Sumitomo Wrestling

Election night, 1995. Phoenix Mayor Skip Rimsza is beaming. Though it is the lowest-turnout municipal election anyone could remember, voters have given Rimsza a sizable victory over three challengers. In his victory speech, flanked by supporters, His Honor chalks it up to the confidence and sense of good stewardship he inspired in voters.

It was about business sense, he says, pointing to his track record of bringing new businesses to the city.

That record includes the Japanese manufacturing giant Sumitomo, which announced just days earlier that it would locate a 500,000-square-foot silicon-wafer factory in northeast Phoenix. The plant would bring 400 jobs to the area--a development north of the Central Arizona Project canal near Tatum Boulevard--and enhance the high-tech luster local politicians have tried to put on that part of the Valley.

News media and businesspeople alike had praised the effort to bring Sumitomo here, calling it a model of cooperation between industry and state and local governments. Rimsza isn't about to pass up the opportunity to take his share of credit for the coup.

"Not very often do you have the opportunity to even consider getting a company of this magnitude," he says proudly. He likens Sumitomo's arrival to the 1971 move by the Greyhound Corporation (now the Dial Corporation) to Phoenix. The mayor is obviously pleased with himself and his deal.

Not everyone else is. Some people living near the plant's planned site worry about traffic, pollution and the huge amount of water the facility is projected to use.

But the most serious questions about the Sumitomo deal involve the enormous incentive package state and local governments have offered to the company.

State and local officials have offered Sumitomo--a Japanese superconglomerate that owns the world's largest bank and boasts nearly $150 billion in annual revenue--inducements worth billions of dollars to build a computer-chip plant that may employ as few as 400 people. The inducements include:

* immediate off-site infrastructure improvements valued at $8 million;
* a state job-training grant of $450,000;
* a variety of income-tax breaks that the state government has refused to detail; and

* a promise to make Sumitomo's site a "free-trade subzone" that will allow the plant to operate free of import-export duties and some taxes.

It is the free-trade-subzone deal that constitutes the most stunning of the governmental subsidies offered to Sumitomo. The free-trade designation will make the company exempt from 80 percent of the property taxes it would otherwise have to pay.

At current rates, that tax break would save the company approximately $11 million a year in local property taxes. Those tax benefits would continue for the life of a 99-year lease of state land for the wafer plant. The face value of this break alone is more than $1 billion.

The future value of this tax break--that is, the value of these tax savings (or, from the government's point of view, lost tax revenue), if they were invested at a moderate interest rate--tops $80 billion.

Perhaps the most disturbing feature of the incentive package offered to Sumitomo is its covert nature. The state and city conducted most of the negotiations to bring the company here in secret, without the participation or knowledge of the public. Amid a barrage of boosterism, there was no serious press coverage of the potentially negative aspects of the wooing of Sumitomo.

And no one in a position of authority publicized this bit of elementary mathematics:

The average job at the new chip plant will pay about $23,000 per year. If the factory reaches its possible capacity of 700 jobs--and there's no guarantee it will--during each year of the next century, the government will give Sumitomo a property-tax subsidy of $15,000 for each of those jobs.

In early September, just weeks before Sumitomo decided to build in Phoenix, the city and the state had all but given up on snagging the plant. It looked as if Newberg, Oregon, a suburb of Portland, had won the race going away. Sumitomo officials were said to prefer the area's climate, lifestyle and better-educated worker base. Only a last-minute scramble of antiplant activism, and a show of backbone by Oregon officials, had killed the deal. In essence, Phoenix won by default.

It was a costly win, all the same.
"Arizona won this project because we rolled up our sleeves," Governor Fife Symington crowed. "We worked as a team to show Sumitomo that we wanted them here in Arizona. We were serious about that."

They sure were. Just look at the A-list of Valley movers and shakers brought in to help the deal along: Doug Yearley, chairman of Phelps Dodge Corporation, who used his connections from joint ventures between the Phoenix-based mining company and other Sumitomo divisions; Don Budinger, president of Rodel Inc., who played up the benefits of locating near his company, which manufactures chemicals and polishing tools for silicon wafers; Mark DeMichele, chief executive officer of Arizona Public Service Company, who helped put together a utility deal; and Roy Herberger, president of the American Graduate School of International Management, who put his expertise in Japanese business practices to work on the state's behalf.

