SolarCity gigafactory brightens New York's manufacturing revival

Buffalo, New York, is on the verge of becoming famous for more than wicked winters, spicy chicken wings and its Rust Belt legacy. The Queen City is the crown jewel in Gov. Andrew Cuomo's multibillion-dollar business-development strategy to revitalize economically depressed Upstate New York by turning it into a 21st-century manufacturing powerhouse.

His Buffalo Billion (as in dollars invested) project — although the subject of federal and state bid-rigging probes — is highlighted by a 1.2-million-square-foot "gigafactory" that will be run by Elon Musk's SolarCity and fabricate up to 10,000 solar panels per day. In late May, New York's Public Authorities Control Board unanimously approved a $485.5 million grant, part of the total $750 million the state will spend to construct and equip the humongous facility.

New York will retain ownership and lease it to SolarCity in a deal negotiated by Albany-based SUNY Polytechnic Institute, the state university known as SUNY Poly.

On June 21, Musk made headlines, and raised investors' eyebrows, by announcing plans for his Tesla electric-car company to acquire SolarCity. The all-stock deal could value debt-ridden SolarCity — whose shares have dropped 63 percent over the last 12 months, partly due to changes in regulations on the solar-energy industry — at as much as $2.8 billion. Tesla is valued at nearly $33 billion.

"We would be the world's only vertically integrated energy company offering end-to-end clean energy products to our customers," Tesla said of the deal on its company blog. "This would start with the car that you drive and the energy that you use to charge it, and would extend to how everything else in your home or business is powered." Coincidentally, Tesla is constructing a battery-production gigafactory in Reno, Nevada.

While the acquisition awaits approval from the companies' respective boards and shareholders, SolarCity co-founder and CEO Lyndon Rive — who will recuse himself from the decision-making process — told CNBC.com, "We don't expect the offer to impact our plans in Buffalo." The company has said it will spend $5 billion on capital, operations and supply-chain support over the next decade at the facility.

SolarCity officials recently reported that the gigafactory is nearly 90 percent complete and that it hopes to start installing equipment this summer. "Manufacturing is scheduled to begin in 2017," Rive said. "SolarCity has committed to employ at least 1,460 people in the city of Buffalo, with 500 jobs at the manufacturing facility. We will employ a total of 5,000 people in New York state by the 10th anniversary of the completion of the facility."

New York state boasts a long and illustrious history as a manufacturing empire. As did other Rust Belt states, however, it suffered a devastating decline beginning in the 1970s, when manufacturers moved to the U.S. South, Mexico and other foreign countries to take advantage of cheaper labor, lower taxes and fewer regulations. Globalization and the Great Recession forced further factory closings. Manufacturing jobs statewide, numbering more than 2 million in the mid-1940s, plummeted to less than 500,000 in 2009, according to the state's Manufacturing Research Institute.

Despite current political rhetoric to the contrary, the majority of those factories and jobs aren't coming back. In 2000, New York's Department of Labor identified 23,814 manufacturing establishments, employing 745,585 workers. By the third quarter of 2015, preliminary reports counted 17,103 manufacturers and 454,636 employees.

Nonetheless, over the past decade or so, New York has made strategic — and gigantic — investments and implemented enticing economic development programs, including tax subsidies, grants, loans and other attractive lures. Indeed, New York beat out other states vying for the SolarCity gigafactory. Rive declined to comment on the particulars, stating only that "the scope of New York's offer was instrumental in making our decision."

The technology behind the next-generation solar panels SolarCity will produce in Buffalo — developed by Silevo, a start-up it acquired in 2014 — incorporates advances in nanoscience, a burgeoning field that New York has zeroed in on as a source for its manufacturing revival.

Its economic development unit, Empire State Development, has established a long-term, multibillion-dollar game plan to attract nanotechnology manufacturers to make not only solar panels but also semiconductors, pharmaceuticals and other products from very small materials (there are 25,400,000 nanometers in an inch). Buffalo Billion is one of three initiatives under way upstate — the others are in Albany and Utica — all being managed by SUNY Poly.

Former Gov. Mario Cuomo first championed nanoscience, and in 1997 the Albany NanoTech Complex opened "as a combined vision of government, academia and industry," said Jerry Gretzinger, a spokesman for SUNY Poly.

"The site has grown from one building to a fully integrated research, development, prototyping and educational complex spanning 1.3 million square feet and boasting more than $20 billion in high-tech investments and over 300 corporate partners on site," including IBM, Intel, GlobalFoundries, Samsung, TSMC, Toshiba, Applied Materials, Tokyo Electron, ASML and Lam Research. More than 4,000 scientists, researchers, engineers, students, faculty and staff currently work at the complex.

