by stating that California is a very beautiful state with a history of great innovation and substantial business assets. Many Asian companies, first the Japanese and now the Chinese, view California as a logical beachhead into the North American market. And that makes sense for a variety of reasons.

But I have been fast concluding for some years now that California, and this is a broad brush statement, doesn’t particularly cherish the idea of making itself a great home for business. Indeed, it would appear that state and some (not all) local governments have gone off the deep end with a regulatory climate that substantially increases the cost of doing business there.

Those Wonderful Garages

It is somewhat ironic then that California has been the birthplace of some of the most important companies in our nation’s history, many of which began in humble garages.

In 1976, Steve Jobs and Steve Wozniak hand-built 50 computers in 30 days from a garage in Cupertino. Today, Apple is the most valuable technology company in the world.

In Los Angeles, there’s a house where The Walt Disney Company got its start. It belonged to Walt Disney’s uncle, Robert Disney. Walt and his brother Roy moved in with their uncle in 1923 and set up “The First Disney Studio” in the one-car garage out back. Today, Disney is the highest-grossing media conglomerate in the world.

Bill Hewlett and Dave Packard founded HP in Packard’s garage with an initial investment of $538. That was in 1939 and their first product was an audio oscillator and one of their first customers was Walt Disney, who purchased eight oscillators to develop the sound system for the movie Fantasia.

The HP Garage in Palo Alto is known as the birthplace of Silicon Valley and HP is now one of the largest companies in the world. Carrying on that California garage tradition, Google, the most trafficked website company in the world, began in a garage in Menlo Park by Stanford graduate students.

Most Costly, Complex and Uncertain

So it is undeniable that great companies have been birthed in California in humble surroundings. And by that very fact, you would think that there would be a climate by which government would want to encourage businesses to form and grow. But that is not the drumbeat that I am hearing. Consider the following:

“By a large margin, California’s regulatory environment is the most costly, complex and uncertain in the nation. No other state comes close to California on these dimensions. For example in the area of labor law, California enacted 15 statutory changes per year between 1992 and 2002. This rate is four times the average for state legislatures nationwide over that same period and three times the average in New York.” – California Business Roundtable.

Last week, Chief Executive magazine released its annual Best & Worst States for Business survey and as in years past, California was ranked 50th by the 500 CEOs participating in the poll.

CEOs said California’s bottom ranking is the result of regulatory red tape, high taxes and a generally negative attitude toward business. “We dread doing business in California,” one CEO responded. “State regulations duplicate federal regs, especially in safety. In addition to MSHA and OSHA, we have to comply with CALOSHA. No other state has a similar system.”

Texas Strikes Again

And for the 10th year in a row, the surveyed CEOs ranked Texas as the best state to do business in. Said one CEO, “Texas is the best state for business and I don’t see anything to slow [it] down. The education and quality of eligible employees is excellent right now. Business is booming and growing quicker and more rapidly in 2014 than any other year. It’s an exciting time in Texas.”

Now I live in Texas and I can tell you that it is not nirvana for all business. No such place is. As a site selection consultant, I advise companies on where they should be and that can be from Maine to California, from Canada to Mexico.

But what is indisputable is that many California-based companies have been moving to what they see as greener pastures and one of their favorite landing places has been Texas. You may have heard of one of them recently, a little firm called Toyota.

My Neighborhood

The world’s largest carmaker earlier this month announced that it will be moving its North American corporate headquarters from Torrance, Calif., to my neighborhood here in Plano.

(And when I say my neighborhood, I really mean it. It’s called Legacy in the northwest part of the city, and it’s a headquarters mecca for companies such as Alliance Data, Cinemark Theatres, Dell Services, Dr Pepper Snapple Group, Ericsson, Frito-Lay, HP Enterprise Services, Huawei, J.C. Penny, Pizza Hut, Rent-A-Center, Traxxas and Siemens PLM Software.) said the cost of living for employees is 39 percent higher in Torrance than in Plano, and housing costs are 63 percent lower in Plano. And keep in mind that California has the highest income tax in the country, with a top rate of 13 percent compared with zero in Texas.

“As we looked closer, though, the advantages Plano offered our company and the quality of life it offered our employees became clear — including the cost of living, access to top-tier schools and cultural offerings, low tax rates and a wide range of affordable urban and suburban living options within a short commute of our headquarters site,” said Jim Lentz, chief executive officer for Toyota North America.

“Another reason we chose Plano is simple geography. Locating there will bring us closer to our manufacturing footprint, in a time zone that allows us to communicate more easily with our North American operations, with direct flights to all of our operations — including Japan.”

The Smart People Know

What Toyota didn’t say, didn’t need to say, was that California was a more expensive place to do business. But my friend, Joe Vranich, a site selection consultant with Spectrum Location Solutions based in Irvine, Calif., is none too shy about it.

“I’ll say what Toyota didn’t – any business leaving California can benefit from cost reductions between 20 and 35 percent, depending upon their destination, helped significantly by lower taxes and lower compliance costs as compared to California’s jumble of mind-boggling regulations.

“I’ve been to Sacramento and have encouraged policy changes to benefit commercial enterprises. For all the difference it’s made, I may as well have spoken to a box full of doorknobs.”

And the Exodus Continues

Toyota is just the latest news of some big companies ditching the Golden State.  Fluor Corp., an engineering and construction company, left Orange County in 2006 for Dallas. That same year Nissan moved its North American headquarters from Carson to Nashville, Tenn.

Last year, Raytheon Space and Airborne Systems moved its headquarters staff from El Segundo, Calif., to McKinney, Texas, about 20 minutes from where I live in Plano. And in February, Occidental Petroleum said it would relocate its headquarters in Westwood, Calif., to Houston. I am sure I could cite more big name companies who have sought to escape from California with a little more digging.

Vranich has been documenting and blogging about the exodus for several years now and said there were 254 companies that left the state in 2011 alone.

When the latest news broke on Toyota, California Gov. Jerry Brown said, “We’ve got a few problems, we have lots of little burdens and regulations and taxes, but smart people figure out how to make it.” 

The Wall Street Journal’s comeback: “California’s problem is that smart people have figured out they can make it better elsewhere.”

Where to Fish

Texas Gov. Rick Perry has not been reticent about traveling to California, New York and Illinois (places consistently ranked worst states by Chief Executive magazine) to beckon companies to the Lone Star State.

“Texas is number one for doing business. Why? Our taxes are lower, our legal system is fair and our energy is affordable,” Perry says in a television message posted to YouTube in March.

When asked why he frequently targets California, Perry quipped, “You fish where the fish are.”

That’s not a bad answer, as the proof is in the catch.

I’ll see you down the road.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a site selection and economic development consulting firm based in Plano, Texas. If your company needs an optimal location for future operations anywhere in North America, we can help. If your community needs to improve its competitive standing, we can help. All requests for information are considered confidential.

If you liked what you saw here, invite me to speak at your next meeting.

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  1. Great post about California business relocation

  2. Once again Dean you het the nail square on the head. Michigan was on the same program until an economic disaster struck that state.

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