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The Town Ibm Left Behind


Special Report -- After IBM

THE TOWN IBM LEFT BEHIND

IBM was...it was great. You should have been here to see it. They could spend money, they were like the government. We'd get a multimillion-dollar job done, and before you knew it, they'd rip it out and start something new. We thought it would never end.

--Ronald J. Weiss, C.B. Strain & Son,

mechanical contractors

On the morning of Mar. 30, 1993, the world's biggest computer company announced what many in New York's Hudson Valley had feared in their guts, but few had really thought possible: "2,700 Fired," the Poughkeepsie Journal mourned. IBM already had drained thousands of jobs from the region in the previous five years. But this was a crushing blow: For the first time in its history, Big Blue was laying people off.

"It was really devastating to everyone," recalls Yvette Wild, a line worker who lost her job that day. What had been the valley's dominant employer ultimately would reduce the payroll at three local plants by two-thirds from its 1984 peak of 31,300 jobs, abandoning a mammoth chunk of its East Fishkill factory and shuttering another in Kingston, 20 miles upriver. The reason was no mystery: IBM had lost $16 billion over three years. Its products in many markets were uncompetitive; its rivals simply were better.

More than two years later, Poughkeepsie and the villages that dot Dutchess County's surrounding hills still suffer from the resulting dislocation. Howard Aronoff, once a senior planner for IBM's mainframe software, is retired at age 55. Although a generous severance package keeps him above water, he hasn't found the sort of work he spent a career doing--and "I refuse to pack cans in a grocery store." Doug Bradley, who used to clean IBM's floors, does odd jobs and gets lunch at a soup kitchen. At Mike's Lawn Mower in LaGrange, Mike Zdrodowski's business is off 40%. "Some people are paying, some aren't," he says. "Money is tight--let's face it."

IBM's downsizing, in fact, has cut deep into this community 75 miles north of New York City. Yet the shock also has led to something fairly remarkable: The high-tech company town, now lacking its company, is finding a new energy of its own. A wave of industrial migrants is filling some of the empty properties that form a necklace of "For Rent" signs around the region, won over in part by an activist government that once had the luxury of thumbing its nose at development. High-tech startups are retooling the clean rooms IBM once used to manufacture microprocessors; mom-and-pop operations have found happiness in old IBM research space.

Entrepreneurship is blossoming where once, "everyone, everywhere had the same big-company mentality," says Robert J. Ritter, 35, a frenetic young executive who, in a year, has built a thriving small-business incubator nurturing 35 startups. Fayiz Hilal's Cetek Inc., a 22-employee machine shop, lost more than half its revenue in 1994; now, Hilal is developing a new ceramics process technology. "Once we're set up to get sufficient production out the door, we'll be sold out," he pledges. "Sold out."

The Hudson Valley has embarked on a quest to regenerate itself--to survive and retain viability in this era of global competition. It is a struggle that resonates in cities and towns throughout the nation. Can communities save themselves from economic and social irrelevance? How do they sustain competitive advantage? "International capital can go anywhere it wants," says Harvey K. Flad, a geographer at Vassar College in Poughkeepsie. What will bring it here?

The answer, the valley is discovering, is complex. Government, certainly, must buy in: Its actions can nurture development or choke it. Regional linkages, too, are crucial. The Information Age notwithstanding, companies locate or expand in places where there are suppliers and buyers. Most important of all is human capital--an educated workforce that can keep up with unyielding market change.

NO PRISONERS. What's at stake, in essence, is quality of life. The global economy is acting relentlessly and decisively on American communities, forcing them to do battle with Singapore, Mexico, and one another for jobs and wealth. Yet how cities and towns respond to that challenge produces quintessentially local, human effects. Strategies for development, or lack thereof, determine whether homes will gain value; whether the playground will be maintained; whether people will plant roots or flee to a place with better prospects.

Dutchess County has begun to create a new competitive machine. The cooperative effort of business and government has yielded impressive early results, producing a substantial foundation for recovery. The region won't ever bring back the heyday of IBM. Indeed, few here want that. What most envision is something far more potent: a diversified economy yielding sustainable, high-wage employment. The alternative is a region little more than another spot on the map, an also-ran with low-skill service jobs, a McDonald's and a Wal-Mart. An also-ran that used to have it really good.