To replicate that success, in 2013 the state launched Nano Utica, a public-private partnership in which six initial private manufacturers — Advanced Nanotechnology Solutions, Sematech, Atotech, IBM, Lam Research and Tokyo Electron — have invested $1.5 billion. The state put up $200 million to purchase equipment over 10 years. "The initiative is projected to create at least 4,000 jobs over the next decade," Gretzinger reported.

The first phase of Nano Utica is the Computer Chip Commercialization Center, or Quad-C, a 253,000-square-foot $125 million facility currently being outfitted with tools and other equipment for corporate partners, including GE. Last April groundbreaking commenced on SUNY Poly's 360,000-square-foot computer-chip fab at the nearby Marcy Nanocenter, which will be home to Austria-based ams AG's advanced sensor manufacturing and more than $2 billion in initial private investment.

"Ams has committed to create more than 1,000 new jobs there," said Howard Zemsky, president and CEO of Empire State Development and formerly co-chair of the Western New York Regional Economic Development Council in Buffalo.

Last year ESD was among the state's agencies that launched Buffalo Billion to promote advanced manufacturing, health and life sciences and tourism in western New York, creating an estimated 12,000 new jobs. Besides SolarCity, another cornerstone is Buffalo Manufacturing Works, which is operated by EWI, a nonprofit engineering services R&D company based in Columbus, Ohio.

The center is located in a building purchased by the Buffalo Niagara Medical Campus with an $8 million Buffalo Billion grant from ESD, which also provided $800,000 in start-up funding support for EWI.

"We created what amounts to a cooperative, where we invest millions in equipment and bring in expertise and cutting-edge technologies to help companies innovate without having to lay out a ton of money and then have redundant investments in the community," Zemsky explained.

At the same time New York is nurturing nanotechnology upstate, it's also cultivating a thriving yogurt industry. It began in 2007, when Chobani opened a factory in South Edmeston, south of Utica, to produce Greek yogurt, a variety made thicker by straining it to remove whey.

Chobani founder Hamdi Ulukaya took out a $1 million federal Small Business Administration loan in 2005 to purchase a shuttered Kraft facility and has since invested about $100 million to retrofit and expand the factory, which now employs around 1,000 people.

The U.S. market for that then-unfamiliar style was 1 percent of total yogurt sales, according to research firm Technavio. By 2010 that share exploded to 10 percent. Today Greek yogurt sales, at nearly $3.8 billion, constitute more than 48 percent of the total $7.7 billion yogurt market, according to Nielsen.

Recognizing the consumer craving for Greek yogurt, as well as its plethora of dairy farms upstate, New York has made a concerted effort to broaden the industry.

Several major competitors to Chobani have expanded or opened Greek yogurt plants in Upstate New York, including Fage in Johnstown, Alpina Foods in Batavia, Upstate Farms in Buffalo and Byrne Dairy in Cortlandville. In total "we have 31 yogurt manufacturers in New York state," said a spokeswoman for its agriculture and markets division.

That doesn't include the ancillary businesses that supply goods and services to the industry, such as Agrana Fruit, which opened a $50 million plant in Lysander in 2014 and sources crops from local fruit farmers.

"New York is very progressive in offering incentives to locate here," said Marty Broccoli, a specialist at Cornell University's Agriculture Economic Development department. He cited the state's grant program, tax benefits through Start-Up NY and Recharge NY, which offers low-cost electricity in exchange for job retention and creation.

Meanwhile, federal investigators — led by Preet Bharara, the U.S. attorney for the Southern District of New York — are examining how money and contracts were distributed to Buffalo Billion, including SolarCity. Cuomo's office has opened its own investigation into what it has called suspicions of "improper lobbying and undisclosed conflicts of interest" that may have defrauded the state.

Still, Cuomo has deemed Buffalo Billion "a tremendous success" and suggested that the probe did not "go to the essence" of the program. EDS chief Zemsky echoed that sentiment, declaring that the Buffalo Billion's efforts will continue unabated.

"What they're investigating, they will investigate, and whatever the findings are, they are," Zemsky said. "The conduct of a couple of people one way or the other is certainly not, and shouldn't, derail the extraordinary commitments that have been made by the state and the people of these communities. I'm extremely bullish on our strategies and the future of New York as a great place to do business."

— By Bob Woods, special to CNBC.com