The funny thing about turnaround stories is that most people fail to understand the strategic planning and hard work that enables a region or state to chart a course leading to what is viewed as an improbable economic renaissance. This is because the observable effects of the plan aren’t typically realized until well after the plan was developed and deployed.
Such is the case in Ohio and the Midwest Region of our Nation. Headlines like “Midwest Leading Nation in Economic Recovery” infer a miracle is in the making. But the truth is a well conceived, long-term strategic plan, a lot of hard work and a little bit of luck are underpinning the turnaround of a Region hard hit by the worst national crisis since the Great Depression.
The work to turn Ohio around actually started before the Nation was trapped in the downward spiral of the financial crisis of 2007 – 2012. It started when Ohio commissioned the development of a new long-range strategic plan to help address the continued business decline of the American automobile industry.
As background, the auto industry has historically been, and continues to be, an important growth engine for Ohio’s economy. The Ohio Department of Development reports Ohio’s motor vehicle cluster produced nearly $5B worth of goods in 2010, ranking it 3rd among all states. And, according to the Center For Automotive Research, this output translates to nearly 850,000 jobs (1 out of every 8 Ohio jobs was linked to the auto industry).
At the start of the 21st century, public and private sector leaders in Ohio became concerned with the apparent shift of the auto industry from the Midwest to the South. The move south of the Mason-Dixon line began in the late 1980s and accelerated into the 21st century. For example, in 1992 BMW announced it would locate in Greer, South Carolina; in 1993 Mercedes-Benz announced it would locate near Tuscaloosa, Alabama; in 2003 Toyota selected San Antonio, Texas for its new truck plant; and in 2002 Hyundai selected Montgomery, Alabama. It became evident to the leadership in Ohio that continued reliance on growth in the auto industry would be a high-risk economic development strategy moving forward. To mitigate that risk, it was decided that a new long-range strategic plan was needed.
Public and private sector leaders in Ohio collaborated to form a new vision for Ohio as the ideal location for manufacturing. A SWOT analysis confirmed Ohio had a core capability as a manufacturing state that included the automotive industry, but also other industries that ranged widely from polymers, to aeronautics, and medical diagnostics. It also confirmed the state’s infrastructure (e.g. transportation, labor, telecommunications) and geographic proximity to major population centers in the U.S. and Canada made it an ideal location choice. But, the analysis uncovered that Ohio’s corporate tax structure was a serious barrier. It had to be addressed for Ohio to be successful.
To enable Ohio based companies to become more globally competitive, the following strategic changes to the Ohio tax structure were enacted on June 30, 2005.
- To help companies attract talent and shrink their labor costs, personal income tax was decreased by 21%.
- To encourage companies to improve operational efficiencies and increase inventories to better serve global demand, the tangible personal property tax was eliminated.
- To further encourage companies to compete globally, product sold to customers outside of Ohio was made tax-free, and was replaced by a new commercial activity tax on gross receipts for Ohio sales rather than company profit.
- To encourage an increase in entrepreneurial startups, the first $1M in gross receipts was made tax-free.
A detailed analysis of the new tax law from the law firm Bricker & Eckler LLP reported “Many manufacturers should see a reduction in their overall business tax burden as a result of the tax reform effort. All manufacturers will enjoy the benefit of the elimination of the tax on tangible personal property.”
Every economic turnaround starts with addressing two fundamental strategic questions – 1) “Where to play?” and 2) “How to win?” In Ohio’s case, leadership made clear choices. The state would preferentially play in the manufacturing sector where it had developed a world-class core capability, and it would dramatically overhaul the state’s corporate tax structure as a way to win. These long-term strategic choices are the real drivers behind the apparent economic renaissance happening in Ohio.
The results have been impressive. Data from the U.S. Bureau of economic Analysis show that in 2011, 52 out of 88 Ohio counties have economies now being driven by the manufacturing sector (>= 20% of average annual earnings in the county). Only California and Texas have more manufacturing workers than Ohio.
George Zeller, a Cleveland economic research analyst, was quoted in the February 4, 2013 issue of Insurance Journal as saying “Manufacturing is driving the Ohio recovery, particularly since we have such an intense concentration of jobs in the sector. Manufacturing is not only important for its high-wage jobs for Ohio workers, but it is also extremely important because of its large ripple effect on the rest of the economy”.
In addition, the 2013 Best & Worst States to Do Business Report from Chief Executive Magazine (May/June issue) reflects the ongoing positive impact of the purposeful business climate changes. Based on the annual CEO survey results, Ohio posted the nation’s greatest year-over-year state ranking improvement (up 13 positions).
Looking forward, Ohio’s economic prospects remain strong. Building on its winning strategy the state is also poised to benefit from two pieces of good luck.
- Rising labor costs in Asia and a weak dollar are resulting in a re-shoring of manufacturing. The strategic choices Ohio made in 2005 have positioned the state well to disproportionally benefit from this trend. Companies are discovering the benefits of serving global demand from Ohio.
- And, Ohio is beginning to realize the economic impact of the emerging shale energy industry. For perspective, Ohio participates in both the Marcellus and Utica Shale Plays. The industry is helping to ensure an on-going supply of low cost natural gas to fuel Ohio based manufacturing operations.
Clearly, everybody loves a turnaround story. The more improbable, like the 1980 U.S. Olympic Miracle on Ice, the more it is celebrated. But, few turnarounds simply happen. Ohio’s improbable renaissance has been years in the making, and is the result of a committed private and public leadership collaboration that made tough but smart strategic choices to set the stage for success. As a direct result, Ohio residents and companies can expect to reap the rewards of those choices for decades to come.
CEO, The Burghard Group LLC
Former Executive Director, Ohio Business Development Coalition
Retired Harley Procter Marketer, Procter & Gamble