The company town is a fundamentally flawed economic organism. We have known this for decades, with grim testament in the collapse of Rust Belt industrial centers. Think of U.S. Steel and Homestead, Pa., or General Motors and Flint, Mich. (page 112). Dominant employers foster dependency in their communities, dulling the incentive to take risks. Given captive labor and suppliers, moreover, companies themselves typically lose their edge. "The model is not conducive to growth," says Edward L. Glaeser, an economist at the Hoover Institution on War, Revolution & Peace. "Diversity and competition are the linchpins to long-term profitability."

But the truth is, company towns are irresistible. Big employers create complacency, but also jobs. They build schools and pay doctors' bills. "People always say, `Don't put your eggs in one basket,"' says Emerson L. Burger, a project manager laid off when his employer, a Poughkeepsie engineering firm, went under with IBM's cutbacks. "But when there's a major employer in the area, it's awfully hard not to."

WAR MARRIAGE. IBM arrived in the Hudson Valley in 1941, setting up shop to make aircraft cannons during the war and, afterward, office equipment. The place appealed as it had to earlier industrial migrants: Land was cheap, labor was skilled, the mountains looked nice, and a solid transportation infrastructure linked the area to major Eastern markets. By the mid-1960s, Poughkeepsie and Kingston were at the heart of a spectacularly successful mainframe-computer business.

For four decades, IBM thrived--and the Hudson Valley boomed. Kids got high-paying manufacturing work out of high school. Developers devoured the dairy farms around Poughkeepsie, building offices for IBM and housing for the engineers and managers flooding in. Home prices soared, as did wages. "Beemers," as the locals called them, populated local zoning boards and ran charities; their money fueled a vibrant retail sector. And the companies that supplied IBM with parts, engineering services, food, and landscaping slipped into comfortably monogamous relationships with their big benefactor.

All of which made the crash, when it arrived, that much more cataclysmic. "There was disbelief," says Louis W. Quaresimo, president of Local 201 of the Plumbers & Steamfitters Union. "People thought some other big computer giant was going to come in, and everything would be back to normal. It took six months to realize what was happening." By then, in late 1993, unemployment in Dutchess County had reached 10.8%, from 3% in 1990, and business foreclosures were soaring. Some 80% of Quaresimo's members were out of work, even after accepting a 25% wage cut. The housing market collapsed; the Porsche dealer shut down.

The company town didn't fold. In fact, the sense of crisis gradually ebbed, and the support groups in church basements for unemployed engineers quietly disbanded. Newcomers rushed to fill the newly cheap homes, cushioning both the real estate market and retail sales. For the county, being two hours from New York City and its job engine became a fortuitous geographical blessing.

But there was a perilous downward spiral in the making. The new residents, who mainly commuted to work south of the county, did nothing to expand local employment. Instead, jobs kept seeping out, as successive waves of suppliers shut their doors. The risk grew that the shrinkage of the region's industrial base would perpetuate itself, placing increasing pressure on residents and remaining businesses to support strained government services. "There's a ripple effect," says Paul J. Ganci, president of Central Hudson Gas & Electric Corp. "You risk losing everything that's a fabric of the community. That was scary."

BIG PHONE BILL. As IBM mapped out its restructuring early in 1993, a few local leaders began making their own plans. Ganci and T. Jefferson Cunningham, a banker, buttonholed other business executives--senior IBMers among them--for donations to revitalize the county's marketing efforts. They raised $450,000, got the county and state to add $500,000, and commissioned a study of the region's resources. The primary recommendation: market the dozens of empty IBM sites scattered around the county as low-cost alternatives for New York area companies.

With that, Kathleen Sullivan Norat went into action. Sullivan Norat, now 38, was regional director for the state's Economic Development Dept.--the area's chief marketing officer, in effect. In dozens of calls each day to prospective tenants all over the country, she pitched the valley's human resources, the network of suppliers, and the extensive communications infrastructure. She talked of a "global company town" from which companies could do business anywhere.

Her strategy: prime the pump. Bring in state and local monies to start businesses and bolster existing companies. Pursue high-wage, high-skill jobs, "because low-wage jobs are probably going to go elsewhere anyway, and they're not going to build back the economy," she says. And target smaller employers, leaving to deeper pockets the giants that demanded huge public incentives. A few successes would encourage others, setting the stage for broader recovery.

