Amazon Opens Bidding to Cities for $5 Billion ‘HQ2′, a Second Headquarters

Screen Shot 2017-09-08 at 5.40.38 PM September 7, 2017

By REUTERS | The New York Times

Amazon.com Inc said on Thursday it would build a $5 billion second headquarters in North America, kicking off a competition between cities and states to offer tax cuts and incentives that could bring 50,000 new jobs.

The largest e-commerce company said it intended to create “HQ2″, a headquarters that would be a “full equal” to its Seattle office, Chief Executive Jeff Bezos said in a statement. The company wants a metropolitan area of more than a million people with an international airport, good education and mass transit.

Amazon was likely to land its second headquarters in a cheaper city than Seattle and score subsidies. The company promised up to 50,000 jobs averaging more than $100,000 in annual compensation over the next 10 to 15 years.

Cities and states immediately began saying they would bid. Dallas, Houston, Toronto, St. Louis, Kentucky and Miami are a few that are committed to bid. Chicago Mayor Rahm Emanuel has made a case for his city in discussions with Bezos, a Chicago spokesman said.

Companies with two headquarters are rare and distance could challenge the management abilities of Bezos and other leaders, but some investors and analysts also saw the geographical diversification as a way to cut costs and risk. It would also make it easier for the conglomerate to break up down the line if it so chooses.

“The company is changing radically and it depends so heavily on disruptive thinking. Moving to a new city and finding a new talent pool is a good idea,” said Antony Karabus, chief executive of HRC Retail Advisory.

Incentives from land to fee cuts to relocation packages will be a major part of the decision, Amazon said.

Local governments have gone to great lengths to secure jobs and investment. Wisconsin’s legislature, for instance, recently voted to give Taiwanese manufacturer Foxconn a $3-billion incentive package to build a $10-billion liquid crystal display factory in the state.

Amazon’s plan will also boost its political leverage at a time when it has been blamed for the decline of bricks-and-mortar retailers. President Donald Trump has criticized Amazon as doing “great damage”, costing jobs in cities and states. The Wisconsin Foxconn factory will be in the home district of Paul Ryan, Speaker of the U.S. House of Representatives.

Amazon said it was seeking proposals by Oct. 19 and would select the location next year.

More than 50 cities have the 1-million metropolitan area population Amazon targets. Likely contenders could include U.S. Midwest states, where Amazon has many warehouses; Texas, which is the base of the Whole Foods Market grocery chain it acquired this year; and other business-friendly states.

Amazon has been awarded more than $1 billion in state and local subsidies since 2000, according to estimates by watchdog Good Jobs First. Texas leads the way with the value of subsidies to Amazon, followed by Illinois, Kentucky, and Ohio, it said.

Seattle has become an expensive city, ranking 44th on the Economist Intelligence Unit global cost-of-living ranking.

“The high cost of living and the high cost of real estate, all of that adds up to why expanding in that market is not viable,” said Burt Flickinger, managing director of retail consultant Strategic Resource Group.

Amazon may be looking for “more affordable” locations such as Detroit or Atlanta, said Daniel Morgan, vice president and senior portfolio manager, at Synovus Trust Company in Atlanta. Synovus holds a “large” position in Amazon, he added.

Amazon’s shares closed up 1.2 percent at $979.47.

TWO AMAZONS, EVENTUALLY?

Amazon began as a bookseller and grew into the internet’s biggest retailer. It built an award-winning movie studio and has expanded around the world. Its workforce has exploded to more than 380,000 from under 25,000 since it moved to downtown Seattle in 2010.

Total revenue was $136 billion at the end of last year, up sharply from $34 billion in 2010. Amazon recently snatched up Whole Foods Market for $13.7 billion.

Ashim Mehra, an analyst who works on the $256 million Baron Opportunity Fund, said the dual-city strategy pushed Amazon toward an eventual split between its Amazon Web Services business and its retail business.

Such a move would ease the threat of increased regulations on the company and cut internal competition for the best engineers, he said.

The “HQ2″ project would initially need more than 500,000 square feet and up to 8 million square feet beyond 2027, Amazon said. Its Seattle campus spreads across 8.1 million square feet in 33 buildings and employs more than 40,000 people.

The second headquarters also allows the company to lower its operational risks should a natural disaster hit Seattle, said Josh Cummings, an analyst who works on several funds at Denver-based Janus Henderson funds.

He also saw the potential for an eventual split. “I think that immediately this is about staging the next leg of growth at Amazon as it exists today, but down the road this gives them an additional degree of freedom if they decide or are forced to separate the company,” he said.