The Boom Belt

If you want to know why the South is rising again, consider Project Pretoria. That was the code name BMW gave to its search for a low-cost site for a plant to make its popular 3-series models. Over three years, the auto maker scoured 250 locations in 10 countries. By the spring of last year, the battle for the $400 million facility was reduced to a showdown between Nebraska and South Carolina.

South Carolina, BMW officials mused, had in its favor a temperate climate, year-round golf, and, as the dollar declined against the mark, inexpensive antebellum mansions. There was just one problem: The only site that appealed to BMW executives was a 1,000-acre tract off Interstate 85 containing a large number of middle-class homes.

BLITZED. That obstacle evaporated under a determined onslaught by state officials. Sweet-talking pols, including Republican Governor Carroll A. Campbell Jr., blitzed the community near Spartanburg with visits and phone calls. Within 14 weeks, the state and local governments had spent $36.6 million to buy all 140 properties--including a home that one family had just finished building two weeks before they were approached. It was a stunning display of the state's efficiency and eagerness to attract new employers. And it paid off in June, 1992, when BMW said it would bring 2,000 jobs and a $66.5 million annual payroll to South Carolina.

The courtship of BMW was only the latest success for a region that has embraced the global economy like no other. Despite some resistance from old business barons, the area's leaders have assiduously wooed foreign direct investment and pushed ambitious export programs. In part, the newcomers are attracted by the region's cheap labor, low taxes, and few unions. But increasingly, satisfied companies point also to a distinctive brand of industrial policy.

South Carolina has been in the forefront of public-school reforms designed to produce a more skilled work force. North Carolina created an attractive atmosphere for high-tech companies around the world-renowned Research Triangle Park. Officials throughout the region have devised innovative training programs and have promoted infrastructure projects such as Atlanta's Hartsfield International Airport and Tennessee's state-of-the-art telephone network.

The strategy has helped transform the region bordering I-85, the Southeast's primary transportation artery, from a sleepy economic backwater into an area that's growing as fast as its prolific kudzu vines. Between 1985 and 1992, nonfarm employment along this new Tobacco Road grew 17.8%, vs. 11.2% for the country as a whole. Per capita income shot up 46.3%, vs. 40% for the nation, helping narrow the region's historic wage gap (charts, page 100).

The Southeast's impressive growth may be picking up even more speed. The region includes four of the country's top five entrepreneurial hot spots, according to a recent report by small-business guru David Birch. And a poll of corporate real estate executives last year led Ernst & Young to predict the region flanking I-85 between Raleigh-Durham, N.C., and Atlanta will be "the preferred megacorridor for business" in the 1990s.

OPRY-BOUND. The key to the success of the Southeast has been its ability to lure foreign manufacturers, who have found the business climate inviting. That benefits not just the Southeast but the entire country. The strategy provides a lesson for other regions on how to boost their plodding economies.

To be sure, this newfound prosperity isn't shared by everyone in the Southeast. Not far from the shimmering office towers in such booming urban centers as Atlanta and Charlotte, N.C. lie rural hamlets still mired in poverty. While Research Triangle Park boasts one of the nation's highest concentrations of PhDs, more than one-third of the adults living in North Carolina's 75 rural counties never finished high school--and 45,000 homes still lack indoor plumbing.

For this rural underclass, the best economic opportunities still lie in dirty, low-paying jobs in cut-and-sew sweatshops or poultry factories. Small wonder that Southeastern states still rank among the nation's worst in such measures of social progress as infant mortality and literacy. "We've got parts of this state that look like Bangladesh, except they're slightly better fed," admits one North Carolina official.

But much of the region looks more like Japan or Germany--and that's by design. In the 1950s, long before such thinking was fashionable, Southern leaders figured their economic salvation lay abroad. They realized they needed to expand their economic base beyond its primary industries, textiles and tobacco. So governors began trekking to Europe and Asia to recruit new industry and to promote exports. Their first successes came in convincing German makers of textile looms to begin producing them in South Carolina, closer to the mills. And thanks to aggressive export promotion offices in Europe and Asia, North Carolina today claims to be one of the few states that runs a trade surplus.

NATIVE ATTRACTIONS. State recruiters have even managed to exploit the stereotypes many foreigners have about the region. When Tennessee officials began traveling to Japan in the 1970s, they realized that all that Japanese executives knew about their state was "Jack Daniel's, the Tennessee Waltz, and country music," says John C. Word, one of the state's top industrial recruiters. So when they host receptions in Tokyo, state representatives serve Jack Daniel's while teaching their Japanese guests how to dance to the Tennessee Waltz. When Japanese visit, Tennessee recruiters take them to the Grand Ole Opry in Nashville and give dulcimers as gifts. To leave lasting impressions with foreign executives, Atlanta has hired models to impersonate characters from Gone With the Wind. "We've used Rhett and Scarlett," says Glenn Cornell, senior vice-president of NationsBank of Georgia. "We've used peanuts. We've used peaches. We've used whatever it took."