Muckamucks from both Intel and Motorola, two of Sumitomo's biggest customers, also lobbied on Arizona's behalf. And powerhouse Valley development lawyer Grady Gammage Jr., who owns a substantial stake in the development where the plant is slated to go up, is said to have done his share of behind-the-scenes flesh-pressing.

The usual lineup of official economic-development types did their best to court the company, too. The Arizona Department of Commerce, Phoenix's Community and Economic Development Council, the state Land Department and the Greater Phoenix Economic Council all went to work convincing Sumitomo to come to the Valley.

Despite officials' claims to the contrary, it was probably not the money that brought Sumitomo here, after all. Large corporations rarely make incentives their first priority when picking a site; factors such as market access, quality of life, labor costs and the local regulatory environment figure much more prominently in their thinking, according to recent surveys of corporations.

And Sumitomo executives have admitted that their decision to move here was prompted by more than just money. The relative inflexibility of environmental laws in Oregon, the company's first site choice, had a lot to do with the decision, they say. So did the approach of the bad-weather season there, which would have delayed construction.

Even so, Phoenix and Arizona offered quite an economic bonanza to Sumitomo-Sitix Corporation, the subsidiary that will actually produce silicon wafers here. Here's how the deal stacks up:

The city will pitch in $8 million in infrastructure improvements--streets, water and sewer lines--leading to the plant's 105-acre site near Tatum Boulevard and Union Hills Drive. City officials say the improvements would have been needed anyway, and their installation was simply accelerated.

That claim, however, seems to be disputed in a July 21 letter to deputy city manager David Garcia from the city's Water Services Department.

The letter, attached to a list of improvements needed at the site, reads in part, "Please note that revised ... water and sewer demands provided by Sumitomo are considerably higher than the numbers used previously to estimate infrastructure requirements."

Bing Brown, a spokesman for the city's Water Services Department, says the letter simply refers to requirements that increased sooner than anticipated, and that the same capacity would ultimately have been needed in the area--if not at the plant site--regardless of whether Sumitomo developed there.

The city also promised to sponsor Sumitomo's application to create a free-trade subzone at the site. If the federal government approves the application, Sumitomo will not pay any duty on goods shipped into or out of the country. Sumitomo executives say they don't know how much money that will save the company. Because the factory will be outfitted with extremely pricey manufacturing equipment from Japan, though, the savings promise to add up to a bundle.

Still, those benefits are not the frosting on this cake.
Approval of the free-trade subzone--which is almost assured--would also mean that the company's annual property taxes will be slashed by about 80 percent--from $13.7 million to $2.7 million.

It is this incentive--perhaps more than any other aspect of the deal--that has riled taxpayers and businesspeople alike. Over the 99-year life of the lease, Sumitomo will receive direct property-tax subsidies of about $1.1 billion. Assuming a 6.5 percent interest rate, the total value of those savings at the end of a 99-year lease of state land to Sumitomo would be roughly $86 billion.

Chris Estes, a local activist who sits on the planning board in the neighborhood where Sumitomo's factory will be built, says forking over that much money to one of the world's biggest companies is absurd.

"We're paying for everything," he says. "Once again, we have the little guy bearing the burden for a giant corporation. Small-business owners should be outraged.

"The average taxpayer will have to make up the difference."
The state did its share to lure the company here, too. The Arizona Department of Commerce offered about $450,000 in state job-training funds to the company--in effect, offering money to the world's largest silicon-wafer manufacturer to teach people how to make silicon wafers. Also, the department has offered the company help in obtaining a $100,000 grant for infrastructure improvements at the site.

The state Land Department got into the act, as well, putting together a package to lease the state-owned site in record time--despite that, for months, neither Phoenix nor other state agencies would tell the Land Department whom it was preparing the lease for.

