Wednesday, November 14, 2018

Amazon HQ2 winners vs. Houston

Today's guest post is from Oscar Slotboom:

Observations on Amazon's HQ2 Announcement

Regular blog readers may recall my October 2017 post where I assessed Houston's chances for winning HQ2 and concluded that Houston and Amazon were a poor match, and Houston had no chance of winning. Of course, Houston was not among the finalists, which in my view was a good result since it avoided the expenditure of local time and resources in a futile effort, although the Greater Houston Partnership may have gladly incurred the cost for the "prestige" of being a finalist.

Tory subsequently added his views (1, 2) on Houston's lack of finalist status
  1. Amazon did not want to compete with the oil industry for talent, since periodic booms make the industry flush with cash for raiding talent
  2. Amazon did not want to be seen squeezing Houston for incentives after Hurricane Harvey
A Good Business Climate with Low Costs Was Not Amazon's Priority
Now that we know the winners, it is clear that Houston was totally incompatible with Amazon's HQ2 desires. Houston's strengths are a low cost of living, ample supply of housing, and a good business climate, providing a lower cost of doing business. Finalists Atlanta and Dallas also have these strengths. Amazon chose the cities ranked #1 and #3 for the highest cost of living in the U.S. (chart from Monday's Chronicle). The much smaller operations center in Nashville slated for 5000 workers is a lower cost location, however.

(click to enlarge)
On Sunday the Dallas Morning News reported on the higher costs of living in NYC and DC, particularly housing, including these graphics.

It appears that the deciding factors were public transit and workforce availability in both cities, and enhanced ability to influence the federal government with the Arlington location (as well as being convenient to Jeff Bezos' DC home). New York state is reported to be providing $1.5 billion in incentives plus the potential for tax credits per eligible employee, while Virginia was reported by WSJ to "grant $550 million over 12 years as long as Amazon creates 25,000 jobs with an average wage of over $150,000."

In a Twitter post after the initial leak of the winners, Tory mentioned that the selection may be designed to attract a certain workforce, mainly recent college graduates and single 20-somethings who want to live in trendy cities, while frightening away 30-something family-oriented employees who won't be able to afford housing (or face super-long commutes) and 40+ workers who won't want to pay the premium to live in a trendy area. The smaller Nashville office, in contrast, may be attractive to everyone.
"Confirms my suspicions that tech companies strongly prefer cheap young single employees willing to work long hours over older family-centered employees that cost more and work less, so they pick cities as family-unfriendly as possible to drive that turnover."
Houston's Response
Of course, Houston's exclusion from the finalist list forced some introspection on our competitive position for attracting tech jobs, and spurred local leadership to strengthen tech-oriented startup activity, as was nicely reported recently by the Dallas Morning News.

But making Houston attractive to a big tech employer like Amazon will be very difficult and may have negative effects, since a workforce realignment to Amazon-style tech skills may weaken or starve the specialized and disparate STEM skills needed by local industries. But that's another topic.

Head Scratcher
While Amazon has massive revenue and a huge market capitalization, it reported good profits for the first time only this year, and is generally a low-margin operation. It seems that Amazon will have to pay higher wages for those 50,000 workers in NYC and DC, maybe much higher, as compared to other finalist cities. The Virginia incentives appear to require an average salary of $150,000 per employee, 50% higher than the $100,000 listed in the original Amazon requirement. Also, the majority of those 50,000 jobs are likely to be routine, run-of-the-mill IT and administrative jobs, not really requiring a premium workforce in an elite location and easily handled by a lower-cost workforce in Chicago, Atlanta, Dallas, or other finalist cities.

Update 2017-11-21 
WSJ is reporting that half the jobs at both the NYC and DC  sites will be non-tech positions, and will be "administrative jobs, custodial staff, HR and [other staffers]".

Biggest Losers
Chicago and Atlanta, which are both very qualified, have excellent downtown locations available, really wanted to win and were believed to offer substantial incentives. The #3 loser Dallas, which was less qualified due to weaker higher education and no prime downtown site, offered up to $1.1 billion in incentives for the full 50K jobs (or $550 million for 25K jobs). Maryland and Newark offered massive incentive packages but were passed over for other locations in their regions.

Houston can take solace in the fact that Atlanta and Dallas, which are our closest competitive/peer cities, both were shut out.

Cities that Win By Losing
Boston, Austin, and Denver, which all would sustain substantial negatives from the large Amazon presence.

The other finalist cities were not qualified and had no chance of winning, but did get some good press from being on the finalist list.

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At 8:33 AM, November 15, 2018, Blogger Bryan Guido Hassin said...

