Return to Virginia Business - April 2002

by Steve Vaughan

Many would like to forget the year 2001. A recession and bear stock market sapped portfolios and cut jobs. The worst terrorist attack ever on U.S. soil left thousands of civilians dead and launched the U.S. into war. Business executives plagued with bloated inventories and tight financing anxiously searched for signs of a recovery that never came.

Against this backdrop, it is remarkable, if not ironic, that Virginia had, by one measure, its best-ever year for corporate expansions in 2001. While the state didn't match its record of new corporate investment of more than $6 billion, set in 2000, it fared better in 2001 when compared to other states. The state saw $2.7 billion in corporate expansions involving 294 new projects that eventually will create more than 28,000 jobs. Virginian's contrarian performance not only was uplifting news for state businesses, but it garnered national attention as well. Site Selection magazine, a trade journal which tracks economic development across the U.S., gave Virginia its highest rating ever for nabbing new projects, rating the state 4th nationwide.

Despite the good news in 2001, Virginia's economic development future could be cloudy. Most of the marquee projects landed in the richer areas of the so-called "Golden Crescent," which stretches from Northern Virginia down Interstate 95 to Richmond and then east on Interstate 64 to Hampton Roads. Not many expansions located in the areas that needed them most: hard-pressed Southside and Southwest Virginia, where free-trade pacts and the recession decimated manufacturing jobs in apparel, textiles and furniture.
Topping this year's expansion list is Ford Motor Co., which began building a new factory in Norfolk that will manufacture the popular F-150 pickup truck. The project, the state's largest, brings an investment of $375 million and will employ 200 workers. Especially notable is the fact that Ford is expanding in Hampton Roads while drastically cutting back production elsewhere, notably in the Midwest and Canada, due to slumping profits.

When it came to Hampton Roads, however, the decision to expand wasn't a tough one. The automaker has been in the area for seven decades and cited the state's favorable business climate and well-trained work force as other compelling factors. "We have been part of the Norfolk community for over 75 years and are extremely pleased with the state and local support we have received through the years," says Mike Hom, plant manager at Norfolk Assembly. Incentives provided another reason to grow. Ford benefited from $4 million in incentives. The Governor's Economic Opportunity Fund gave Norfolk $500,000, which the city matched dollar for dollar. Ford received another $3 million in performance-based grants from the Virginia Invest-ment Partnership. "This expansion will help us maintain world-class productivity and quality levels at Norfolk. It allows us to capitalize on an outstanding work force and an outstanding product," Hom says.

Like Ford, most companies expanding in the state chose to do so in Virginia's "Golden Crescent." In 2001, for example, Loudoun County, the fastest-growing locality in the state, netted the project creating the most new jobs. WorldCom Inc., an Internet access provider, announced a $180 million investment in Loudoun expected to create 3,600 jobs. The Richmond suburb of Chesterfield County was the most successful jurisdiction at luring new expansions, with five out of the top 25. Another huge project, listed the year before, is a major expansion of Capital One Financial Corp., which is adding 8,000 jobs at three expanded sites in Goochland County, Chesterfield County and Tysons Corner.

Indeed, of the top 25 expansions in 2001, 17 were in the "Golden Crescent" - six in Northern Virginia, six in the Richmond area and five in Hampton Roads. The largest expansion elsewhere in the state was one by Merck & Company, Inc., a pharmaceuticals company, which announced an $88.7 million investment in rural Rockingham County. Only one of the top 25 expansions - a $30 million investment in a tobacco processing facility in Danville by Universal Leaf - was in the state's Southside, a region that has suffered severely from layoffs and plant closings over the past three years and has the state's highest unemployment rate.

Clearly, the trend shows that rich areas just keep getting richer. Gov. Mark R. Warner, though, is determined to share the wealth. "I'm proud that since we've been in office we've been able to announce four business expansions in that area (Southside) that will create over 1,000 jobs," says Warner, who took office in January. Warner says his administration is concentrating much of its economic development efforts in the Southside. But even legislators there are skeptical and Warner notes that with the budget in a shortfall, there won't be as many funds available to do what he promised during his campaign. During last month's session, the General Assembly cut $4.5 million from the Governor's Economic Opportunity Fund for fiscal year 2002. Over the next biennium the fund will receive $17.5 million, instead of the $20 million requested by the Warner administration.