"That bothered us, yes," says Mike Phalen, planning and asset manager for the assets section of the Land Department. "But we went to work doing it, and got it done. [Preparing such a lease] is usually a six- to 18-month process, but we did it in about three months."

The state will hold an auction on the lease for the proposed site on December 12, but many view that auction as a mere formality.

Dave Krietor, director of the city's Community and Economic Development Council, says the incentives offered to Sumitomo-Sitix are appropriate. He downplays the $11 million property-tax break, contending it is necessary for Arizona to compete with other states that have less hostile business-property-tax structures.

"There still will be $2.5 [million] to $3 million in property taxes being collected there," he says. "The facility will still be one of the two or three biggest tax generators in [its] school district. Had we not had that [free-trade subzone] program available, they may not have located here."

Officials also have claimed the incentives are appropriate in light of the 700 jobs Sumitomo says it may eventually create with the project. Only 400 jobs are guaranteed for now.

Rimsza and Symington have publicly lauded the company on several occasions for creating high-paying jobs. But the bulk of Sumitomo's jobs will pay only about $23,000 per year--far less than the average wages at other Valley high-tech plants such as Motorola and Intel, according to spokespeople for those firms. Only about 50 of the first 400 employees, Sumitomo says, are expected to be higher-paid engineers. The rest mostly will be technicians and operators.

Sumitomo-Sitix is but one of more than 100 worldwide subsidiaries of Sumitomo Corporation, a gigantic, 400-year-old international trading company based in Osaka, Japan.

In the fiscal year that ended in May, Sumitomo earned 35.6billion yen, or about $352million, on revenue of 15trillion yen, or about $148.5 billion. Its businesses include chemicals, steel, copper, petroleum, precious metals, real estate, telecommunications, plastics, construction, insurance and banking concerns.

Sumitomo Bank is the world's largest, with about $625 billion in assets. It holds stakes in CB Commercial Real Estate Group, Goldman Sachs & Co. and many other financial companies.

Sumitomo Corporation's copper-mining division owns a 15 percent share in Phelps Dodge's Morenci copper mine in southeastern Arizona and is a 20 percent partner in a Phelps Dodge open-pit copper mine in Chile.

At its Phoenix plant, Sumitomo will melt silicon, add impurities to achieve certain electrical characteristics, and "grow" the substance into crystals. The crystals then will be sliced into wafers, machined flat, smoothed with chemicals and polished.

The wafers then will be either shipped to chip manufacturers (such as Motorola and Intel, two of the company's biggest customers) or put through another step--epitaxy, in which another silicon layer is grown on top of the polished wafer. A Sumitomo facility in Albuquerque handles epitaxial layering, and also "reclaims" scrap wafers by removing circuits from them.

Sumitomo has wafer plants in Fremont, California; Maineville, Ohio; and Saga, Imari and Amagasaki, Japan.

With a couple of exceptions at its Japanese plants, the company has a reputation for being "clean" by computer-industry standards and has a history of bringing benefits to the communities it locates in. It seems like the kind of corporate citizen any city would love.

So why, local critics ask, didn't Newberg, Oregon, want it?
After months of offers and counteroffers to Sumitomo from Newberg and Phoenix, the Oregon city retained several advantages--cheap land, a cool climate, nonstop flights to Japan, a well-educated labor pool and nearby customers.

There also was an enormous difference in land costs. Sumitomo could have purchased the entire 195-acre site in Newberg for $11million or less. That compares with leasing the 105-acre site in Phoenix for about $100million over 99 years, after which the land's use will revert to the state. And, although the city is giving the company $8million in off-site infrastructure, Sumitomo must pay up to $10 million for required rights of way and on-site improvements.

Even though it was cheaper in some ways, Newberg had some sizable disadvantages--no tax breaks, an organized and highly active environmental opposition, and, perhaps most important, a limited water supply.

Although the city is near both the Willamette and Columbia rivers, Newberg's water rights are limited. Sumitomo would have needed up to 25 percent of the city's total supply for the water-intensive manufacturing process of producing silicon wafers.

