A Suggested Bid for Amazon HQ2

“My offer is this….nothing.”

Ever since Amazon.com announced that it was searching for a location for its “second headquarters,“ cities across North America have been falling over each other trying to make a case for their own sites.  In Canada, representatives from Vancouver, Toronto, Calgary, Waterloo, Montreal and Halifax have all said publicly that they should be considered, and committed to submitting a “bid” for the privilege of hosting a company that promises tens of thousands of jobs, a new focus for technology-driven business, and bragging rights associated with hosting one of the world’s most valuable companies.

To those developing lucrative packages with possible tax holidays, direct incentives, subsidies, and other contributions, I suggest that they instead offer the Michael Corleone package…nothing. If Amazon wants to establish a large physical presence here, it is more than welcome to.  But, the company does not need nor does it deserve any publicly-funded incentives to advance its business model from a Canadian base.  Here’s why.

Amazon is a job destroyer.

Amazon is primarily a retail fulfilment company, with some technological services, electronic device manufacturing, and content development thrown in.  Technology may drive much of Amazon’s operations and future growth, but the company’s history and business model show that its primary objective is to dominate the retail space – competing against traditional bricks and mortar retailers.

The emergence of Amazon, amongst other online merchants, has contributed to the rapid decline of the traditional retail sector, with commensurate job loss.  The Institute for Local Self-Reliance reports that by the end of 2015, Amazon had caused a net loss of 149,000 jobs.  Given the store closings announced by Sears, Macy’s JCPenney, and many other national chains since that time, the current number is definitely a lot higher. In March of this year, MarketWatch estimated that Amazon will destroy 1.5 million retail jobs in the next five years.  Those are US statistics, but the effects of an Amazon-driven retail transformation will be similarly felt around the globe, in terms of the contraction and/or shuttering of physical retailers.

Don’t forget about the stores

In Toronto, my home, an employment profile published by Toronto City Planning estimates that the retail sector accounts for over 10% of all employment in Toronto – approximately 150,000 jobs.  That’s a lot of jobs.  And you can bet that no one at city hall is working overtime to devise incentives for attracting and retaining main street merchants. On the contrary, downtown store owners are regularly complaining of unfair property taxes, high utility bills, and changes to labour laws that will add to their costs.

So, why would government bodies and representatives consider handouts to a foreign company whose aim is to put a sector that represents 10% of the work force in deeper trouble than it is now?  Why would we be asked to pay millions of dollars to one of the world’s wealthiest companies, so it can further ravage a sector that not only employs a significant number of our neighbours, but also adds considerably to the city’s social fabric and contributes significantly to its tax base?  That doesn’t make sense.

The unfairness of it all

One can argue that the continued rise of online shopping is inevitable – that we should just acknowledge the transformation from physical locations to online transactions, and back the winner. If that is so, and the Amazon business model is indeed the future of retail customer fulfilment, then it can stand on its own – it does not need government subsidies or even encouragement.   Furthermore, if governments do get into the business of supporting new e-commerce capabilities, they cannot play favourites.  It also doesn’t make sense if subsidies would be made available to the dominant foreign-owned representative of the new economy, but not to others who have built their online businesses within Canada on their own.

Ed Clark (former head of TD Bank, current business advisor to the Premier of Ontario, and leader of a possible Amazon bid from Ontario) acknowledged during an interview with CBC that he’s treading a fine line – that he can’t be seen to be offering incentives to Amazon that would not be available to other companies, most of which have grown without the help of government subsidies.  Mr. Clark has also said that there’s a difference between incentives and bribes, but who’s kidding whom?   One is just the more legitimate cousin of the other. He mentioned that rather than tax forgiveness or direct payments, the government might consider donating land.  However, if the land has value, it’s a subsidy/bribe, however you want to label it.  And if other companies competing against Amazon are not accorded similar treatment, it’s grossly unfair.

