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WHAT’S “GOOD” ABOUT THE 5 WORST STATES FOR BUSINESS

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WHAT’S NEW IN THE TOP 5 STATES

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Goldfish Leaping

UNDERSTANDING THE INS AND OUTS OF STATE INCENTIVES

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Looking To Change

HOW THE TECHNICAL TALENT FACTOR IS MAKING STATES COMPETITIVE

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Male entrepreneur touching financial chart

Competitive Insight on Where to Locate Your Business

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In the 10th annual survey of CEOs concerning their views of the best and worst states for business, over 500 CEOs across the U.S. responded, grading states with which they were familiar on measures including tax and regulatory regime, the quality of the workforce, and the quality of the living environment.

2015 Regional Report: The Southeast

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Mercedes-Benz has exited the Jersey Turnpike headed toward Sandy Springs, Georgia. The automaker’s New Jersey-to-Georgia relocation, announced in January, ranks among the year-to-date’s biggest corporate relocation deals, both in value and impact. Mercedes’ decision to transfer at least 800 headquarters jobs to the Peach State hit Garden State business leaders and government officials with the force of a head-on collision, while helping further strengthen the spine of what’s become known as the Southern Auto Corridor.

Mercedes expects to open a new $100 million plant in Georgia in 2017, joining Porsche and Kia Motors in the Peach State’s expanding automotive cluster. Across the state line in Alabama, the car-makers club includes Hyundai, Honda and Mercedes. North in Tennessee, Volkswagen is expanding its Chattanooga plant, while GM and Nissan’s operations are thriving. Toyota and Nissan are ensconced in Mississippi.

“The corporate takeover is complete. The Southeast absolutely controls the U.S. auto industry.”

Toyota, Ford and GM are major employers in Kentucky. BMW put down South Carolina roots two decades ago. “The auto industry is now located in the Southeastern states,” claims Tom Stringer, who works for BDO. “The corporate takeover is complete. The Southeast absolutely controls the U.S. auto industry.” Cars are not the Southeast’s sole success story. Attracted by lower tax rates and amicable regulatory environments, clusters of financial services, transportation and logistics, call center operations and professional and business services (like temp agencies and staffing services) are growing like kudzu in the region. Employers are lured by the region’s combination of generous incentive packages, right to work laws, newer and well-maintained infrastructure and lifestyle marketing outreach.

For companies seeking low-cost land, low-cost power and low-cost labor, the Southeast offers a trifecta. “The South has all that and a trainable work force,” says Michael Philpot, chairman
of the Southern Economic Development Council. A skilled labor force and training programs for workers help close many relocation deals. “The Southeast holds up very well in terms of site selection,” says Betty McIntosh, senior managing director of Cushman Wakefield’s Business Incentives Practice. McIntosh credits the region’s thriving business networks, including many active chambers of commerce; the collaborative, rather than competitive, attitudes of many local economic-development officials, and the resources offered by regional power authorities.

“You never have to worry about a client being ignored by the local economic development community,” she notes. The attention clients receive “proves southern hospitality is no myth.”

Texas: Beyond Black Gold

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Producing more black gold than any other state provided tremendous fuel to Texas’ powerful job-production engine—and so did former Governor Rick Perry. Now two things have changed.

One, Greg Abbott was elected governor last fall to succeed his fellow Republican, who had decided to seek the GOP presidential nomination. Two, in the wake of the bounty produced by the American fracking revolution, global oil prices plunged and have stayed lower, creating a huge new drag on the Texas job-creation juggernaut and promising to reduce oil-drilling and pumping revenues.

Even as Texas hung on to its No. 1 ranking for 2015 in the Best States & Worst States list, can the Lone Star State withstand the continued hit from the global surplus of oil because of its diversifying economy—or even outperform its previous benchmarks as the U.S. economy gains steam?

“Texas must become bigger, broader and bolder in our economic-development efforts and more aggressive in attracting companies and foreign direct investment.”

State officials concede that now is the time for Texas to shift gears. “Texas must become bigger, broader and bolder in our economic-development efforts and more aggressive in attracting companies and foreign direct investment so that we become not just the national leader, but a world leader, in job creation,” says Tracye McDaniels, president and CEO of Texas Economic Development.

But internal players and outside observers alike give Texas good odds of finishing No. 1 again in the 2016 Chief Executive index based largely on four factors: only about 4 percent of the state’s workforce is in the oil and gas industry now, a fraction of a generation ago; other industry pillars keep rising; regions outside the oil patch have made their own prosperity; and the Abbott administration has some strengths of its own.

“Every year Texas becomes more diverse, becomes more things to more people, and it remains competitive and attractive to all of our clients from an access and infrastructure point of view,
and for labor costs and availability,” says Andy Mace, managing director of supply-chain solutions in the global business consulting practice of Cushman & Wakefield. Indeed, Texas continued to lead America in job growth in January 2015, adding 20,100 jobs and nudging its unemployment rate down to 4.4 percent from 4.6 percent in December 2014.