Instead of attracting Amazon to Houston, Houston should be focused on building the NEXT Amazon. Rather than offering $1B+ to companies that are already rich, what could Houston do with $1B+ to support its fledgling entrepreneurship ecosystem?

At 10:47 AM, November 15, 2018, Blogger Tory Gattis said...

Exactly! It was never going to happen, so I'm glad Houston didn't get sucked into the game like Dallas and Austin did. I'm excited about what Rice wants to do with the Sears in Midtown. Huge potential if they can get it right.

At 1:01 PM, November 15, 2018, Anonymous Anonymous said...

I agree Houston was not going to win and that we thus avoided costs in even trying. But your complacency with that is misguided. You could have just as easily summarized this as, "I learned next to nothing from the HQ2 selection." You purport to conclude that the deciding factors were "public transit and workforce availability," but then try to dismiss this criteria by saying maybe the Crystal City sight was chosen to "influence the federal government." You also try to imply that perhaps Amazon has some ulterior motive to improperly discriminate against older workers. The reality is Houston's advantages -- cheap cost of living and a business friendly climate -- exist in dozens of cities and do next to nothing to differentiate us in future similar site selections. As you admit, Dallas and Atlanta offer the same if not better. And COL and business climate are just not the defining criteria for a Fortune 100 HQ anymore. They want to keep and attract superstar talent, and superstar talent by and large does not want to be in Houston (for that reason, I seriously doubt they are worried whether older workers are marginally more expensive or less productive than 20 year olds. It's that they think the superstar tech, finance, and management talent skews young and prioritizes a lifestyle Houston doesn't offer. And they're right. I also think you misunderstand Amazon as a company. Yes, it's "low margin," but that is by its own choice. It is prioritizing market share and R&D over profit. It is fundamentally a tech company and not a retailer and its margins would reflect that if it chose to do so.)

Houston will continue to attract HQs for petrochemical companies and engineering companies. There's a unique value proposition here for those companies. But as for everyone else, Houston fails in comparison on almost every other metric: universities, labor pool education, transportation other than automotive, quality of life (including public schools, recreational opportunities, and community amenities), separation from other business hubs on the East/West coast, progressive culture, etc. Amazon said they considered all of these and the selected sites beat Houston in nearly every category. You can fault them for prioritizing these things, but I think that's what most companies will prioritize for corporate HQs going forward, and Houston would be smart to address improving those things now.

Or Houston can accept that its future is in attracting factories and backoffice locations. That's fine too, but we should temper our "global city" egos if that's the case.

At 3:39 PM, November 15, 2018, Blogger Tory Gattis said...

We are absolutely a global city (the most affordable one in America, IMHO), we're just not trying to play the "be the next Silicon Valley" game every other city is trying to play. We may not attract top tech companies, but we enable tons of energy and smaller "off the radar" industrial and service companies to thrive. Amazon HQ2 adds 50k jobs over a decade, but we add that every 8 months! And the vast majority of people I meet are quite happy with Houston's value proposition and amenity package - and Klineberg's survey validates that (80%+). Just met a midrange entrepreneur the other day ranting about what he couldn't get done in NYC (for lots of reasons) was so much easier to accomplish here. We will continue to be an opportunity mecca for the small and midrange entrepreneur, and I think we have quite a thriving niche there. And GQ even validates our amenities/culture:

At 8:55 PM, November 15, 2018, Blogger Tory Gattis said...

"Five cities—New York, Chicago, Dallas, Houston, San Francisco—accounted for a third of all Fortune 500 headquarters and half of Fortune 500 firms’ profits last year"

At 12:15 PM, November 16, 2018, Blogger Tory Gattis said...

"Communities away from the coasts shouldn’t be trying to lure the Amazons and Googles — already huge and well-established companies, Mr. Stringer said. They need to emphasize their strengths and incubate the Amazons of the future."

At 12:41 PM, November 16, 2018, Blogger Bryan Guido Hassin said...

Blogger needs a Like button.

At 1:26 PM, November 16, 2018, Blogger Jardinero1 said...

I have said it before and I will say it again. Bezos and the the top flacks at Amazon knew, at the outset, where they wanted to place these offices and employees. The purpose of turning it into a contest was to squeeze every last incentive out of those already determined host cities. Something I read elsewhere, not an original thought for me, was that now Amazon has a treasure trove of info on every city that bid for this. When Amazon returns to one of those cities for development, Amazon will know, in advance, how much they can expect those metros to pay.

At 7:57 AM, December 05, 2018, Blogger George Rogers said...

Sunbelt cities are not as well suited to Churn and Burn.

At 8:27 AM, December 09, 2018, Blogger George Rogers said...

Good video on openness in cities


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