It may seem ironic that water concerns which, in large part, kept the company from building in the Pacific Northwest seemed to have played almost no part in the consideration of whether to put the same plant in the middle of a desert. Phoenix water officials say the plant will be able to draw as much water as it will ever need from the nearby Central Arizona Project canal.

There are reasons for what may seem like an overgenerous offer of limited resources. For tax-revenue purposes, city officials want very badly to turn the area surrounding the Sumitomo site into the Valley's next high-tech manufacturing center--and they don't want to worry about water while they're doing it.

It is an area that city officials have long projected as a major population center. Population projections envision more than 200,000 residents in the area by 2020, according to a study conducted for the city by Pollack and Associates, a Phoenix consulting firm.

Mike Martin of Northeast Phoenix Partners, which holds the master permit for 5,600 acres north of the CAP canal called Desert Ridge, was a major player in the effort to lure Sumitomo to the area. He says residential development has already begun. The speed of development will only pick up now that Sumitomo has settled on the area.

The Mayo Clinic is already set to build a hospital officials hope will serve as the core of a cluster of health-care-oriented companies immediately east of where Sumitomo will locate.

A concentration of jobs in the area would accelerate the development of housing in Desert Ridge and to the north, city officials say, creating the population necessary for development of a regional shopping mall. In fact, the city's general plan for the area allows such a mall between 56th Street and Tatum Boulevard, north of the Pima Freeway.

The mall and other nearby retail development would be major sales-tax generators for Phoenix and Scottsdale. This future tax revenue is one of the hidden reasons politicos are so eager to kick-start development in the area.

Promises of new jobs, hospitals and enhanced sales-tax revenue, however, don't make everyone feel better about the water issue.

Hannah Goldstein, president of Scottsdale Concerned Citizens Inc., says there's more to the Sumitomo water issue than meets the eye. Her group has joined in a coalition with Sonoran North Incorporated, Don't Waste Arizona Incorporated and the Northeast Valley Citizens Organization to stop Sumitomo from building its plant.

"Everyone acts like we have all the water we could possibly need," Goldstein says. "We don't. And as more development occurs up here, we will have less and less."

Sumitomo and the city say that eventually the plant will use about 2.5 million gallons of water per day--enough water to meet the daily needs of about 25,000 people.

Residents of the area are already sensitive about water concerns. The large number of golf courses built nearby in the last few years has brought the locals' attention to the aquifer that lies just beneath the site--an aquifer that studies show is being rapidly depleted.

"It's one of the last aquifers in the state that we know is clean," Goldstein says. "If that [water] gets pumped out, there won't be any groundwater left up here, and we'll all be totally dependent on the CAP."

Phoenix water officials say that, although the Sumitomo plant will eventually get all its water from the CAP canal, at least some water will probably have to be pumped from the ground during the construction and start-up phases.

"It's foolish to think that just because we have what looks like plenty of water from the CAP today, we will have as much as we need forever," says Steve Brittle of Don't Waste Arizona. "Even if there is enough water to meet everybody's needs up there now, will there be enough when the area is built out? Are they giving away a resource that can't be replenished?

"Where is this water coming from, where is it going to go, and what's going to be in it?"

Silicon-wafer manufacturing is an extremely chemical-intensive business, based as it is on stringent standards of cleanliness and precision. Large amounts of solvents are used to clean, smooth and polish the wafers as they are formed, and even larger amounts are needed to clean the wafer-making machinery. Then, vast amounts of water are used to wash all the chemicals off equipment, floors and workers.

So where does the chemical-laden water go after that?
In Sumitomo's case, it will travel from the plant site all the way across the city--to the Phoenix water-treatment plant at 91st Avenue and the Salt River. As the pipes run, it is a distance of more than 20 miles.

According to the ELaw Society, an environmental watchdog organization in Oregon that fought Sumitomo's plans to locate there, these types of manufacturing facilities use chemicals that are so new that federal officials are not sure whether they pose a public-safety risk. Some extremely hazardous chemicals used in the industry are arsine, phosphine and ammonia.

The chemical compounds that seem to concern environmental activists the most, however, are fluorides.

