[CMYK] D1 Sunday, November 7, 2010

[CMYK] D1 Sunday, November 7, 2010 ---- NEWSSPEED01 11/05/2010

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By SUSAN FEYDERsfeyder@startribune.com

After Polaris Industries announced itwas closing a plant in Osceola,Wis., andbuilding a new one in Mexico, Bill Meissays his customers didn’t hold back.

“There were people who told methey’d never buy a Polaris again,” saidMeis, sales manager of Frontier Power-sports in Fergus Falls, Minn.

Most calmed down, Meis said, whenhe asked them to consider that Polarisisn’t the only recreational vehicle com-

pany that manufactures outside theUnited States.

“It’s just the way things are,” Meissaid.

Thatairof inevitability surfaceswhenexecutives of Polaris talk about the planto close the Osceola plant, whose 500workersmake it amajor employer in thetownof 2,600.A combination of geogra-phy, changing manufacturing methodsand the lure of Mexico’s low-cost labormarket dictated the decision, executiveshave said in recent months.

It’s a choice that comes with some

risks, beyond just potential consumerbacklash for exporting jobs when near-ly one in 10 Americans are unemployed.Medina-basedPolaris recentlydisclosedthat it will spend about $2 million morethan initially planned this year to makethe move to Monterrey, Mexico. Thehigher upfront costs, part of $25 millionto be spent on the transition, are for se-curity to protect the new plant and itsworkforce from a flare-up in violence inMonterrey by drug traffickers.

But Polaris expects the extra costs—plus another $35 million in capital ex-penditures— to be quickly recouped bythe $30million itwill save annually aftertheMexico plant is done next year.

In an interview, CEOScottWine saidPolaris will pay its Mexican workforceone-third ofwhat it nowpaysworkers atits plants— all nonunion— in Osceola,Roseau, Minn., and Spirit Lake, Iowa.

Those dramatically lower labor costswere the reason Polaris rejected theidea of building a plant in the southernUnited States, even though that wouldhave accomplished the goal of gettingthe company closer to faster-growingall-terrain-vehicle markets in stateslike Texas, Arizona and California. Thesnowmobiles that gave the company itsstart more than 50 years ago have been

S TA RT R I BUN E . COM/BU S I N E S S • S E C T ION D • SUNDAY, NOV EMB E R 7 , 2 010

businessbusiness+money+money

Christopher&Banks loses

third top executive in four

monthswith resignation

of CEO LornaNagler.

inside track D2 viewpoints D3 whiteboard D4 yourmoney D5

BobKill talks about the

mixed state of recovery

forMinnesota’s

manufacturers.

GNReSoundhelps the

hard of hearing turn up

the volumewithout

causing a commotion.

Read the fine print:Kara

McGuire helps identify

the commonmistakes

coupon-usersmake.

6 Big banks are in a high-stakes race to launch newmobile

payment networks before consumers take their business

elsewhere. Billions of dollars in transaction fees are at stake.

By CHRIS SERRES • cserres@startribune.com

Dominic Venturo strolled to the counterof an Office Depot store in downtownMinneapolis with a packet of No. 2 pen-

cils he wanted to buy and his trusty iPhone.Venturo, chief innovation officer at U.S.

Bancorp, gently waved the iPhone inches infront of an electronic card reader. Secondslater, a text message appeared: His $2.58 pay-ment had gone through.

“You see,” he said, holding up the phone invictory. “No cash. No card. Just wave and go.”

The fact that the transaction went offwithout a hitch is no small matter. U.S. Ban-corp and other major banks are under in-tense pressure to introduce mobile pay-ments technology — and to do so quick-ly — before millions of smart-phone-totingconsumers take their business elsewhere.

Tens of billions of dollars in fee income isat stake, as banks, retailers and wireless car-riers scramble for a piece of the Americanwallet.

This summer, Minneapolis-based U.S.Bancorp and at least three other giant banks— Bank of America, Wells Fargo & Co. andJ.P. Morgan Chase — began quietly testingnew technology that lets consumers buy ev-erything from office supplies to toothpastewith cell phones equipped with special mi-crochips. The trials are the most ambitiouseffort yet by the large banks to take advantageof consumers’ shift to mobile devices.

