Corporate Welfare in Vermont: the corporation as Cash Cow

by Bruce Shields

A month before last fall’s election, the guberanatorial candidate from Essex observed at a campaign rally that if Vermont Yankee electric station closed down, IBM would leave Vermont. Shumlin partisans in the media promptly trumpeted this statement as a Dubie lie, alleging that IBM had never “threatened” to leave Vermont if Vermont Yankee were closed in 2012. IBM, not desiring to appear partisan, confirmed that they had never issued any ultimatum regarding the retention of Vermont Yankee. And that is true: IBM was never so crude as to suggest that keeping Vermont Yankee open was the only, or even an important, factor influencing their continuation in Vermont.

But in a rough and ready kind of way, Dubie’s was accurate. One must look back almost 20 years in the history of IBM in Essex Junction, VT, to understand how accurate. From its origins some half a century ago, the Essex Junction plant became home to researchers, tools, equipment, and processes actively creating the fastest and most capable computer chips in all the world. It had the most productive workers, and exported product to every advanced country. The dynamism of the IBM facility attracted many other computer designers and manufacturers to Chittenden County, stoking that region of Vermont to achieve extraordinary economic prosperity, enjoying a median wage nearly triple that of the rest of Vermont. Other locations all over the world, from Glasgow to Hong Kong eagerly competed to induce IBM to expand or relocate the type of operation developed at Essex. By contrast, about 20 years ago the Vermont legislature began to treat IBM as a cash cow to be milked for wealth to spread across the state.

Essex Junction is a manufacturing facility. Its product is the result of an incredible array of thought and design, but the manufacturing process is very simple. An intricate design is etched onto large ceramic plates which are sawed up into microscopic chips, which are then embedded in a plastic matrix. The research and manufacturing facility at Essex provided the most daring and advanced chips of any facility in the world — for instance, the Power PC chip which propelled Apple’s Macintosh computer to its world famous status was designed and built in Essex. But competition in the world of microchips is fierce, swift, and brutal. Price is not the only factor, but is number 2 on every buyer’s list. IBM constantly reviews every possible method of reducing cost. Electricity is the largest element of variable cost at the Essex Junction facility. But it was in regard to electricity that the State of Vermont refused to cooperate with IBM.

IBM analysts about 1990 noted that electric power is sold to wholesale consumers at a lower price than to retail customers. If IBM at Essex Junction were a stand alone “licensed electric utility,” it would be the 3d largest in Vermont, exceeded in size only by GMP and CVPS. Yet Vermont licenses utilities as small as Hyde Park or Hardwick, whose annual consumption would run IBM for very few days. IBM applied for license from Vermont to negotiate with and purchase directly from such electric suppliers as Hydro Quebec and Seabrook Electric. Permission was denied. Soon after, national research services began noting that in the overall scheme of things, Vermont ranked as the most expensive state in the US for manufacturing (with Rhode Island occasionally ranking worse).

IBM was also paying an ad valorem property tax based on the value of the tools, unfinished inventory, and equipment installed in the plant. After protracted and unsuccessful negotiation on this issue, the valuations went to court and were sharply reduced, saving IBM tens of millions of dollars annually in property tax. Such taxes on tools and inventory are not routinely assessed in most states. When the Vermont legislature created the “efficiency utility” now known as Efficiency Vermont, the utility is funded by a surcharge of several percent on each KWH of consumption on consumer electric bills. Efficiency Vermont in return consults with electric consumers regarding how to reduce their electric (and other) energy consumption. IBM again requested permission to be considered its own efficiency utility, on the ground that it already had a far more sophisticated and effective efficiency department than any outside agency would be able to provide, with no risk of exposing trade secrets to industrial spies. IBM was not allowed to create its own utility, though a mechanism was created for IBM to retrieve some of its surcharge by meeting certain benchmarks.

About the time that IBM was consistently being denied by Vermont the ability to function in the marketplace as a wholesale utility, a revolution swept across the world of chip making. Many of the traditional makers died, and their facilities were sold off piecemeal. New tools and machinery became available, allowing chips to be manufactured which were capable of incredible advance performance. Intel evolved its “dual core” and “quad core” chips, a whole generation more capable than the older style chips. Apple’s MacIntosh dropped the PowerPC chip from IBM in about 2003. IBM quickly moved to start building the more advanced chips — at East Fishkill, NY. Essex Junction will continue to make older, slower, less capable chips. These are still being consumed in vast quantities, for cell phones, tire-pressure sending units in cars & trucks, programmable thermostats, GPS tracking devices, and thousands of other uses. But IBM’s loss of Apple as customer shows the direction of the future. The low-end commodity chips which now dominate Essex Junction’s portfolio increasingly are bought based only on price per million transistors. They sell in some cases for just a few pennies each for the chips (before embedding). This style of chip can be manufactured in Malaysia, Taiwan, Korea, Mexico, South Africa, India.

To return to Brian Dubie’s comment that if Vermont Yankee closes, IBM will leave Vermont. I would argue that in many respects IBM has already left Vermont, because Vermont chooses not to assist IBM to remain competitive in a rapidly changing world. The public comments IBM spokespeople made in the heat of an election campaign hold little planning value. Anyone interested may consult IBM’s annual filing with the Securities and Exchange Commission, the report 10Q available from the SEC’s EDGAR web site. In its 10Q filings, IBM has been crystal clear for 20 years: manufacturing will migrate to locations where it is profitable. Vermont’s energy policy has impeded IBM in Essex Junction. That is not a threat. In the wider view of things, Dubie was right.

– Bruce Shields is on the board of Vermont Forest Products Association, and active member of the Vermont Traditions Coalition and Vermont Farm Bureau, and past director of VT Maple Sugar Makers. He lives in Wolcott

One thought on “Corporate Welfare in Vermont: the corporation as Cash Cow

  1. Guess what Bruce, we can’t afford to keep paying IBM’s ransom and blood money. They are welfare queens that will continue to ask us to subsidize their business. It ain’t worth it.

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