The best US cities for foreign investment

This is an audio transcript of the FT News Briefing podcast episode: ‘The best US cities for foreign investment’

Sonja Hutson
Good morning from the Financial Times. Today is Tuesday, November 7th, and this is your FT News Briefing.

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WeWork is looking for a new lease on life, and PwC is cutting up to 600 jobs in the UK. Plus, the FT’s Peter Spiegel reveals which city in the US is the best for foreign investment.

Peter Spiegel
Much to my surprise, I guess, we had a huge number of Texas cities that finished in the top 10. Part of it is their low tax environment. They’re business friendly, a lot of loose labour laws.

Sonja Hutson
I’m Sonja Hutson, in for Marc Filippino, and here’s the news you need to start your day.

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WeWork filed for bankruptcy yesterday. It’s the latest in a long list of troubles for the co-working start-up that was once valued at nearly $50bn. The FT’s Sujeet Indap has been covering the saga, and he joins me now. Hey, Sujeet.

Sujeet Indap
Hello. Thanks for having me.

Sonja Hutson
So tell me about the main factors that led to this bankruptcy. What brought WeWork to the brink?

Sujeet Indap
Yeah, so it’s very interesting. Adam Neumann, who is the very famous, eccentric founder of WeWork for many years ago, had conceived the company as really a tech start-up that they could take this boring sector, office space, and turn it into this tech-infused type of business. But what was most interesting to me about that business model was that it really resembled a bank and that Adam Neumann ended up signing up very expensive long-term leases and office buildings and then would rent out the space, sublease it to tech companies or start-ups or whatever. But those leases were very short-term. But in fact Adam Neumann’s lease with his landlord and the actual building was for 15 years. And so that mismatch really became a problem after the pandemic when people weren’t returning to offices, buildings were much less valuable, and so there was very little in rent or memberships that WeWork itself was collecting from its customers. But it owed these very big lease expenses to its landlords and the buildings. And so that just was unsustainable business model.

Sonja Hutson
Yeah, I mean, this big fall from grace has really just been incredible to watch. It wasn’t that long ago when it felt like there were WeWork offices popping up on basically every corner of every major city. And you mentioned the company’s founder, Adam Neumann. What’s his legacy in all this?

Sujeet Indap
Yeah, so I mean, there was this sense, particularly before the pandemic, that if you were a charismatic founder, had a great idea of, like these venture capital firms in Silicon Valley in New York were happy to just throw money at you, the only thing they cared about was growth. And so somebody like Adam Neumann was just the perfect embodiment of that. He had this vision about just the boring office company that really could be a lifestyle brand. They were going to do schools and all these other things, like cool living spaces. But as we fast forward to actually what went wrong, the ultimate basic nuts and bolts of running a business — making sure revenue is more than cost, you actually have enough demand for all of the office buildings that you’re renting — no one was really paying attention to that. And then the company actually realised that it had to really be managed like a regular boring company.

Sonja Hutson
So do you have a sense of what’s next for the company now? I mean, what is this restructuring potentially gonna look like?

Sujeet Indap
Yeah, so the company under its new management and has a very professional CEO now who has a very traditional background in private equity and has an MBA and everything that WeWork really wasn’t several years ago in the Adam Neumann era. Their view is this: that the actual idea of WeWork, Adam Neumann’s vision, actually still makes sense, that people want flexible office spaces. It just has to be on a much smaller and more humble scale. And so one of the bankruptcy is to reduce all these really expensive rents and leases that they have, get it to something shrunken down more sensible. But in fact, the business itself and the concept themselves will go on just at a much smaller valuation. And with the tools of the bankruptcy code, they can do that.

Sonja Hutson
So what’s the lesson here then?

Sujeet Indap
Yeah, I mean, I think there’s a lot of lessons here. There’s certainly bad luck for this company with the pandemic and just these massive social changes around going to the office. And that, really, they couldn’t have predicted. I think the other lesson, though, is that of just how much of a herd mentality there is on Wall Street. Again, in the Adam Neumann heyday of five, 10 years ago, there was no need to be disciplined. It was all about growth. And you could just get money essentially for free without really showing any proof of concept. And that pivoted very quickly, first with the pandemic and then this era of the last two years of high, high interest rates, where you truly do have to be disciplined and profitable. And these in hindsight, in retrospect to say, oh, yeah, look how profligate and reckless these guys were, but they were rewarded for it. And then the world changed on a dime and here we are now.

