Pacheco: Why power and people matter more than incentives

One of my job functions is industrial recruitment, which I have been doing for many years. When some people hear the term industrial recruiter, they assume that I recruit qualified individuals for open job positions, which is not the case. 

As an industrial recruiter, I am a contractor who interacts with production plants, distribution centers and their service providers so that they can locate operations to my region. Over the years, I have recruited plastic injection operations, metal fabricators, packing material producers, logistics firms and distribution centers, mostly to the U.S. side of the U.S.-Mexico border region.

Through time, I have seen the factors change that have been important to a company making a decision to establish operations in a new site or relocate their operations. Years ago, federal, state and local business incentives tended to dominate the conversation. These include tax abatements, job-training funds, incentives for job creation, and capital investment. While these are still an important part of the recruitment pitch to prospects, other factors have emerged as even more important.

The availability of labor is a major factor in getting companies interested in a particular region. Many people assume the availability of labor equates to cheap labor. This is not necessarily the case anymore. If cheap labor was the driving factor for production or distribution, global companies would be flocking to places such as Chad or Kazakhstan to set up operations. China and Mexico used to be production bases that paid their labor base much less than in the U.S. or Europe. However, the labor rates in these countries have risen over time.

It is a plus if a community has trained labor, and many companies require certain skill sets to even consider setting up operations in a particular region. More and more, I am seeing that the availability of general labor is becoming even more important. If an abundance of labor is available, companies are willing to train employees with the skill sets they require. States such as Texas and New Mexico have attractive programs to support companies in training their citizens in order to secure good-paying jobs with benefits.

Although incentives and labor are critical factors in recruiting companies, two new factors will drive recruitment and, in a larger sense, economic development in the future: infrastructure and energy. Companies are now requiring modern infrastructure to set up new operations. Take the case of a company that needs to build a large facility for its operations or to lease a building to prospective companies. I recently worked with a company that built a 425,000-square-foot building that it put on the market to lease.

At the time this building was constructed, the construction cost was $80 per square foot. This means that the construction cost totaled $34 million, which did not include the cost of the tenant improvements — referred to as TIs, which are the buildout of office space and other customized modifications — or the land. 

If a company wishes to lease this size of building, the lease rates where I am located are approaching $9.30 per square foot. This equates to lease payments of $3.95 million per year or $329,375 per month. A project facing these high costs is not going to locate where it cannot recoup its investment. It will only move to a place that offers infrastructure such as modern roads, water and wastewater capacity, access to rail, air freight, and broadband.

While these are important, energy and energy infrastructure are driving more of the deals I am seeing. A community’s electrical and natural gas capacity plays a major role in companies looking at potential production sites. As fewer young people want to work in manufacturing, production processes are becoming more automated, which requires more energy consumption.

And then let’s talk about the energy that the large data center projects require. It takes massive amounts of power to keep the servers running that provide us with our artificial intelligence. It is not uncommon for a large data center project to use between 500 megawatts to more than a gigawatt of power. 

To put this in perspective, according to AI, a gigawatt can power between 700,000 and 750,000 typical homes per year. Data centers are being built around the world that require this level of power. In 2023, data centers accounted for 4.4% of the power used in the U.S. This is predicted to rise to 12% by 2028. The AI wave only seems to be growing on a daily basis, and more power is going to be required.

Mexico has had tremendous success in attracting industry and the investment and jobs it creates. However, in recent years, major production bases such as Juarez, Chihuahua, have been struggling to catch up with the ever-increasing demand for power. If it loses this struggle, it will lose its ability to expand its production base. This will affect U.S. communities such as El Paso, Texas and Santa Teresa, New Mexico, that are supplying Juarez’s production base.

The commitment and ability to create more energy is a national security issue, as the U.S. competes against China and other countries to expand its economy. The term “build it and they will come” has not always been the case for various projects in the past. However, when it comes to creating more energy capacity, this has become a no-brainer.

Jerry Pacheco is the executive director of the nonprofit International Business Accelerator. He can be reached at (575) 589-2200 or jerry@nmiba.com.