This early missionary work is paying big dividends. With the increase of U.S. competitiveness prompting more foreign manufacturers to shift production to America, the Southeast has been the biggest beneficiary. Between 1990 and 1992, North Carolina lured 93 new foreign-owned plants. South Carolina attracted 45--as many as New England and the mid-Atlantic region combined.

Nowhere is the foreign presence more visible than in the rolling foothills of the Blue Ridge Mountains in the western part of South Carolina. So many German companies have flocked to this area that locals have nicknamed one stretch of I-85 "the Autobahn." In Spartanburg, a county of 230,000 that claims the highest per-capita foreign investment in the U.S., the roster of foreign manufacturers includes Hoechst Celanese, BASF, BIC, Michelin, Hitachi, Adidas, and Menzel, which last year imported two huge pieces of the Berlin Wall for its lawn.

Statewide, one out of every four manufacturing workers in South Carolina gets a paycheck from a foreign employer. That number could increase if the state lands a new $300 million plant being planned by Daimler Benz, which is said to have narrowed its search for a Mercedes plant site to the Southeast. State officials are pushing the carmaker to locate near Charleston, where the closing of the Navy Yard will eliminate thousands of skilled jobs.

RESEARCH HEAVEN. North Carolina, with its recent success in attracting foreign investment and high-tech research jobs, isn't far behind. The prime draw: Research Triangle Park, a state-conceived development designed to lure companies to the research conducted at nearby schools such as Duke University and the University of North Carolina. IBM developed the bar-code scanner in the Park, Northern Telecom conducts research and development in digital switching technology there, and Burroughs Wellcome Co. refined and commercialized two of its best-selling drugs, AZT and Zovirax.

The Southeast's innovative approaches aren't its only appeal. The region's relatively low wages and rabid anti-unionism have persuaded many companies to move to the area. In

rural Morganton, N.C., ITT Automotive last January hired 440 workers to assemble antilock braking systems at a starting pay of $7.31 an hour. That's well above the local market rate, but less than half the national auto-industry average of $15.42.

For workers who move from other parts of the country, the pay can be dismaying. John Friend, a 31-year old Ohio native, blindly headed south five years ago after losing his $10.75-an-hour job at an auto supplier in Sandusky. The first job he found after moving, at a light bulb factory, paid a mere $5 an hour. But Friend felt he had no choice. "Ohio died," he said. "You couldn't buy a job in Ohio."

The region's older industrialists are trying mightily to preserve their heritage--particularly the low wages. Two years ago, a group of 500 Greensboro (N.C.) businesses joined forces to discourage United Air- lines Inc. from locating a $500 million maintenance facility there. United could have brought the city 6,000 maintenance jobs, but they would have been unionized positions averaging $40,000 a year. Instead, United opted for Indianapolis.

REAR-GUARD ACTION. The troglodytes may be fighting a losing battle. In many larger towns along I-85, wages lurch ever upward. In Spartanburg, for instance, Michelin workers make $15 to $16 an hour building truck tires. And John Friend now earns $11.35 an hour at a new Matsushita air-compressor plant in rural Mooresville, N.C. With an influx of high-skilled jobs, the gap between the region's per capita income and the national average shrank from 19% in 1980 to 12% last year. "Nobody comes to South Carolina just for cheap land and cheap labor anymore," says Education Secretary Richard W. Riley, a former governor of South Carolina.

Indeed, many manufacturers say the region's cooperative approach is far more of an enticement than labor costs. Among the inducements that appeal most to German manufacturers: training programs for new workers that effectively serve as state-sponsored apprenticeships. To land the BMW plant, South Carolina agreed to screen all job applicants and then train BMW's entire work force through the state's technical schools. When the company later decided to send some of its new engineers to Germany for firsthand instruction, South Carolina raised an additional $2.8 million from private sources to cover that expense.

Critics contend that the states are "buying" industry at too steep a price. The financial incentives necessary to land the BMW plant--including a $1-a-year lease on the 1000 acres--will cost South Carolina taxpayers $130 million over 30 years, although most of the incentives are in the first year. Douglas McKay III, one of the state's top economic recruiters, counters that most

of the inducements were in the form of trained workers and improved roads, which would remain if BMW ever left. McKay adds that the state only provides extensive incentives for those companies that agree to make at least $85 million in capital investments and provide health care and other benefits for its entire work force.

