Economic Impact Analysis

Ashley Sarver ED 2 – UPP 531

11/6/2012

1

Economic Impact of Komatsu to Peoria Region

Komatsu is a large manufacturer of construction and mining equipment with prospects to

base their facility devoted to heavy construction machinery and diesel engines here in the Peoria

region. In addition to the economic impact that this facility would have on the region, other

benefits may also be derived. A State initiative to create a Center for Precision Manufacturing at

the Illinois Central College for job training needs would add to the impact of Komatsu coming to

town.

In evaluating the benefits that this facility may bring we may consider the addition of this

Center, though the specifics as to the number of faculty members or administrative staff to run

the classes are unclear; that being so, only the construction of the Center would be considered as

part of the economic impact analysis. In Table 1 you will see the economic impact summary

with two scenarios – one including the addition of the Center and one that does not include the

addition of the Center. It is important to keep in mind that the operations of the learning center

are discarded due to lack of information for this analysis. Including the learning center in the

analysis, as Table 1 shows, alters the output by +$6.9 million, the employment by +44 full-time

equivalent jobs, and earnings by +$2.5 million. Given that the addition is not drastic, the report

from this point on will utilize the scenario using the addition of the learning center in evaluating

the overall impacts. The actual impact of the center may be even greater if information

regarding the employment and salaries of the staff there should be available and included.

To determine the impact, the analysis considered the construction of the facility and the

equipment that must be purchased in order to start production of their commodities. The

equipment utilized in the facility is highly specialized, and 70% of the equipment had to be


11/6/2012

2

purchased from Japan as the local market could not support these specific needs. Thirty-percent

(30%) of the equipment was then assumed to be procured locally when the market would allow

it. Komatsu was able to provide estimated production values which inputted and utilized to

estimate the number of employees and their earnings from the information that IMPLAN

provides.

The diesel engines that Komatsu produces will be transferred to other Komatsu sites in

North America. In the model, it is assumed that the local market would absorb a portion of the

diesel engines in order to account for the increase in employment and employment earnings that

otherwise would not be able to take place. As one-third of the facility is dedicated to diesel

engine production, the total output would be less than the estimates provided in the report, but it

was deemed important to ignore that factor so as to account for the employment and employment

earnings.

The estimate of the total four-year output impact of the facility in the Peoria region,

including the learning center is $1.7 billion and would add an additional $24.6 million in state

and local taxes. The major employment sectors to be impacted by this facility coming to the area

would be in machinery manufacturing and construction. Machinery manufacturing would

experience 27% of the benefits of the increase in employment and construction would experience

18% (See Table 2). However in terms of employment earnings, the construction would garner

44% of the benefit while machinery manufacturing’s share would be 19% (See Table 3). This

may be accounted for by higher earnings for construction workers than machinery

manufacturers.

While this report outlines the economic impacts, there are additional benefits the region

may experience due to the facility locating here. Their impacts could not be evaluated through


11/6/2012

3

the IMPLAN modeling system because more crucial details were not provided, but it is worth

noting some other things may bring benefit to the local economy. The employees would be

offered free job training at the learning center which would add to the human capital in the area

as those employees gain knowledge and skills that increase their future earnings. This would in

turn affect the local economy. Additionally, the state has agreed to do some road improvements

around the area that would have otherwise had to have been provided by the local government.

Those local dollars can be used in other ways possibly through salaries to new or existing

employees which would impact the economy or they may choose to use the dollars to further

other public services from which the local community would benefit. Komatsu has also been

promised access to the Illinois Office of Trade and Investment in various countries abroad that

may contribute to increases in future production, and consequently to indirect and induced

increases to the local economy.

Komatsu is a direct competitor of Caterpillar, Inc. which is also headquartered in Peoria.

