Electrolux in Memphis, or How Not to Woo a Company

(Bloomberg Opinion) -- A few weeks before Amazon.com Inc. reversed its plan to establish a major presence in New York — a plan that would have brought at least 25,000 jobs to the city — the Swedish appliance maker, Electrolux AB, announced that it would be shuttering its Memphis, Tennessee, plant. Unlike the reaction among progressives to the Amazon news, no one in Memphis was cheering the departure of Electrolux and its 530 jobs.

The news wasn’t entirely a surprise. Employment at the plant had been gradually falling. The Electrolux chief executive, Jonas Samuelson, had acknowledged in earnings calls that business in North America was slowing. The U.S.-imposed tariffs weren’t helping matters, he said.

But the death knell for the Memphis plant came in October, when Sears filed for bankruptcy. One out of every 10 appliances Electrolux sells in North America is sold via Sears; the bankruptcy made the Memphis plant suddenly superfluous.

City and county officials understood this reality. They were grateful that Electrolux was giving the city two years’ notice; the plant closure wouldn’t take place until 2020. And they were pleased that Electrolux had agreed to begin paying property tax that had been previously waived.

But that doesn’t mean they weren’t upset. “It’s fair to say that the community and the city and the county are really disappointed and angry about what happened,” said Reid Dulberger, the chief executive of the Economic Development Growth Engine for Memphis and Shelby County. Tennessee had staked a lot on bringing Electrolux to Memphis; the business realities notwithstanding, they couldn’t help but feel abandoned.

They were angry at Electrolux, yes, but they were also angry at themselves, or more precisely at their predecessors. The city and state had cut the deal to lure Electrolux in 2010. It was, they now acknowledged, probably the worst such deal in Tennessee history.

The Memphis economy was in bad shape in 2010. The unemployment rate that January was close to 12 percent. Foreclosures were sky high. The Great Recession had not yet begun to abate.

So when Electrolux — which already had a facility about 200 miles away in Springfield, Tennessee — came calling, promising 1,240 jobs if the government would help it build a plant, the city and state thought that it was an opportunity they could not let slip away. Their desperation led them to give away the store. Of the $190 million it was going to cost to get the plant up and running, various government entities agreed to pay $150 million. In cash! The state was in for $97 million, $55.3 million of which dedicated to the purchase of factory equipment. Shelby County’s share was $20 million, and the city of Memphis put in another $20 million, mostly for infrastructure. Electrolux would also get all the usual subsidies — payment in lieu of taxes, property tax relief and so on. Electrolux’s contribution to its own facility amounted to a mere $40 million.

“This was a struggling community,” said Dulberger. “They thought landing Electrolux was a grand slam.” In one presentation, Electrolux rolled out plans that called for the creation of a “supplier park,” with Electrolux-linked companies setting up shop in Memphis. Those plans, however, never came to fruition.

The plant opened for business in 2014, but from the start, it never employed the 1,240 it had promised. Employee headcount topped out at a little over 1,100, though for most of time, it was well below 1,000. In other words, having received an extraordinarily generous package from Tennessee — a package based on 1,240 jobs coming to Memphis — Electrolux wasn’t holding up its end of the bargain. Yet there was nothing the city, county or state could do about it. The memorandum of understanding with Electrolux had no protection for the taxpayer in the event the company fell short of its promises.

Now that Electrolux is pulling out, the deal looks even worse. When it leaves in 2020, the company will have operated in Memphis for just six years. The incentives it got, starting with that $150 million, were “way out of whack” for the jobs it created, said Bob Rolfe, the head of the Tennessee Department of Economic and Community Development. And there is no way to get any of that back from the company. The deal “was excessive and unrecoupable,” Rolfe added. In two years, all Memphis will have to show for the money it spent on Electrolux is an empty plant.

When I mentioned to Rolfe the idea — much favored by academics and journalists — that perhaps communities should stop offering subsidies to lure (or keep) companies, he laughed. “That would be unilateral disarmament,” he said. Maybe New York can afford to turn its back on subsidies — as Representative Alexandria Ocasio-Cortez has suggested — but if you’re Memphis, and you’re competing with Jacksonville, Florida, and Charleston, South Carolina, and a half-dozen other cities for a plant and the jobs it will bring, subsidies are an important weapon in your arsenal.

There is some good news, however. In Tennessee, and many other states, economic development officials have gotten much better at cutting deals that give some protection to the taxpayer. Tennessee officials now include “accountability agreements” as part of any package they put together for a company. It gives governments the ability to claw back money in the event the company fails to deliver on its promises. “If you promise to create 100 jobs, and you only create 33, you would have to reimburse us for two-thirds of the money,” Rolfe said. If such a clause had been included in the Electrolux deal, he told me, “the state would have recouped $38.8 million.”

It’s foolish to think that subsidies for corporations are going to go away. It doesn’t even matter that most companies, from Amazon to Electrolux, don’t really need the subsidies. Executives who are looking to expand will always pit one city against another to get the best deal possible.

The best taxpayers can hope for is not that their city will refuse to offer subsidies — and lose the jobs a company could have brought — but that it will offer deals that make sense given the benefits the city expects to receive. And that will allow the city to recoup some of that subsidy if the company underperforms. For all the furor about subsidies, the good news is that cities and states are getting smarter about it.

To contact the editor responsible for this story: Stacey Shick at sshick@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. He is co-author of “Indentured: The Inside Story of the Rebellion Against the NCAA.”

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