If governments are generous with incentives, it's because they seem to work. Since 1984, Stabilus has expanded its nine-year-old Gastonia (N.C.) plant steadily, from a couple dozen workers to 320, while its original, unionized Pennsylvania plant hasn't grown in 20 years. The reason: Stabilus, a German maker of gas springs, takes advantage of North Carolina's pledge to provide training for any manufacturer adding six or more new workers. "We have never gotten a red cent from the state of Pennsylvania," says manufacturing director Edward L. Novotny. "You want to go where you feel wanted."

While the investments in human capital have proved important, Southern leaders also have spent heavily on an advanced infrastructure. Atlanta's development of Hartsfield International Airport has enabled the city to move beyond the regional sales offices that were located there and snare corporate headquarters. In recent years, United Parcel Service, Saab, Holiday Inns, and the world relief group CARE have all moved to Atlanta. And Hartsfield's capacity was instrumental in the International Olympic Committee's decision to award the 1996 games to the city.

If Atlanta bet its future on air transport, Tennessee leaders gambled in the late 1970s that phone lines would serve as the critical "information highways" of the future. The state struck a bargain with local phone companies in the early 1980s: They could raise rates aggressively if they funneled the money into state-of-the-art digital switches and fiber-optic lines. This high-tech system has helped bring thousands of new jobs to Knoxville alone: Two years ago, for example, Travelers Corp. opened a 250-person office in Knoxville that handles customer calls from half the country about its personal insurance lines.

LOCAL HEROES. Finance has also helped fuel the Southeast's renaissance. Charlotte has become the nation's third-largest banking center, behind New York and San Francisco. A decade ago, Southern governors watched in horror as New York banks pressured Congress to allow nationwide branching. So the politicians circled the wagons by enacting laws that allowed mergers among banks within the region--but blocked outsiders from coming in. That gave local banks the chance to consolidate and create superregionals with the critical mass to take on the money-center banks. Now, North Carolina is home to NationsBank, the nation's fourth largest, First Union, the ninth, and Wachovia, the twenty-second.

In a region long dependent upon outsiders for capital, these megabanks give the Southeast new financial muscle. For the first time, some Southeastern banks are draining deposits from other areas to support growth at home: NationsBank calculates its loan-to-deposit ratio in North Carolina at 100%, compared with the 77% national average. And in South Carolina, the ratio is up from 73% to 120% since NationsBank acquired a competitor in 1986. "There is financial clout in this region that virtually any company can utilize," says NationsBank executive Joel A. Smith III.

With so much money flowing into the area, the Southeast may have more control over its economic destiny. For decades it has been beholden to faraway banks and corporate headquarters, but that's starting to change. Consider Mebane Packaging Corp., a $70 million North Carolina maker of pharmaceutical packaging. Five years ago, with the privately held company's owners nearing retirement and anxious to cash out, Mebane executives searched the East Coast for financing that would allow them to keep control. But all they got were offers from buyout groups in New York or Boston, who would have taken over the company and flipped it for a profit.

But First Union's then-nascent merchant banking group put up $25 million. That let Mebane's management buy the company and keep local control. Mebane built a plant in nearby Garner and two years ago reversed the usual trend by acquiring a major New Jersey rival. "If First Union hadn't come along with financing, we would likely have been sold and our whole character would have changed," says Chairman James H. Corrigan Jr.

Critics note that for all its success in attracting outside investment, the New South still faces challenges. The region's leaders have yet to figure out how to grow many businesses at home. North Carolina has one of the nation's highest failure rates for businesses. And Research Triangle Park in the past has been unable to spawn startups on the scale of Silicon Valley and Boston's Route 128. Experts cite the South's risk-averse culture, which has discouraged venture capital, as well as the universities' restrictive policies against transferring technology to private ventures.

"STILL SHADOWS." More troubling is the growing disparity between the I-85 corridor and the counties that have missed the new investment. Political leaders are trying to fight the trend. To attract business to its 80 neediest counties, Georgia offers an annual job tax credit of up to $2,000 for each new job created. And in March, Democratic Governor Zell Miller created the Governor's Development Council, which will pull together major universities, chambers of commerce, and businesses active in economic development, such as Georgia Power Co. and NationsBank, to draft an economic development plan for the state. "There are parts of Georgia that are still shadows in the Sunbelt," says J. Mac Holladay, the council's COO.

Even with such incentives, Southeast officials concede it's hard to convince companies to locate in poor rural counties far removed from I-85. "When you get away from this corridor, the jobs aren't out there," admits Robert B. Jordan, head of the North Carolina Economic Development Board.

Bringing hope to these impoverished areas may be the biggest problem facing Southern leaders. But if any region has a chance of succeeding, it's the South. It has shown that with a strong will and some shrewd planning, it can overcome its legacy as an economic backwater. Like Scarlett O'Hara, the South seems intent never to go hungry again.

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