Most of the products that Komatsu and Caterpillar manufacture are not consumed locally. Their

markets are outside of their Peoria headquarters. The addition of the Komatsu facility to Peoria

would only give Komatsu a slight edge. Their increased production of construction

manufacturing machinery and diesel engines may make their products more marketable or widen

the products they offer; however, the local economy will not largely feel the effects of this

competition. However, drastic effects may incur due to employment and employment earnings

loss if Caterpillar were to have to shut down if Komatsu by addition of this facility proves to take

over the market of Caterpillar. The competition factor cannot be accounted for in the IMPLAN

model as it assumes a static equilibrium model which provides that the economy is not changing


11/6/2012

4

over time and that supply meets demand. It cannot account for if one product is more

marketable.

To conclude, this report analyzed the economic impacts of adding a Komatsu facility and

the resulting learning center that it would incur by its arrival to the Peoria region. Alternative

impacts were also considered excluding the learning center. A future model to be tested could

include high and low costs of inputs (i.e. construction to build the facility and equipment to run

the facility) or take into account inducements should more information on those specifics be

known.

Table 1

Summary of Impacts, Komatsu Facility to Peoria Region

Direct Indirect Induced Total

Including Learning Center Output Impacts (in millions of 2013 dollars) 760.8 200.5 115.3 1,076.6 Employment Impacts (in full-‐time equivalent jobs) 1,396 914 915 3,226 Earnings Impacts (in millions of 2013 dollars) 142.3 56.0 36.6 234.9

Not Including Learning Center Output Impacts (in millions of 2013 dollars) 756.3 199.3 114.0 1,069.7 Employment Impacts (in full-‐time equivalent jobs) 1,370 907 905 3,182 Earnings Impacts (in millions of 2013 dollars) 140.6 55.6 36.2 232.4

Source: IMPLAN economic modeling software, author's estimates


11/6/2012

5

Table 2 Summary of State and Local Tax,

including learning center (in 2013 dollars)

Description

Employee Compensation

Proprietor Income

Indirect Business Tax Households Corporations

Dividends

2,789,601.00 Social Ins Tax-‐ Employee Contribution 95,071.00 0.00

Social Ins Tax-‐ Employer Contribution 409,027.00

Indirect Bus Tax: Sales Tax

6,531,524.00 Indirect Bus Tax: Property

Tax

7,453,376.00 Indirect Bus Tax: Motor

Vehicle Lic

223,249.00 Indirect Bus Tax:

Severance Tax

395.00 Indirect Bus Tax: Other

Taxes

591,980.00 Indirect Bus Tax: S/L

NonTaxes

808,459.00 Corporate Profits Tax

1,409,642.00

Personal Tax: Income Tax

2,865,076.00 Personal Tax: NonTaxes

(Fines-‐ Fees

897,392.00 Personal Tax: Motor

Vehicle License

338,717.00 Personal Tax: Property

Taxes

116,963.00 Personal Tax: Other Tax

(Fish/Hunt)

50,383.00 Total State and Local Tax 504,098.00 0.00 15,608,982.00 4,268,531.00 4,199,243.00

Total All State and Local Taxes $24,580,854



11/6/2012

6

Table 3 Summary of Top 8 Employment Sectors Impacted, with

learning center

NAICS Code (3-‐digit) NAICS Sector Employment

Share of Total (Direct, Indirect, & Induced)

333 Machinery manufacturing 869 0.27 23-‐ Construction 566 0.18 42-‐ Wholesale trade 170.9 0.05 722 Food services and drinking places 142.6 0.04 622 Hospitals 67.4 0.02 484 Truck transportation 61.0 0.02 452 General merchandise stores 58.9 0.02 621 Ambulatory health care services 51.0 0.02


Table 4 Summary of Top 8 Employment Sectors Impacted, by earnings, with

learning center NAICS Code (3-‐digit) NAICS Sector

Employment Earnings (in millions of 2013 dollars)

Earnings as Share of Total

23-‐ Construction 104.1 0.44

333 Machinery manufacturing 44.0 0.19

42-‐ Wholesale trade 12.3 0.05

621 Ambulatory health care services 4.7 0.02

622 Hospitals 4.1 0.02

484 Truck transportation 3.1 0.01

541 Professional, scientific, and technical services 2.9 0.01

55 Management of companies and enterprises 2.8 0.01


Documents

Economic Impact Analysis