Dear Cities: Resist Amazon’s HQ2

September 30, 2017

There is something untoward about the feeding frenzy we are witnessing as cities across the country vie to be the site of Amazon’s second headquarters (“HQ2”). Amazon, after all, is the poster child for driving, first, independent booksellers and then retailers out of business, hollowing out communities across America. It is considered a meat grinder for white-collar workers who churn through the place at a rapid clip in search of their piece of the gold, and equally well-known for treating its warehouse workers like draft animals. It is also a notorious if not clever tax avoider.  Just the kind of company you want to build your economic development strategy around, right? Yet cities are drooling over the opportunity to bribe the company with tax giveaways and other subsidies in a sickening and dumb race to the bottom in which citizens are the losers, and powerful companies (and their executives) only grow more powerful.

Reports suggest that Amazon will invest $5 billion and create 50,000 jobs over a ten-year period (with little common sense scrutiny), mostly in support areas like finance and accounting. We should be glad Amazon is searching in the US, and not in India, I suppose, since no doubt cost is a driving factor for the (barely) profitable Amazon. If we take founder and CEO Jeff Bezos at his word on Amazon’s “plans” (I view them as chum in the water to create a feeding frenzy), this would provide one of the largest single job creation and real estate development stimulus impacts since Disney moved into the Orlando area in the late 1960s. If the plans materialize (big if, see below), they will transform whatever city is chosen, for better (perhaps) and for worse.

Of course, mayors and real estate developers are huddled in their “war rooms” to rashly cobble together their proposals under an absurd (and thus telling) time limit. Mayors rightly care about jobs, and real estate developers know all too well the formula for this once in a lifetime bonanza. These are the times when it can be very lonely trying to articulate a more regenerative approach to economic development. One might say “tilting at windmills,” but here goes.

First of all, it is stunning to consider the scale of this enterprise today, before contemplating its growth plans. Amazon occupies over 8 million square feet in downtown Seattle, more than the next 42 Seattle enterprises combined. Citibank, the second largest corporate headquarters in a major US city, occupies only 2.7 million square feet by comparison, representing a tiny fraction of the concentration in much larger New York City. Reports suggest Amazon intends to expand another 50% in Seattle to 12 million square feet, in addition to the HQ2 project.

Scale matters. If something goes wrong at Amazon, it will send a crippling shockwave across Seattle (Boeing was barely a ripple in comparison) and wherever HQ2 ends up. No city, no matter how appealing in the short term, should want to have its future rest in the hands of one company, as many “company towns” have learned over the ages. Detroit, one of the cities that has assembled a war room to pursue the opportunity, has suffered precisely because it built its city around one industry. The science of living systems reveals that systems that sustain themselves over time nurture diversity and the resiliency that goes with it, and seek a balance in favor of many complementary small and mid-sized organisms over one dominant one (even if benevolent, which Amazon most certainly is not).

As a brilliant and searing recent report released by the Institute for Local Self-Reliance points out, Amazon, valued at $450 billion, captures one in every two dollars Americans spend online, thanks in large part to the irresistible genius of Amazon Prime (I admit to being a member). Half of all online shopping searches start directly on Amazon, not on Google or individual retailers’ websites. Think about it. This would make even the railroad barons of earlier days blush.

Cities must think long term, and anyone who doesn’t consider a major anti-trust risk for Amazon that could materially undo its growth plans, even in our corrupt current political environment, is not thinking clearly. In fact, there is already rising bi-partisan clamor rightly agitating around the power of the mega tech platform companies, beginning with Amazon.

Furthermore, despite its hegemonic reach, Amazon’s core retail e-commerce business still basically loses money on a global basis. Its razor-thin US operating margins are offset by losses overseas. Never in the history of business has a company managed to grow to many tens of billions in sales without making a profit. What keeps the juggernaut not only afloat, but soaring? Three things.

First, founder Jeff Bezos is not only very smart and visionary, he is a master salesman. Like no one before him on such a scale, he has managed to get the stock market to buy into his world dominance dream, built on a fierce commitment to customer convenience and satisfaction (a critical vice of our consumerist society and thus a brilliant cover for a monopolist). Second (and related), the highly speculative stock market has enabled Bezos to pull off a stock bubble feat while the dotcom crash is still visible in the backs of our minds. And third, that same visionary foresight combined with an insider’s view on emerging technology trends allowed Amazon to leap ahead of slower stalwarts like Microsoft and IBM to grab a leading position in the highly profitable and scalable cloud computing sector, providing the much needed and just-in-time earnings boost to keep Amazon flying high. The result is the fourth largest company in the US, thanks to an absurd price earnings multiple of 243. The three largest American companies, Apple, Google, and Microsoft have price earnings ratios of 17, 27, and 28 respectively. Amazon could be overvalued by nearly ten times compared to its closest peers!

