Snow flurries floated about one recent cloudy morning in the parking lot of Qimonda, a German-owned silicon chipmaker in eastern Henrico County. Metallic gray buildings with erector-set-like towers sprawled in the distance as a middle-aged man dressed in a navy blue hoodie with a plastic ID tag walked to work.
“Everyone is worried about his job,” said the man, who didn't want to be identified. “They laid about 1,200 off in the fall. After Christmas they put us on a schedule where we have to take every other Friday off without pay,” he added. “They're the kings and queens and we are the pawns.”
Just a week later, Qimonda announced it was laying off 1,500 more at the plant, in effect shutting it down and highlighting the risks of Richmond's economy during perhaps the worst recession in 75 years. Layoffs and forced furloughs have hit all of the region's key sectors, including financial services, manufacturing, sales, health care and technology.
Bankruptcies and liquidations have struck such big national names as Circuit City, LandAmerica and Chesapeake Corp. Although the area's unemployment rate has been about 4.5 percent, better than the national average, firings continue apace and economists expect unemployment locally to reach 7 percent, perhaps more.
The malaise raises difficult questions: What will be the long-term effects of losing so many companies? Who recruits businesses for the region and how can they pick winners? Who calculates the millions of dollars in perks to entice promising corporate candidates to come here? And if so much of the public's money is being paid out, how can you know the company will be around 10 or 20 years from now?
Many people are rethinking Richmond's economy. Stunned by the fallout, the Greater Richmond Partnership, the region's leading economic development agency, is taking a three-month hiatus to reconsider what kinds of industries it should recruit and how to mitigate the damage from the downturn. It's reassessing its focus on recruiting companies in such previously desirable sectors as finance, logistics and computer chips.
Matthew Martin, an economist with the Federal Reserve Bank of Richmond who is based in Charlotte, N.C., says metro Richmond is undergoing a structural economic change. No one knows how that will shape up.
The emphasis is on finding sustainable industries that have a good chance of being around “10, 30 or 40 years from now,” says Liz Povar, director of business development at the Virginia Economic Development Partnership, a state agency.
But it all comes down to guesswork and hunches. As Greg Wingfield, president and chief executive of the Greater Richmond Partnership, puts it: “How do you know if something will be a sustainable facility? You don't.”
As far as sustainability, Qimonda offers a cautionary tale. Its story traces to the mid-1990s when making silicon chips in ultraclean rooms was considered a cutting-edge endeavor. Desktop computers, laptops and servers that use silicon wafers for their semiconductors were exploding on the market. The Internet was just beginning to change the nation's economy.
So local and state officials were elated when Illinois electronics giant Motorola announced plans for a $3 billion semiconductor facility in Goochland County. Also in the company's plans was a similar, $1.5 billon facility called White Oak east of Richmond International Airport. Motorola would build the plant in a joint venture with global German-based conglomerate Siemens. The two chip plants promised to turn Richmond into an East Coast technology hub, creating thousands of jobs and countless economic spinoffs as vendors and suppliers relocated to Richmond.
Eager to boost Virginia's prospects in the glamorous high-tech sector, then-Gov. George Allen touted the White Oak facility in the fall of 1997 as “a powerful symbol of the teamwork that is leading to a more productive and prosperous future for Virginians.” All levels of government opened the goodie spigot. Perks totaled a record $80 million. Henrico County spent $43 million building roads, water and sewer lines for the 210-acre park. Richmond agreed to supply natural gas and Virginia Dominion Power installed a 230-kilovolt substation ahead of schedule.
To seal the deal, Allen promised to fast-track completion of Route 288 from Chesterfield to Goochland, dumping off at Motorola's plant in the West Creek office park at a cost of $434 million.
Such rich incentives helped Richmond beat out 20 competing metro areas in 16 states. The White Oak plant opened in 1998 and eventually employed 3,000.