Attracting businesses to rural Virginia is further complicated by infrastructure problems both old and new. Much of Southside Virginia is not serviced by an interstate highway and many areas in Southside lack high-speed Internet access, a liability in today's communications-dependent business environment. "We have to have a system to put infrastructure in place to attract businesses here," says State Sen. Charles R. Hawkins, R-Chatham, a member of the Senate Finance Committee. "It used to be that businesses gravitated to areas with natural resources. Now they gravitate to areas that have the communications and research infrastructure that they need."
Efforts are underway to upgrade U.S. 58 in Southside and to provide high-speed Internet access, Hawkins says. "This economic downturn has hit us at the worst possible time, because we've just lost several core industries that aren't coming back. We've got to find niche industries to fill that void."

A sluggish economy, both nationally and in the commonwealth, continues to affect business expansion despite the banner year. ERNI Components Inc., an electronics firm, has decided to delay an expansion in Chesterfield County, the fourth-largest new investment in the state at $98.4 million, because of uncertain economic times. Michael Savage, ERNI's vice president of sales, says the expansion may occur sometime later this year or next year. WorldCom is also closely watching the economy as it proceeds with its expansion in Loudoun, according to company spokeswoman Debbie Lewis. WorldCom's project has a grant from the Virginia Economic Development Partnership that is contingent on a certain level of investment by the company. "We want to make that $180 million investment and to create those 3,600 jobs," Lewis says, "but there's no guarantee. It's dependent on the economy, on the volume of business."

The type of incentives used to lure these two expansions may be severely restricted in the future because of Virginia's budget mess. As part of the solution to a deficit estimated at as much as $3.6 billion over the next three years, the General Assembly has proposed cutting funds of the Secretariat of Commerce and Trade, which promotes economic development. The Governor's Economic Development Opportunity Fund, which has been used to attract companies such as WorldCom, fared better than expected for fiscal 2002 - $4.5 million was cut rather than $8 million.

Warner fought against the funding cuts. "As a business person, I just don't think it makes sense to cut your marketing budget during a recession. None of the business expansions that we've announced since taking office would have occurred without the opportunity fund," he says.

Even members of former Gov. Jim Gilmore's administration worry that slicing economic development funds could bring on bigger pain later. "The troubling thing about what the legislature is proposing," says Joshua N. Lief, Gilmore's secretary of commerce and trade, "is that the economic development budget is pretty much proven to provide a return on the investment. In tough economic times, what you want to do is bring more money in. In a competitive marketplace, which we are in, incentives are part of the equation. What's being considered now is step back for the state."

Warner says Virginia governors have used the fund to attract numerous business expansions to the state. He particularly praised the way former Gov. George Allen, now a U.S. senator, used the opportunity fund. "Over the past 10 years, that fund has expended about $100 million to encourage about $9 billion worth of investment. I think the people of Virginia can be very happy with the return on their investment from the governor's opportunity fund," says Warner.
Warner is spending a large portion of his time encouraging economic development in Virginia and says he looks forward to spending even more time promoting the state's economy after the General Assembly's veto session this month.

Investment partnerships that Warner set up to provide venture capital in various parts of the state, including Southside Rising, which operates in the hard-hit Southside area, continue to seek investment opportunities, according to Nicholas Perrins of MRW Enterprises, Warner's company. Warner has resigned from the investment committees of the venture capital partnerships and put his assets in trust while he serves in Richmond. Perrins said the partnerships have not had any important investment announcements since the governor took office.

For 2002, the good news is that the economic recovery might ease much of last year's pain and uncertainty. If it does, however, the areas in Virginia most likely to benefit will be the lucky ones in the Golden Crescent.

Return to Virginia Business -April 2002