Many years ago, a journalist asked a governor why he was recycling politicians who had served in previous administrations. The governor simply told him: “we only use those who are active”. I am not here to debate if that is an efficient method to use when building teams. Yet there is a small lesson there: we all like to join moving trains. In forming governments, the moving trains can be simply those that show up irrespective of their capabilities. Also, in companies, once they become active and start winning, a continuum is established and they just keep going. It is called positioning.
We have read that Amazon received 238 proposals for its second headquarters. Cities competed for the opportunity for Amazon to choose them for its headquarters.
Amazon.com Inc.’s second headquarters, dubbed HQ2, has lured 238 proposals extending across 54 states, provinces, districts and territories in North America, the company said Monday. Only seven U.S. states refrained from bidding: Arkansas, Hawaii, Wyoming, North Dakota, South Dakota, Montana and Vermont, according to a map Amazon published on its website.
Cities are battling for Amazon’s investment of $5 billion in construction and 50,000 high-paying jobs spread over the next two decades: New York City’s Mayor Bill de Blasio ordered landmarks around the city lit up in “Amazon orange” before the bids were due last week. Canadian Prime Minister Justin Trudeau penned a personal letter to Amazon Chief Executive Officer Jeff Bezos advocating for HQ2. Newark, New Jersey, has offered $7 billion in potential tax credits.
Notice that Newark, New Jersey, is offering $7 billion in tax credits. But that may not be enough. Amazon had made it clear that it would make the selection based on the city that can provide all the basic things (good roads, access to airport, electricity, etc) with massive “tax breaks and grants”. The grant part is interesting because that means that the city will have to give Amazon money. So, you waive tax and you also have to provide grant to Amazon.
Let me connect this to the Nigerian case: Few weeks ago, many people went ballistic when the Nigerian government noted through a minister that it was offering tax incentives to enable Dangote Group fix some roads. Some felt it was immoral to do that in a country of more than 180 million people. (I do not know the terms to ascertain how balanced the tax concessions are. Also Dangote Group has refuted some parts of the statements made by the minister.) Unfortunately, that is how capitalism works. I have called this type of incentives Conglomerate Tax: for their successes, conglomerates tax the economies where they operate as the economies indeed subsidize their businesses.
It is called Conglomerate Tax. It is a game played in all parts of the world. Conglomerates use their powers and scales to bully governments to do things the very way they want things. If governments refuse, they do not invest and nothing changes. Because they know the governments are financially incapable or strategically deficient, they hit them at the pain points: I cannot solve this problem if you do not accept my terms.
You may not like it, but there is nothing you can do about it. It is legal. From GE to Carlos Slim Grupo Carso, citizens subsidize most things conglomerates do as most times they do not have to pay tax. They get great deals you wish you can. And you can if you follow the game plan (I will explain later).
The news is that the Dangote Group will not pay tax in the next ten years for it to help Nigerian government fix roads.
Amazon does not seem to be a natural company to receive any support when you consider that it has ravaged communities through its ecommerce operation that has devastated shopping malls across America. The cities that plan to give it billions in tax credits and grants are the same cities complaining that Amazon has reduced their tax receipts by out-competing retailers who collapse taking with them local taxes. To add salt to injury, Amazon does not even collect local taxes for most cities. So, using historical impact data, Amazon should be punished by cities for what it has done on them, though indirectly.
Unfortunately, conglomerates are so critical because they open up markets and economies. What they do is so vital to communities that you can forget their past “sins”. Yes, Amazon wants to invest $5 billion but cities are offering packages in billions of dollars of tax credits. I expect the winning bid to offer around $5 billion in tax credits and at least $250 million in grants.
Now, why will a city do this? If Amazon is bringing $5 billion, it will drive the local economy. It is a virtuous circle that the $5 billion can stimulate more than $100 billion of value in the city. The cities are competing because Amazon over the years has accumulated capabilities, operating at the upstream level of the economy. The cities want more economic growth and Amazon can help them to unlock it. The fact is this: any company that attains that level of capability can get the same deal because governments are looking for entities that can fix their major pain point which is job creation. If you want to invest $5 billion in any Nigerian state, you will not just get land, you will receive tax benefits.
Conglomerate Tax is not corruption. You cannot even say that it is making the market not to operate freely and fairly. For example, Amazon competitors can say that the industry leader is getting an unfair advantage. You can say all you want, but government does not care, since if you have the same level of resources and want a deal, they will package something for you. Government does not create jobs, it only provides enabling environments.
Capitalism can be interesting because not everything seems fair. But as the Amazon case teaches us, it is better people focus on the motivating energy of capitalism. They will build firms and unlock value, instead of wasting time complaining on what the government is giving to conglomerates like Dangote Group. Every Nigerian government will keep offering benefits because if they do not, another African government will invite Dangote Group to come, offering the same benefits. Our problem is just that only one company is at the level of the Dangote Group when you talk of conglomerates. (We have other companies but most are not at Dangote Group level as diversified industrialized conglomerates.) In America, Amazon is making its own competition a show, but it could have gotten these same benefits secretly, just as GE and Honeywell do yearly.
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