But performance at White Oak and the history of Richmond's foray into silicon chips has been tumultuous. Chips can be made just about anywhere in the world, including Third World countries such as Malaysia. As more chips flood the global market, they become commodities selling at cheaper prices. Motorola ended up ditching its Goochland plant while taking a $50 million loss and the White Oak facility ended up as property of Qimonda, a unit of Germany's Infineon.
Although it's scored double-digit production growth rates in recent years at White Oak, Qimonda is in economic free-fall, showing just how dangerously cyclical chip-making is. London's Financial Times newspaper reports that the company has until the first part of March to find an angel investor, but it appears be to be too little, too late. Last week, the company laid off all but a skeleton crew of fewer than 100 workers at White Oak.
Unfortunately, there are uncomfortable similarities between Qimonda and other sectors of the area's economy. Take financial services. After the 2001 recession, the highly profitable sector seemed to be a great place to make money. Following the 9/11 attacks, Richmond became an attractive headquarters for brokerage houses to operate within a few short hours of New York and Washington.
Meanwhile, businesses and families became heavily leveraged with cheap credit as Federal Reserve Chairman Alan Greenspan kept interest rates incredibly low. Housing boomed and property values skyrocketed. Second and third mortgages retired piles of credit-card debt that was soon to build up.
It was a natural fit. Richmond had a long and rich history as a regional banking center, besides being headquarters for the Federal Reserve's five-state Fifth District. But the Virginia capital took a major hit in the 1990s when ambitious lawmakers in Raleigh, N.C., sweetened North Carolina's banking laws and lured away some of Richmond's most powerful banks, including Central Fidelity, Signet and Sovran.
Rebounding, Richmond got an unexpected boost in 2003 when Prudential Securities merged its New York area operations with Wachovia Securities and chose downtown Richmond as its new headquarters. Richmond put up about $16 million in incentives to trump New York City, Charlotte and Winston-Salem, N.C., for the prize.
Snaring the investment and brokerage house had a special cachet because it re-elevated the city as a banking center. An additional 1,200 jobs came to Riverfront Plaza, which became the epicenter of a brokerage empire with 2,800 offices nationwide and in Latin America. Chief Executive Daniel J. Ludeman, a former Wheat First boss, became a familiar face on Richmond's charity circuit.
The good times were fleeting. Just four years later, Wachovia Securities announced its merger with A.G. Edwards, a national brokerage based in St. Louis, Mo., dooming hundreds of local jobs and prompting 630 transfers to Missouri. Within two years, Wachovia, having bought a California lender swollen with toxic, subprime mortgages, fell victim to the financial firestorm.
Wachovia Securities isn't the only financial giant to be whipsawed by mergers and the financial meltdown. LandAmerica, whose roots in Richmond date to 1925, was flying high just three years ago when the $4 billion real estate insurer was riding the real estate boom. Just two years ago, Chief Executive Theodore L. Chandler dismissed the darkening clouds in the real estate sector as a “soft landing.”
“Keep in mind that even with the downturn,” he said at the time, “the recent performance is still better than many of the years of the 1990s.”
But the financial crisis swamped LandAmerica in 2008 with unexpected ferocity. Racking up layoffs, the company was sold to Fidelity National Financial in December. On Jan. 15, Chandler, one of the region's most powerful corporate chiefs, left the sold-out company. In a sour footnote, executives of LandAmerica have become defendants in fraud lawsuits accusing them of running pyramid schemes.
Genworth, once part of the juggernaut General Electric conglomerate, announced it was laying off 1,000 of its 7,300 workers nationwide. It has about 1,750 in the Richmond area and the firings affect employees in the Henrico headquarters.
Other sectors are hit by the downturn as well. Topping the list is retail. Bankrupt Circuit City is liquidating at the loss of 30,000 jobs, including all 1,100 at the Richmond headquarters. In packaging, Chesapeake Corp. has filed for bankruptcy, taking many jobs with it. Some 2,000 jobs nationally are being cut at $6.8 billion MeadWestvaco, which was recruited with great fanfare in 2006 with Richmond beating out Raleigh and Atlanta for its headquarters site. The impact on Richmond will be only about 50 layoffs. And, in health care, medical insurer Anthem's parent company will cut 1,500 jobs. The company has 3,000 workers in the Richmond area but officials won't say how many might be affected by the cuts.