Sonja Hutson
Sujeet Indap is the FT’s Wall Street editor. Thanks Sujeet.

Sujeet Indap
Thanks for having me.

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Sonja Hutson
PwC was the last holdout among the Big Four accounting firms when it came to major lay-offs in the UK. But now sources tell the FT that the firm plans to cut up to 600 jobs there, mostly in the company’s advisory business. The problem is demand for their services has dropped and on top of that, fewer people are quitting the firm to go to other jobs in different fields. So there’s more employees but less work. Deloitte, EY and KPMG have also cut positions and frozen pay for hundreds of people over the past few months.

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The FT is out with its annual list of the best cities in the US for foreign investment. And the winner is (sound of drum roll) Houston, Texas. In the past year, a host of foreign companies have announced plans to invest in the city. Houston is traditionally known as a hub for the oil and gas industry, but it’s now become a centre for green energy innovation. Here to talk more about the rankings is the FT’s US managing editor, Peter Spiegel. Hey, Peter.

Peter Spiegel
Thank you for having me on.

Sonja Hutson
So why did Houston win?

Peter Spiegel
Yeah, I mean, what we have done with these rankings, we ranked every city based on sort of seven overall categories. And Houston didn’t really stand out in any one category, but they were sort of an all-rounder, right? As you said, in an oil and gas industry that has been there historically means there’s a really strong, educated workforce there that foreign companies can come in and pluck from. They have a big port that the companies can use for their own needs. They also happen to have things that are a little bit below the radar, like they have a very good economic promotional authority that brings in companies and provides them incentives and support once they come in. So they were very good across the board and really had high marks in almost every category we had.

Sonja Hutson
What other cities made the list?

Peter Spiegel
Much to my surprise, I guess, we had a huge number of Texas cities that finished in the top 10. You know, part of it is their low tax environment. They’re business friendly. A lot of loose labour laws so sometimes it’s easier to business there, but they sometimes are less able to produce the kind of skilled labour that some of these companies need. The flipside is you get some of these northern cities, Pittsburgh being a clear example that Seattle, Boston, which did very well. Those are cities where the business environment might be less friendly, if you look from a tax relation perspective, but are hubs for universities where the talent pool is really deep and will get companies choosing those locations for that reason.

Sonja Hutson
Peter, what are some of the wider trends that we’re seeing in terms of how foreign investment is changing?

Peter Spiegel
Well, look, we can’t ignore the impact of the Inflation Reduction Act, which is the green legislation passed by the Biden administration last year that has given a huge amount of incentives for particularly the auto EV industry, the electric vehicle industry, and then the battery industry, because a huge portion of the change in the last 12 months has been because of investment in EVs and batteries. Just last week, North Carolina announced that they had probably the largest investment by a foreign auto industry in modern history. Toyota announced an $8bn battery investment in North Carolina. And, you know, someone sort of offhand way said to me, you know, these states use to be the Bible Belt. We’re now calling it the Battery Belt, right? And that is what the big trend we’ve seen over the last 12 months, foreign investment, but big headline investment from car companies, battery companies in the US and almost all of that is tied directly to Biden administration policy.

Sonja Hutson
And why do you think we should be looking at foreign investment at this point in time?

Peter Spiegel
Well, I would say the US is a big economy and it is in many ways the one economy in the world where domestic consumption and domestic production outstrips anything that can be done abroad. So, you know, naturally, when you focus on a domestic economy that is huge, you focus on domestic investment. But what we were seeing over the last two, three, five years is that foreign multinationals, if they want to be playing on a global level, they have to play in the US. And we just didn’t think that that kind of stuff was getting enough attention. There was also a lot of issues surrounding national security and foreign policy. We have a story, a couple stories running on our report today, that focus on the difficulty of Chinese companies that are not involved in national security doing any business in the US because of the nervousness about China. So there’s just been a growing sense that foreign companies in the US that represent opportunities, represent challenges, and a lot of these issues have been overlooked just because traditionally we look at the US economy, the US companies are so big and so dominant, we haven’t needed to look at the foreign companies.

Sonja Hutson
Peter Spiegel is the FT’s US managing editor. Thanks, Peter.

Peter Spiegel
Thanks for having me on.

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Sonja Hutson
You can read more on all these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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