In some ways, the region was an easy sell. For starters, almost everything IBM had built and bought over 50 years was still there. The company brass took 20,000 jobs out of the valley, but they left the custom desks and bookcases behind rather than pay to move them. They left the raised floors, with miles of fiber-optic cable underneath, and the world-class clean rooms, power plants, and chemical-disposal facilities.

For Richard Borstelmann, it was "like living in the Plaza after staying at the Y your whole life." His 10-person company, UCE Inc., moved to the East Fishkill plant in March from cramped quarters in Norwalk, Conn., to make custom liquid-crystal displays in IBM's clean rooms. Down the hall, Gary and Susan Jones are reveling in the IBM evaporators--$5 million, two-story-high pieces of equipment--that they got cheap and fast. Their three-year-old FED Corp. makes advanced flat-panel displays; moving from North Carolina to the IBM space, with its elaborate trappings already in place, saved at least a year in getting their displays to customers.

HUGE LOAN. There's a catch, though. While it was IBM that initially attracted the new talent, taxpayers will end up helping to bankroll the resulting jobs. The East Fishkill site is one of three state economic-development zones in the county. By relocating there, FED and UCE qualify for a seven-year property-tax abatement, not to mention investment-tax credits, sales-tax refunds, and wage-tax credits. Other state and local programs tie grants and low-interest loans to concrete job-creation targets.

In all, $60 million in state aid flowed into the Hudson Valley in 1994--more than the region had received, cumulatively, in all its history. (Sullivan Norat, say admirers, is expert at beating the bureaucratic money-bushes.) Some $40 million of the total was lent to Micrus Corp., a new chipmaking joint venture of IBM and Cirrus Logic Inc. that promised to keep 400 jobs in East Fishkill and add 300 more over two years. An additional $8 million went to retrain former IBM employees.

Such incentives, widely used in regional development, create an attractive hook for out-of-towners looking to site a plant. Yet the payback, in terms of incremental tax revenue or consumer spending, is difficult to pinpoint; indeed, it's not clear whether, ultimately, they create much economic value at all. "I always think those actions might affect things at the margin, but they don't create recovery or decline," says Matthew Drennan, an economist at New York University.

More to the point, the money won't last forever. Now past its crisis, the valley likely will see a small fraction of its 1994 windfall this year. The state likely will turn down Cirrus Logic's request for a $10 million grant to enlarge Micrus, which will expand anyway.

This is entirely appropriate. "Do we need special attention now? No," says Sullivan Norat, who in January became president of Dutchess County's Economic Development Corp. (EDC). Far more important, in any case, are the resources that will remain after the tax abatements run out. Highways. Airports. And, more than anything, suppliers. Fax machines and the Internet may foster global business ties, but having a crucial vendor just across town is still what counts most. "Here, we can get custom parts machined at 2 a.m. if we need it," says FED's Gary Jones. "Anywhere else, we'd have to fly someone to San Jose."

Indeed, a big part of Sullivan Norat's successful pitch to Laerdal Medical Corp. was her promise to locate a medical-products supplier network. Stethoscopes in IBM-land? The EDC worked with the Hudson Valley Technology Development Center, a state-funded nonprofit group, to identify machine shops and other vendors that could supply Laerdal parts and services. With a $135,000 state grant, the EDC also has begun an initiative that links large companies with area suppliers that can take on outsourced operations.

The point is twofold. First, diversity feeds on itself. Second, while imported talent is nice, it's at least as important--and a lot cheaper--to take care of the resources a community already has. That means creating an environment that will induce remaining employers to stay put--a concept that high-tax New York is still struggling with. The private sector has helped address this shortcoming: A consortium of 21 area banks, for example, operates a loan pool for risky small businesses that don't meet typical lending standards.

Meanwhile, the region has fostered entrepreneurship. Bob Ritter's incubator, one of several seeded by county and state money, provides its tenants low-rent space--old IBM space--and low rates on office services. Ritter hopes that, given two or three years, his fledgling entrepreneurs will fill some of the region's empty real estate. Already, though, small business is sprouting throughout the area. Silicon Valley it's not. But absent IBM's security blanket, some people have become risk-takers. "I used to think my career was going to be at IBM, and I'd retire there someday having made all the money I needed," says Henry Duquette, 40. No more. Duquette still works at IBM, building and repairing test equipment. But on the side, he has started Duquette Limousine, hiring out his two cars for $40 an hour.