Meanwhile, two corporate pillars hold up the regional economy. One is Philip Morris USA and its parent, Altria, which moved here in 2004. Although the cigarette maker has taken its lumps and has announced some layoffs, most in its nearly 6,000-person work force aren't affected.
And there's chemical stalwart DuPont, which makes its marquee-brand product Kevlar in Richmond, which has so far avoided significant downsizing. One reason, according to business consultant Ram Charan, is basic common sense and good management. In his recent book, “Leadership in the Era of Economic Uncertainty: The New Rules for Getting the Right Things Done in Difficult Times,” he writes that DuPont was one of the few companies to realize just how huge the downturn was going to be and what steps, such as shoring up cash, could be done to weather it.
Last year, before the storm hit, DuPont's then-chief executive, Charles “Chad” Holliday, visited Japan where a large customer advised him that changes were afoot and that the Japanese company was deeply concerned about preserving cash.
Back in the United States, Holliday took notice and called his top managers to emergency meetings. Among the things he learned was that carmakers were becoming especially skittish. DuPont makes paints for 30 percent of all new American cars and produces the paint within 48 hours of its application on new cars. Thus, DuPont has confidential production schedules from automakers. Surprisingly, Holliday learned that there were suddenly no more production schedules available. Facing slumping sales, carmakers were cutting back.
This convinced Holliday to take even more intensive action. He created 17 standing teams to find ways to deal with the upcoming downturn, according to Charan. Within 10 days of their inception, the teams reported on ways to preserve cash. Working capital was adjusted to ensure plentiful cash. Every employee was informed.
“The company kept very close tabs and made adjustments daily,” says Laurie Captain, a DuPont spokeswoman. The company announced layoffs in December of 2,500 from its work force and 4,000 contractors, but most were limited to the automotive and housing sectors, reflecting the dramatic downturns in carmaking and construction. Greater Richmond so far has been spared many layoffs.
As the recession rages, how can Richmond's economic recruiters attract more winners such as a DuPont and avoid losers such as Qimonda or Wachovia Securities? That's the point of the rethinking at the Greater Richmond Partnership, which occupies downtown offices with a commanding west-looking view of the James River.
The partnership's Wingfield says that in November his group decided to take a three-month pause to reassess its goals and methods. “We're still going after new business,” he says, “but it may not be finance and insurance as it has been.”
By March, the partnership expects to complete a plan to refine its marketing strategies. Under review are a polyglot of sectors such as advanced materials, aerospace, defense, food processing, microelectronics, paper and packaging, advertising, pharmaceuticals and telecommunications.
The partnership is concentrating on steadier sectors such as food processing and life sciences, along with advanced manufacturing and warehousing.
The region has scored some hits in past months from small, international companies such as a Japanese-owned Mazda parts facility, Israeli-owned Sabra Kosher Foods in Chesterfield and England's Pro-Seal. All were attracted by Richmond's plentiful commercial space, proximity to international air connections and strategic market location on the East Coast.
While the Greater Richmond Partnership refines its pitching efforts, it should tout the relatively high education and skill level of the local work force, says Chris Chmura, president of Chmura Economics and Analytics, based in Shockoe Slip. “You need more knowledge-based firms than capital-based ones,” she says.
In this regard, Richmond seems well off. Martin, the regional economist with the Charlotte office of the Richmond Fed, says the region has more college graduates or people with a advanced work skills than Charlotte, the North Carolina banking center against which Richmonders love to compare themselves.
“Charlotte has a unique blend of banking and financing, but it faces the bad effects of the takeover of Wachovia, which is based there, by Wells Fargo out in San Francisco,” Martin says. As many as 20,000 banking jobs could be at stake. Martin doubts that so many will be lost but plenty of Charlotte residents are nervously waiting firing announcements.