Beware those looking for handouts

Economic development incentives are not a new phenomenon.  Governments have long played the game of dangling incentives for companies to come, to expand, or to stay.  In the U.S., it’s estimated that publicly-funded development incentives total more than $80 billion a year.  Are they worth it?  No-one knows, because it is very difficult to do an analysis on a decision that may have been made regardless of the payment.  In a study on such incentives, The New York Times described how jurisdictions are pitted against each other, with the result being that gains for the “winning” jurisdiction are often unidentifiable.  There are very few concrete examples of governments getting their money’s worth from incentives provided to private companies.  Gains for the companies, however, are clear.  For example, Donald Trump recently boasted of job creation efforts that resulted in Foxconn agreeing to manufacture LCD screens in Wisconsin.  What he didn’t mention was that Foxconn will pocket $3B in state-funded incentives as part of the deal.  Nice.

Amazon has made a closet industry of shopping for government incentives.  One study concluded that by the end of 2016, Amazon had reached the $1 billion mark for subsidies gained from state and local jurisdictions. (remember – the company is only 23 years old)  According to Greg LeRoy, executive director of Good Jobs First quoted in Bloomberg BNA, Amazon is now racking up approximately $125 million annually in subsidies.  “Amazon is a juggernaut in terms of tax breaks,” LeRoy says.  The company has staff devoted to seeking and extracting public incentives for funding its expansion (and hence its destruction of traditional retail).  A pretty good business model indeed – getting the public to pick up a large part of the tab for your facilities.

But the jobs!

Amazon states that the new headquarters will include up to 50,000 jobs.  That’s on top of Amazon’s current employment base of over 350,000.   Impressive growth.  But, the Amazon job base is tilted toward low-paying warehouse and customer service type positions.   And, as noted above, the net gain in jobs will almost certainly be far lower.

Amazon claims that the HQ2 would present good, high paying jobs (>$100k/year).  That would mean that it goes far beyond being a fulfilment centre.  Instead, in selling the HQ2, Amazon is being presented as a technology company, where the demand would be for young high-tech skilled workers.   In southern Ontario, we have a large and growing number of those.  We have a large centre of technology education and development.  We have a lot of talented young people emerging from our (publicly-funded) universities.  Those are attractions for any potential employer.  Throwing incentives at just one employer, however, is tantamount to giving them preferential access.

Size matters.  We have experience in providing startup assistance to smaller companies focused on new technologies, so they can develop the scale, expertise, and presence necessary to stand on their own and compete in emerging economic sectors.  That represents a worthwhile expenditure of public funds.   Amazon certainly doesn’t qualify for such incubation.  While the company is shopping for handouts, remember that this is a company with a market capitalization of approximately $450 billion.  Its annual revenues top $174 billion.  Jeff Bezos, the founder and largest shareholder (17%) boasts a net worth of about $80 billion, which places him among the top three richest persons on the planet.  It’s insulting and a bit pathetic that Amazon would even ask for monetary incentives.

Again, it may be increasingly driven by technology, but Amazon remains a company with a goal of dominating the retail sector.  Its success almost mandates the loss of physical retail locations and jobs.   Any contribution to Amazon subsidizes the obliteration of local retailers.  Any public contribution to Amazon’s headquarters effectively subsidizes Amazon’s e-commerce model while leaving other e-commerce providers to fend for themselves. It makes no difference whether the new jobs are in technology, finance, marketing, fulfilment, or other area – they would all be oriented to making the Amazon business model succeed, at the expense of others.

I have a guilty secret – I have been known to shop on Amazon.  The site does provide access to items unavailable at my local retailers.  But, I have no intention of diverting any of my tax dollars (municipal, provincial or federal) to ensuring that in future even more items will become unavailable at my local retailers, if those retailers still exist.

So, Ed Clark, if you’re listening, please consider this:

• A rich incentive may win the day in terms of the Amazon headquarters, but would be totally unproductive and unfair in terms of responsible use of public funds.
• A small incentive implies that the decision would have to be made based on the inherent advantages of the location, not the monetary incentives – so it’s not worth advancing.

The solution?  Offer nothing.