OT from HPC: Michigan economy

Being a Michigander, I have an interest in seeing Michigan grow and thrive. This is a very nice state; there are many positive aspects to it. Apart from some union rules and the proclivity of our state government to tax, it is a good place to set up and run a business. Costs are low, burn rates are low, and relative to the rest of the country, salaries and home prices are lower. This means you get more for your investment by setting up shop here. You aren’t enriching landlords in Sunnyvale with huge rental fees.

Of course, there are some downsides.

This will be a little venting, so skip it if you don’t care about such things.

Last year, we participated in a local VC event. The presenting companies were in large part window dressing for the real meeting between lots of VCs, but thats life. At this event, we had a number of speakers, one of whom talked about freeing distressed assets. In short, pulling value out of failing businesses. This person pointed out that the state had a number of these. Concentrated in the auto industry. The other person of note was the chief economist for Comerica bank. He gave a somewhat more positive outlook pointing out that there has been a long slide, but he expected a pull-out.

His rationale was based upon market conditions and issues in the economy. He and the other speakers all talked about how the state badly needed to diversify its economic portfolio. I don’t remember if he said it during his speech, but what stuck in my head was a comment that someone made with respect to the future of manufacturing in the state. It was something I agreed with.

There is no future. Pretty much all manufacturing will flow to low wage locations. Anyone thinking otherwise is not being honest with themselves.

I read an article about a recent talk of his today. In this article he notes his earlier prediction of turn-around may not be in fact, correct. Michigan is nearly alone in the US in terms of economy, ours is in an all out recession here. Our state government was busy arguing a plan recently over how much to tax businesses, as they didn’t want to lose tax revenue. This is a tax we pay, called the SBT, in addition to the income and sales taxes. Though in the case of the latter, it seems that every group we sell to in the state has a sales tax exemption.

The argument was over how much to knock off the taxes for the the “big three”. Yes, thats right, they want to give tax breaks to some corporations in the state. Tax others.

So rather than focusing the tax cuts on, I dunno, the small companies that are growing in the state, and hiring in the state, and paying taxes in the state, they are looking at how to tax us, and provide a tax break for the large companies who are firing in the state, growing outside the state if at all.

If this wasn’t bad enough …

Pfizer was the recipient of a huge tax break in 2000-2001 time frame. Purportedly to grow its Ann Arbor facilities. And retain the people from the purchased Pharmacia. I thought it was odd at the time that I had been told by a Pharmacia person that there would be massive layoffs at Pharmacia and the MEDC person I spoke to at the time was neither aware nor believing of this. Layoffs were announced within a month of me speaking with that MEDC person (whom has since left the state). Now in 2006/2007 Pfizer found itself in a pickle. It needed to slash costs to continue operations. All businesses have to make these choices from time to time. Pfizer chose to shutter the entire Ann Arbor operations. 2200+ highly paid workers. Drug development.

So obviously, tax breaks to the big guys work really well. Er, no. They don’t. All they do is shift more of a burden to us, the little guys. I hired in the state last year. I plan to hire more in the coming months as business appears to be improving, and there appears to be a strong need for people who know HPC. I don’t expect the state to give us a tax break. How about a simple level playing field?

Of course, this isn’t the end of the issues.

The state has had a “life science corridor” for a while. This has been a feeble attempt at diversifying the state economy not to be absolutely dependent upon the auto industry. Right now, while GM and Chrysler have largely bottomed out and appear to be weakly struggling back (again with massive cost cutting/job loss in the state), questions remain over Ford. Rumors of a chapter 11 filing to fix their union payscale problem abound. In short, line workers are paid significantly higher here than elsewhere in the US and the world. This has the net effect of increasing the prices for cars. Add to this the high healthcare costs supported by the employers and you have a recipe for non-competitive offerings. This is one of the reasons why the auto industry here is in so much pain. And it won’t get any better until this is addressed. It has to be, or it won’t be a recession we are writing about.

The “life science corridor” idea was good. Diversify the economy by investing in other small businesses outside the economy. Unfortunately, the implementation was horrible. For the first three years of it, very little in the way of money found its way to small growing companies, this program was mostly a way to funnel more money to universities. And thats what happened. Something like $150M was spent on this project during this interval, with under 50 new permanent jobs created. ROI was horrible. Companies were given a 5-10% of the focus, most of the effort was to replicate the NIH here. Add to this an inconsistent but very low funding level, a 6+ month review cycle (hey, that sounds like a grant agency, not a growth agency), and where we were after 3 years was down $150M and very little to show for it.

As I said, the program was fundamentally flawed in implementation. We applied for it several times. First time we were told that the state was not a VC. They were right, it wanted to be the NIH. Second time we were dinged on a formatting error. Third time we made it through to the end of the process, with committed capital from partners, VCs, etc. We simply needed the validation done by the state to move forward. Which they failed to provide. Last year, I had two entries in. Both were aggressive, with significant VC and partner leverage on one, and multiple customers on the back end of the other. Both were viable. Both would have created jobs in the state, tax revenues in the state. Provided significant diversification in the state.

Both were rejected. On really silly grounds.

They chose instead to invest in advanced manufacturing (e.g. giving money to auto company suppliers), life sciences, and advanced energy (also to auto or auto suppliers), with little to homeland security.

I have heard that this years fund is in trouble, as the state has an 800M$ deficit to deal with. Good. Take that money off the table. Don’t spend it here when it so obviously needs to go to a tax break to Ford lest they go fire some more people.

The state is in a position of its own making. No one wants to make the hard decisions in government. No one wants to start saying “no” to tax break requests. No one wants to really diversify the economy, actions speak far louder than words.

As we watch all this, we wonder to ourselves when it will be time to leave the state. As I said, it is a great place to start a company, costs are low. But there is no support here. The state isn’t focused upon growing small high tech businesses. There is an air of pandering to constituents, not a focus upon growing an economy.

If I were in the state government, I would be wondering, exactly, precisely what is it we need to do to help create, attract, and hold onto more small companies like mine. The 21st century fund as constituted is as bad of a joke as the life science corridor became. We won’t be participating in future versions of it, it costs us too much money to be part of their political theatre. There are lots of other states around, all of whom want to attract and hold onto small high tech companies, and help them grow.

I remain hopeful that the state will eventually start to act in its own self interest. But paraphrasing Abba Eban, it has not missed an opportunity to miss an opportunity.

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