The oil-price slide already has tested the diversification strategy that Perry initiated, in part by trying to raid California and other states for manufacturers, technology outfits and other growing companies that weren’t dependent on oil prices. One of his biggest plums was Toyota’s move of its U.S. headquarters and about 4,000 jobs to Plano, Texas, from Torrance, California, over the next few years.

Such moves have enhanced the broadening of most regional economies in Texas that will help the whole state power through. Dallas is reasonably diversified, with autos and healthcare, for example; San Antonio has Toyota truck manufacturing, tourism and other industries; and Austin has become a high-tech outpost every bit as vibrant as any in the country except Silicon Valley.
“You have all that stuff plus Texas’s proximity to Mexico and the manufacturing boom that is going on there,” notes Dennis Cuneo, head of DC Strategic Advisors and a former top executive of Toyota Motor USA.

Only the West Texas oil patch, and Houston and the Gulf Coast strip are especially dependent on oil prices anymore. And the Houston area benefits because so much of its energy business is refining and petrochemical processing, whose companies actually benefit from lower oil prices. “Houston will no longer be leading the nation in job growth, and Texas won’t be the strongest job-producing state if oil prices stay down for long,” says Blair Garrou, head of Mercury Fund, a venture-capital firm that specializes in investing in Flyover Country. “But the drag won’t be nearly
as pronounced as people think.”

Still, lower oil prices will have an effect. Lower oil revenues “will force Texas to roll back their incentives a bit” to attract companies and jobs, argues Larry Gergerich, head of Ginovus site selection consultants. “Abbott wants to be more strategic and directed.”

And some wonder whether Abbott can “match up” with Perry’s acknowledged skill as an economic strategist and cheerleader, as Cuneo put it. However, Abbott managed to lure the highly regarded McDaniels back to her home state from a stint in New Jersey.

According to McDaniels, Abbott also has “an extensive economic development agenda” that includes “evaluating and restructuring existing programs, reducing the tax burden on citizens and businesses, reducing regulatory burdens that stifle job creation and improving our roads.”

How Culture Creates Competitive Advantage

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When Southwest Airlines (SWA) began operations in 1971, it had three airplanes and a route structure that included just three cities in Texas. It was not much more than an idea that Herb Kelleher drew up on a cocktail napkin at the Saint Anthony Hotel in San Antonio, Texas. Today, Southwest is an international carrier with 700 airplanes approaching $20 billion in annual revenues and topping $1 billion in net income. From the beginning, the company built its competitive advantage around a simple, efficient operating model and a culture unique to air travel.

The most astonishing factoid about Southwest is that it has not had a single layoff in its 44 years—a stunning accomplishment in an industry that leads the economy in bankruptcies, re-organizations, mergers and companies that have disappeared. Think Eastern and Pan Am.

“SWA is known for its policy of hiring for attitude and training for skill, but what keeps the culture machine humming is the careful leadership and management of it.”

Consider also another astonishing factoid. Southwest gets a lot of resumés from people who want to work there. Last year, it received 178,299. Gary Kelly, the company’s CEO who has been with the airline for 29 years, 15 of them as CFO, says, “We pay about the same for our airplanes and pay about the same for gas. That doesn’t leave a whole lot of cost left. So we have to be more productive with the workforce, which is about a third of any airline’s cost structure.”

SWA is known for its policy of hiring for attitude and training for skill, but what keeps the culture machine humming is the careful leadership and management of it. In the beginning, this effort was led by Colleen Barrett, who passed the baton on to SVP for Culture & Communications Ginger Hardage. After Hardage retired, Linda Rutherford took on the role. The position reports directly to the CEO and the person in it oversees the culture throughout the company. “I don’t know how to fly an airplane,” Kelly explains. “I can’t change the oil in an engine. Even some of the customer service things, I would have to be trained on. So it’s really a team effort.”

It’s not rocket science. Storytelling is part of the culture that binds people to a purpose. A Dayton, Ohio customer agent offered to take a customer’s pet hamster to the agent’s home for a month while the customer visited a sick mother in another city. A five-year-old boy waving enthusiastically at an SWA plane taxiing along a tarmac got a thrill when the pilot opened his window and waved back. The boy’s mother captured the incident on camera and sent it to the company in appreciation.

Dining in a Dallas restaurant one evening, Gary Kelly and his wife were astonished when a waiter came to their table to say that two SWA pilots also at the restaurant had recognized the couple and anonymously paid their bill. They also sent a note of appreciation—written on a cocktail napkin a lá Herb Kelleher.

Any company can create a competitive advantage from its culture by instilling processes designed to keep it going. At Chief Executive’s CEO Talent Summit in Dallas, J.P. Donlon spoke with Gary Kelly to learn how SWA does it.

7 Best States for Startups

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Even states with laws and government attitudes hostile to business can be great places to grow a company in spite of them. That’s the case with nearly half of our “7 Best States for Startups.” Blending qualitative and quantitative criteria, Chief Executive selected Alaska, California, Colorado, Florida, Kansas, Massachusetts and Texas as the best places for new and fledgling companies. While Texas and Florida also rate as No. 1 and No. 2 in the magazine’s 2014 Best State/Worst State rankings, three of these states are in the bottom half of the magazine’s overall rankings of business climate.