The partnership still has high hopes for the Virginia Biotechnology Research Park, on a 34-acre site near the State Capitol, which hosts dozens of private and nonprofit outfits. The park has close ties with Virginia Commonwealth University and its outgoing president, Eugene P. Trani, has worked hard to build it up. But the park was growing slowly until Philip Morris USA recently completed a $350 million research center in the park to examine new tobacco products other than cigarettes.
Economic development officials such as Wingfield are certain that Philip Morris will attract spinoffs and related biotech operations, but it's an industry that's difficult to sell politically. There's another intrinsic problem: Much of the academic research world shuns tobacco-funded research, and Philip Morris, with all of its legal liabilities, is averse to forming close research partnerships. VCU garnered unwanted national attention last year when it was learned that the school had entered into research pacts that gave the tobacco company unprecedented control over research findings.
Advanced manufacturing is one sector upon which officials place high hopes. Rolls Royce, the venerable British aircraft engine and automobile maker, is creating a major manufacturing facility just south of Hardware Drive in Prince George County. On a 60-acre tract, a series of new plants, worth $500 million, will go up between 2010 and 2014. They'll produce engines for mid-sized business jets built by Dassault Aviation in France.
As many as 500 highly skilled workers will be needed to handle the advanced machine tools and Rolls Royce is implementing a two-year training program for employees on the site to train workers and students through a partnership with Virginia Tech and the University of Virginia. (VCU isn't participating for reasons that are unclear.)
There is a caveat. Recent controversies involving corporate jets have dampened the market for such planes. The three heads of the U.S. carmakers flew into a firestorm when they arrived in Washington on three corporate jets to ask for a federal bailout. And Citigroup, another bailout recipient, is being forced to sell new a new $50 million Dassault aircraft after public outcries.
Besides rethinking economic development, local officials are busy trying to help laid-off workers. The partnership has set up a jobs portal on its Web site that links workers' job descriptions and capabilities with Web-based job-search engines such as Monster.com. “The goal is that we want to keep this talent in Richmond and let the outside world know it is here,” Wingfield says. The Richmond Chamber of Commerce also is trying to help with its luncheon meetings to let laid-off workers network and learn about job opportunities, says Laurie Amirshai, a chamber official.
The federal government is also providing a cushion for the regional economy. The latest Base Realignment and Closing Commission review has led to a major consolidation of military training at Fort Lee, just east of Petersburg. Thousands of new soldiers will arrive either temporarily or permanently, bailing out hotels, restaurants, retail stores and real estate agents in Chesterfield and Dinwiddie counties.
Fed economist Martin also says he believes Richmond will benefit as growing federal spending in the Obama administration sweeps down Interstate 95. Wingfield says the area's likely to get a bump from Obama's proposed $819 billion stimulus package, especially because Gov. Tim Kaine is an ardent Obama supporter and heads the Democratic National Committee.
“We're looking at the next 18 months with a retrain, rebuild, renew model,” says Povar of the Virginia Economic Development Partnership. Her group is working with community colleges to develop work forces capable of handling what could come from the stimulus package in Washington, which could include incentives for alternative energy projects, expanding “green” construction and boosting broadband to parts of the region where it hasn't reached.
How much longer will the downturn last? Chmura's group doesn't predict a turnaround until the first quarter of next year so there's plenty of gloom and doom left to go. Many economists think that credit cards will be the next financial industry to go belly up, which isn't good news for credit-card issuer Capital One Financial, which has a huge employment footprint in Richmond.
The company recently reported that card charge-offs — credit accounts that default — increased from 6.13 percent in the third quarter to 7.08 percent in the fourth quarter, resulting in a $1.4 billion loss. Capital One, regarded as being in unusually good financial shape by analysts, expects loan losses from cards to rise to 8.1 percent this year.
Even if Capital One avoids a meltdown, Richmond's future depends on how fast laid-off workers are retrained or helped to find new jobs. But the future really depends on how well local politicians, business people and economic development officials rethink Richmond's economy. S