Fluorides are compounds of the element fluorine, a pale yellow gas with a sharp odor. Different compounds of fluorine are used in many types of manufacturing, including the production of glass, enamels, bricks, aluminum and silicon. Fluorine combines with hydrogen to make hydrogen fluoride, a colorless gas. Hydrogen fluoride is then dissolved in water to make hydrofluoric acid, a solvent used in silicon-wafer manufacturing.

Hydrofluoric acid is one of the most dangerous acids known. Get so much as one drop on a fingertip, and the whole finger usually must be amputated because, as the acid works its way deeper and deeper into body tissue, there is no way to remove it. Some people who get a tiny splash of the stuff on them feel its aftereffects for decades.

Hydrofluoric acid will be in the wastewater generated by the Sumitomo plant. Neither company officials nor state or city water officials know yet exactly what concentrations will be discharged, although the groups say there is nothing to worry about.

Apparently, residents will have to take the official word as gospel. There is no city or state wastewater standard for fluorides.

There are federal standards for fluorides in wastewater, but the measurements to determine whether the city is meeting them are done at the wastewater treatment plant. In this case, the measurements will not be done until Sumitomo's waste has traveled 20 miles and been mixed with, and diluted by, wastewater from all over the city.

Sumitomo says that, as the world's biggest manufacturer of silicon wafers, it knows how to handle dangerous chemicals safely. The company says that by the time any waste chemicals leave the plant, they will be diluted enough that they will pose no hazard to anyone.

Whatever measures are used to clean the water, Phoenix taxpayers will end up footing the bill for much of them.

Currently, Phoenix water records show, the 100 largest industrial users of water in the city pay only about half the cost of treating their wastewater. That leaves taxpayers with the tab for treating the rest of it--about $800,000 per year.

Using 2.5 million gallons of water per day, Sumitomo will by itself increase that wastewater-treatment cost burden by about 17 percent.

Despite the city's fast-tracking of the project, the work public officials and local businesspeople put into getting the company to come here, and the rhetoric to the contrary, the fight over Sumitomo may not be over.

Chris Estes' coalition is working with the city, he says, trying at least to nail down some aspects of the deal (such as environmental permitting) before construction begins. If all else fails, the coalition will sue--on grounds that the city didn't follow public-disclosure rules as it worked to bring the company here. Whether his group can stop the process before ground is broken, he doesn't know.

"The problem that we have is that environmental concerns aren't even addressed. They were never even brought up. We want the city to go back through the process, to do it right this time for the citizens of this city," Estes says.

To say that there was no significant public input into the process is an understatement. Changing Sumitomo's site from residential to industrial zoning required an amendment of Desert Ridge's general plan and a rezoning of that specific parcel. Both were done.

The city, however, had entered into an agreement with Sumitomo that the company's name would be left out of zoning matters until the last possible moment. When the rezoning and the change of the general plan were considered, the Phoenix City Planning Commission was listed as the applicant, not Sumitomo. And state land officials acknowledge that they worked on the lease for the site for months without even knowing whom it was for.

The city's willingness to keep the Sumitomo move a secret is made abundantly clear in a July 20 agreement between the Phoenix Development Services Department and the company. In it, the city promises: "All rezoning applications and fees have been completed and paid by [the developer] and/or the City. Sumitomo-Sitix and their representative ... will not need to participate in the rezoning process and will not be identified as part of this process."

Also, the Phoenix City Council approved the tax and infrastructure subsidies for Sumitomo as "emergencies." Use of the city's emergency clause, which relaxes public-notice requirements for council action, is reserved, by law, for measures that are necessary for the "preservation of the public peace, health and safety."

The Sumitomo incentive measure came to the city council after only one day's notice--a notice that was posted at City Hall, but nowhere near the affected neighborhoods.

Estes says the effort Phoenix exerted in keeping the deal a secret as long as possible is evidence of both the foolishness of the city's financial offers to Sumitomo and the potential environmental dangers the factory poses.

"They knew that this area is under a lot of scrutiny," he says. "You have to ask the question: If the emergency clause is about public safety, what does that have to do with the infrastructure deal for Sumitomo?

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