Four of the seven were rated in the top 10 in the Kauffman Index of Entrepreneurial Activity for 2010 through 2012, a leading gauge of startup fervor and staying power. In these places, robust entrepreneurism persists and even grows despite a climate that may erect barriers to business overall. California, for instance,is “a place where dreamers and innovators are—you get to see things happening long before they ever make it to the rest of the U.S.,” says Chris Reed, founder and CEO of Reed’s, a $40-million brand of all-natural soft drinks based in Los Angeles. “And you simply can’t discount the pleasure of living here, even if the regulatory environment is a little rough.”

Hard criteria also exist to characterize places friendly to starting up and growing companies. These states tend to have reasonable property-tax rates and low or non-existent income taxes, because those types of levies bite all entrepreneurs even before they make a profit, says Yasuyuki Motoyama, senior scholar at the Kansas City-based Kauffman Foundation, which studies and supports entrepreneurship nationwide.

Startup-friendly states also have solid secondary- and higher-education systems—regardless of whether they boast the massive, renowned research universities that are so often incorrectly correlated with a vibrant entrepreneurial culture. They tend to have strong formal and informal networks for mentoring of new entrepreneurs by established ones. And, perhaps tautologically, they often have several urban areas that provide strong environments for startups.

On the other hand, Motoyama says, contrary to conventional wisdom, high levels of government research investment and strong venture-capital communities don’t necessarily correlate with robust entrepreneurial cultures and neither do low corporate-tax rates.

Here are snapshots of the seven states, in alphabetical order:

Alaska: More entrepreneurs are burning the long, midnight oil in the land of the midnight sun. Alaska has no individual income or state-level sales taxes to burden startups. That qualified it for the No. 4 overall ranking in the Tax Foundation’s latest State Business Tax Climate Index. Last year, the state cut taxes for small businesses earning $222,000 or less, and oil-tax simplification will give Alaska a greater economic edge. The state tied for No. 4 in the three-year Kauffman Index.

California: Entrepreneurship is a stubbornly strong feature of the Golden State, as California ranked No. 2 in the Kauffman Index. The self-perpetuating startup cultures of the Silicon Valley—and of lesser renown in Southern California—account for much of California’s reputation despite a blatantly hostile state government and regulators. The state’s unchallenged status as a cultural bellwether also gives new companies an advantage. New laws that cut the pre-startup filing periods and security deposits required for new businesses are glimmers of hopeful change.

Colorado: Pot legalization is stoking many—but not all—of the startups in the Rocky Mountain State lately. Colorado ranked No. 6 in the Kauffman Index with its legacy of technology and new-age food companies. The state also enjoyed four—No. 1, Boulder; No. 2, Fort Collins-Loveland; No. 6, Denver; and No. 9, Colorado Springs—of Kauffman’s top 10 U.S. metro areas for high-tech startup density. A No. 15 ranking for individual income taxes helped Colorado rank No. 19 overall in the Tax Foundation index.

Florida: Retiree heaven has been jolting to life as an unlikely startup haven. It was No. 11 in the Kauffman Index. Lack of an income tax and low unemployment-insurance taxes helped Florida to a No. 5 ranking by the Tax Foundation. Strong population growth tends to yield an inordinate number of new businesses, so that’s a factor as well. Some believe Florida’s renascent housing industry—in a state where it had slumped so badly—is a big contributor as well by creating new contracting companies.

Kansas: The Great Plains leader isn’t a chart-topper for entrepreneurs statistically, ranking only No. 20 in the Tax Foundation index and in the middle of the pack for the Kauffman Index. But small business won hopeful legislative victories last year in areas including individual income taxes, paycheck protection from automatic deduction of union dues and worker’s compensation. Unusually strong entrepreneurial networks, particularly in metro Kansas City, have created ways to propagate success lessons. And Google Fiber’s new high-speed Internet service there is accelerating technology-startup growth.

Massachusetts: This favorite foil of big-company CEOs because of its high labor and utility rates and hyper-regulatory regime remains a hotbed of knowledge-based startups, despite its middling ranking in the Kauffman Index. Cambridge, including Harvard and MIT, ranked as Kauffman’s No. 4 metro area for high-tech-startup density, and entrepreneurs brewed by those institutions love staying around Boston. Also, Massachusetts ranks a surprisingly palatable No. 25 overall by the Tax Foundation. And the hometown Suffolk University index ranks the state business climate No. 1 in the country.

Texas: The business-rich Lone Star State is only getting richer as its entrepreneurial culture spreads from Austin to Texas’s bigger cities, and its unbridled pro-growth stance continues to fuel growth for small businesses as well as large. Texas still specializes in stealing small companies from California. The state tied for No. 5 in the Kauffman Index and ranked No. 11 in the Tax Foundation list, including No. 7 in the crucial individual-income-tax category. Last session, the legislature passed a $1-million tax deduction for Texas businesses.

2014 Best & Worst States for Business Links

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7 Best States for Startups 2014