James Capralos has turned entrepreneur, too. After 29 years with IBM in Poughkeepsie, Capralos took early retirement, at 52, from his $70,000-plus systems analyst job. He found part-time maintenance work, then quit to open the Northeast sales and distribution office for his brother-in-law's small prescription-drug-packaging company.

Today, Capralos' office is his living room. He is his only employee. He makes a fraction of his IBM salary--and he loves it. "I never thought I would end up being a salesman," he says. "Never. I don't know what odds I would have given two years ago that I'd be doing this." The words of a born-again Beemer.

Will the Valley make it? The numbers look remarkably robust. Dutchess County's unemployment rate has slipped to 4.5%, the lowest since 1990. Sales-tax collections, a measure of retail activity, jumped 8.2% last year from 1993. Wages, a key barometer of job quality, are coming back up.

Certainly, there is a troubling undercurrent. The region's labor force has shrunk by 6% in two years, reflecting the exodus of thousands of skilled engineers and assembly workers--"a competitive asset that may already have dissipated," says Marist College economist Ann E. Davis. While officials say they are close to attracting as many as three new high-skill employers, the county's biggest single recruit is the U.S. Postal Service, which will hire at least 800 semiskilled workers--most of them part-timers--to operate electronic image scanners. The state plans to fill half of IBM's empty Kingston plant with similarly low-paid data processing employees. Retail sales are strongest for the big discounters that now crowd a 10-mile section of Route 9, the county's commercial strip, and office space goes begging at $4 to $8 a square foot, roughly half what it was two years ago.

In the face of such challenges, however, signs of the Valley's rebirth are unmistakable. IBM is healthier than it has been in years, largely because of the strength of the Poughkeepsie-based mainframe unit. Local developers are building small office buildings and upscale homes again, and a Manhattan businessman has tentatively agreed to buy the other half of the Kingston plant. At the Poughkeepsie Chamber of Commerce, membership has doubled in four years, to 1,400. For every ex-Beemer still without work, it seems, there is a James Capralos.

The community is changing, subtly. Its dependable IBM audience gone, Poughkeepsie's Bardavon Opera House has broadened its repertory to appeal to new markets; a gay/lesbian opera came to town last spring. The shopping malls along Route 9 have extended their evening shopping hours to accommodate the swelling commuter population. At inner-city Poughkeepsie High School, 100% of this year's graduates will go on to college. Says Principal Theodore Peterson: "There's just not a hell of a lot of work here for these kids. Not anymore. They're better off getting into college as soon as possible."

SLEEPY HOLLOW? Those are good signs. The Hudson Valley is adapting, adjusting, preparing for a new way of life. It has woken up: Wrenching change will do that. Across the region, people are learning to take greater responsibility for their careers and lives, and to think of their communities in terms of collective self-determination.

The risk is that they'll fall asleep again, lulled back into complacency by the cushion created by commuter and retiree dollars. That isn't likely, however. If nothing else, there exists a cadre of civic leaders committed to remembering the many sins of the past. "The mistake is in believing this place is superior to other places," says Charles E. Conklin, whose Conklin Instrument Corp. has operated in the Hudson Valley for 38 years. "It's not."

Not yet, anyway. But it soon could be. Fayiz Hilal, Richard Borstelmann, Kathleen Sullivan Norat, and many others are working on it. Their valley, now out from under Big Blue's shadow, is coming back.

Lessons from Dutchess County

DIVERSITY EQUALS VITALITY A region dominated by a single company or industry is ripe for disaster. Think of it as sound portfolio management: With a broad base of industry, one failure won't kill off the local economy.

PEOPLE POWER It's impossible to compete globally without a skilled workforce. Companies won't move in, and entrepreneurs will go elsewhere.

LOCATION, LOCATION, LOCATION Yes, everyone can do business by fax, phone, and Internet, and companies can sell to anyone, anywhere. But most still depend on a regional network of suppliers and customers to keep them going.

TRANSPLANTS ARE OVERRATED Luring new companies to the region is a quick way to bring in new jobs, but it's an expensive fix. Better to retain existing businesses and to nurture entrepreneurs.

GOVERNMENT HAS A ROLE An aggressive development strategy can trigger growth. Longer term, though, human capital, infrastructure, and market forces are more important.

GROWTH TAKES TIME Economic recovery doesn't happen overnight. The challenge: Keeping critical resources in place and motivation high until development efforts create broad, sustainable gains.By Keith H. Hammonds in Dutchess County, with Ira Sager in New York


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