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California, A Business Hub No Longer?

·4 min read

Still the home to the likes of Google –Alphabet Inc (NASDAQ:GOOGL)– NVIDIA Corporation (NASDAQ:NVDA) and Cisco Systems Inc (NASDAQ:CSCO), the state of California is witnessing how a big pool of businesses headquarters are flocking away to pastures new. What is behind this trend?

Q2 2021 hedge fund letters, conferences and more

Long Distance Moving On The Rise

According to a study by the Hoover Institution, 272 firms have moved their headquarters to other states between January 1, 2018, and June 30, 2021. Interstate moving companies in the area are seeing an increase in U-Haul rentals attached to this phenomenon.

Further, the number of businesses relocating their HQs out of California is running at twice the rate in the first half of 2021, compared to 2020, with 74 taking place during this period.

“The half-year monthly average for 2021 also significantly exceeds the monthly averages for 2018 and 2019,” the study asserts.

Among the fleeing firms, there is Apple Inc (NASDAQ:AAPL), Oracle Corporation (NYSE:ORCL), and Nestle SA (SWX:NESN), all relocating to states such as Texas and Virginia.

The causes are mainly attached to the high tax rates, punitive regulations, expensive cost of labor, energy, and utility, and also the overall deterioration of the quality of life “for many

Californians which reflects the cost of living and housing affordability.”

California Issues

The study yields some revealing information. “Obtaining permits from state, regional, and local agencies in California to build any type of facility is extraordinarily expensive and time-consuming because of confusing, extraneous, and harsh requirements and bureaucratic delays.”

In Los Angeles, securing a building permit for a fast-food restaurant could take up to 285 days, an issue also evident in smaller cities in the state –in Texas it usually takes 62. Also, California’s overtime pay to non-exempt employees is one and a half times the regular pay rate for all hours worked over 40 in a workweek.

Paired with nearly unaffordable housing for employees, the situation has prompted companies to flee the state in search of more benign tax costs and overall quality of living for their staff.

Attractive Texas

The phenomenon is consistent with the findings of Chief Executive magazine’s CEO annual survey. In the 2021 edition, California has ranked the worst state where to do business, and it ranked second-worst at No 49 in the Tax Foundation’s 2021 State Business Tax Climate Index.

The exodus of technology companies from California –accelerated by the pandemic– is greatly benefiting Texas and the border area between Mexico and the U.S., where a technology hub is gradually emerging on the advantage of the bilingual and bicultural reality of the area.

“Last year, starting in July, we began to see a very strong increase in investments,” says Omar Saucedo, spokesperson for The Bridge Accelerator, a Microsoft Corporation (NASDAQ:MSFT)-driven startup accelerator that operates in the border formed by El Paso and Ciudad Juárez.

Border Perks

Although the Californian exodus to Texas had already begun in recent years, the increase of remote work as a result of COVID-19 has played a key role. Since then, cities such as Austin or the El Paso-Juárez conurbation have exacerbated the trend.

In addition to lower tax and regulatory pressure, the border region competes against Silicon Valley with a variable increasingly cited by employers in technology companies: infinitely more affordable costs of living that allow them to pay their workers lower wages than those of California.

Thus, according to the real estate portal Zillow, the average value of a house in El Paso is $155,000, compared to $1.5 million in San Francisco and more than $3 million in Palo Alto –HP Inc (NYSE:HPQ)’s founding place and considered the heart of Silicon Valley.

“It is very common here that the Mexican businessman has a presence in the U.S. and vice versa,” which has become a luring element for technology firms, he adds.

Operations In Both Countries

This is the case of PPAP Manager, a company offering cloud solutions to gain efficiency in the part approval process with suppliers. The company has offices in both Mexico and the U.S., and it operates near the border.

“Being on the border helps us make the flow of our business between the U.S. and Mexico much simpler. It is a region that is always open to experimenting and trying new things: we must not forget that Ciudad Juárez was already a pioneer in Mexican manufacturing at the time,” says Rene Pons, its co-founder.

It is precisely the strong weight of the manufacturing industry in the region –with sectors such as construction materials, plastics, and electronic components.

In the future, Pons asserts, this will generate an ecosystem full of opportunities for emerging technology companies dedicated to offering services to these and other industrial giants.