Thoughtful observers will notice the precariousness of all three vital legs of Amazon’s shaky stool. There is significant key man risk, and Jeff Bezos—love him or hate him—is one of the greatest entrepreneurs of our day, so not easy to replace. There is always technology risk in the technology industry (ask IBM and Microsoft, not to mention Dell and HP) and probably no better time for valuations of cloud computing businesses than right now (nowhere to go but down). There is stock price correction risk of at least 50 percent or perhaps much more for Amazon, which could be triggered by an Amazon-specific event such as an anti-trust backlash, or some blockchain innovation that disrupts all powerful platforms at once – here’s hoping. Finally, there is the strong possibility of a general market reversal that many (including me) think is only a question of time given the Fed’s artificial manipulation of capital markets post financial crisis. Remember, the higher you climb, the harder you fall. There is perhaps no company more exposed than Amazon.

Boom. Bust. We know the story. All the best-laid plans for H2Q go up in smoke if Amazon’s stock crashes back to earth. And a localized real estate crash wherever HQ2 ends up will no doubt ensue, causing severe fiscal shock to that city, unable to capture the promised prosperity they will have paid dearly for.

A regenerative city builds from the inside out. It values healthy trusting relationships and a diversified business mix—not just sectoral but of small, mid-size and larger enterprises. It invests in its infrastructure as a way to attract good companies at the appropriate scale, rather than participate in a zero-sum race to the bottom for the dubious prize of a single mega-corporation with a reputation.

Mayors of America, lead!  Don’t be divided and conquered, which is Amazon’s real plan.  You dictate the terms for an Amazon welcome mat and the line beyond which you walk away.

“It’s not how big you grow, but how you grow big.” — Jane Jacobs

  • I’m so glad you are waving a different-coloured flag at the big Amazon Party. This trend in shopping is leading us ever-further down the path towards individualized loneliness, and the collapse of community. True community wealth and personal wellbeing both depend on a rich fabric of interpersonal relationships, which a trip to the mailbox does not provide.

    As you so rightly say, “A regenerative city builds from the inside out” – and the best way to do that is to build on local, home-grown enterprise, as people like Michael Shuman have been saying (and doing) for so long. Many thanks!

    • John Fullerton

      On my linkedin network, I was accused of tilting at windmills! Which I have to agree with, and sort of take as a complement. So thanks for restoring my conviction! The way I think about it is not “either or” between local and larger scale. So I’m not a “local economy” guy per se, although have great respect for Michael and his work. I am a “in balance” guy, following the patterns that exist in living systems that sustain themselves over long periods of time. We have big arteries (in service to the system we call our bodies, not extractive in service of their own needs – a key challenge within our current economic system), and we have many more veins, and zillions of capillaries to circulate oxygen and nutrients throughout our bodies. All in balance. Capillaries alone and we are dead. make sense as an analog?

      • Yes. Schumacher said that if everything had been too small, he would have titled his book “Big is Beautiful”, instead of “Small is Beautiful”.

        • John Fullerton

          indeed he did!

  • Mfanawemkosi Fakudze

    Ms. Jacobs you have done a good job of painting the negative view of what can go wrong with the Amazon HQ2 deal…plenty…and that should concern every Mayor and economic development president but with this type of feeding frenzy most individuals abandon rational thinking while being willing to sell their community souls to dance with the devil. My community, the National Capital Region of Canada has thrown its hat within the ring. I see the bid as a waste of time because it lacks the advantages of a central distribution hub, plus it has a very sticky border to cross. I think any Canadian city has almost chance of landing HQ2. I think the winner will come from a hub-community in the middle of America.

    • John Fullerton

      I have no idea who will “win”… I do believe they will celebrate, and it will be great for some period of time. But if one thinks in decades, it will sow the seeds of their problems. But hard to resist indeed for any real estate developer or politician who thinks in 1 to 5 year timeframes…

  • piyush2

    Amazon, true to its mission that is coded in its name (A->Z) is a black hole in the universe of all corporations that start with any letter. It is appropriating entire industries overnight. It will try to fully capitalize on AI and robotics to continue this process of freeing up human capital to beg on the streets as there will be nothing for the vast masses to do that the machines will not be better and cheaper at doing. Before the machines became brainy, humans had one organ called brain that was still useful to industry but now with the brain also outsourced (along with hands and legs), there does not seem to be any other organ left in the human body to be useful for wealth creation. Recently google’s new version of the game Go (alpha go zero) played with itself with no previous human experience and within a month surpassed all past human knowledge about the game and invented new strategies all by playing with itself starting from random input. Nvidia video shows a robotic hand driven by AI that has seen all Van Gogh paintings and creating new Van Gogh paintings. All these machines will be owned by a few people, eventually probably one person named Bezos.

    Unless of course, the governments bring anti-trust or negotiate a social contract with such corporations so that the AI and robotics serves the broader society instead of impoverishing it further in the process of capitalism reaching singularity (the point of no return when most of human capital is replaced with machine capital).

  • Alvaro Monge Z

    Interesting how Amazon is changing a whole paradigm of corporate headquarters. Proposing its new HQ2 as a “regenerative city”, they build also a new perspective of doing business and a new corporate culture from the inside out. It provokes healthy and trusting relationships and a diversified business mix of service and product providers of small, mid-size and larger scale. Possibly, this kind of investment will not be monetized in the “normal” way that actual enterprises are used to. But the environmental and socioeconomic gains for the people and territory involved in the project, implies a whole new way of managing resources.