By this time next year, these large banksmaybehandingoutmicrochips forcellphonesinmuch the sameway that they’vedistributedmillions of checkbooks and debit cards.

Photos by GLEN STUBBE • gstubbe@startribune.com

Dominic Venturo,U.S. Bancorp’s chief innovation officer, tested new technology that lets consumers buy items using their cell phones instead of debitor credit cards. “Just wave and go,” Venturo said after buying a packet of pencils at an Office Depot store inMinneapolis.

Phones continues on D10Ø

A NEWA NEWWAY TOPAYWAY TOPAY

Next year, analysts predict, large bankswillbegin issuingmillions of tiny chips likethese that store bank account informationand can be put inmany cell phones, turningthe handsets intomobile payment devices.

STAR TRIBUNE EXCLUSIVE Available today at startribune.com for subscribers only.

ericwieffering

GOP’swinsbring reliefformanyin business

I couldn’t see Charlie Weaver, butover the phone I could almost hearhim glowing.

“Iamdoinggreat,”hesaidThursdaymorning. “It has been a great week.”

Weaver, a former Republicanstate legislator who is executive di-rector of the Minnesota BusinessPartnership, gave voice to the sen-timent much of corporate AmericafeltWednesday. The Democrats hadlost control of the U.S. House, theMinnesota House and Senate, andstate capitols around the country,and President Obama had donnedsackcloth and ashes and rued beingperceived as anti-business.

“Perceived?” Weaver asked, in-credulously. “It was real. Many of ourmembers met with him at the WhiteHouse to talk about energy, healthcare, banking reform. The president’sattitudewas very condescending.”

Weaver’smembershipincludestheCEOs of the state’s 100 largest com-panies, but some of those CEOs andothers declined a similar opportunityto publicly savor Tuesday’s electionresults. Requests for interviews fromstate manufacturing, health care andfinancial service firmsweremetwithsilence or a polite “no, thanks.” Toobusy, blah, blah, blah.

And maybe too smart. While theelection brings business immedi-ate and measurable relief on a num-ber of issues both at the federal andstate level, perhaps business leadersalso recognize the folly of assumingit represents a sharp turn back to theloose-oversight, laissez-faire days ofthe past.

Obama’s anti-business label isnot entirely fair. The United Stateshad already experienced 12 straightmonths of job losses by the time hewas sworn in, and his administrationdeserves some of the credit for en-suring that the Great Recession didnot turn into something worse.

The investment in General Mo-tors saved hundreds of thousands ofjobs, and in the end the Troubled As-set Relief Program will end up cost-ing taxpayers far less than the gener-ous grants and tax breaks provided tosmall businesses over the past year.

The Dow Jones industrial aver-age was near 8,000 when Obama as-sumedoffice, and it closed at 11,188 onTuesday — a gain of almost 40 per-cent in less than two years.

But the forced march toward a

Wieffering continues on D2Ø

Polaris execdefendsplan to shift somemanufacturing toMexico6 CEO ScottWine, experienced at running plants south of the border,

notes that rivals already are taking advantage ofMexico’s low labor costs.

Polaris continues on D10Ø

« IT’S GOING TOBEAMADSCRAMBLE TO SEEWHODEPLOYS THIS TECHNOLOGY FIRST. »

Richard Crone, technology consultant

V

POLARISINDUSTRIESBusiness: Snowmobiles,all-terrain vehicles,motor-cycles, personal watercraft.Headquarters:MedinaCEO: ScottWineRevenue (2009):$1.6 billionNet income (2009):$101.0million1-year stock return:+71 percent

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[CMYK] D10 Sunday, November 7, 2010

[CMYK] D10 Sunday, November 7, 2010 ---- NEWSSPEED04Nov 5 2010

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habits and where they shop. Customers could“clip” the coupons electronically, save them intheir handsets, and then activate the coupons byswiping their phones at the checkout line.

Visa is developing technology so granularthat it can send someone a coupon for sham-poo while the person walks through the healthor beauty aisle of the supermarket.

“The banks need to be where consumersare, and that’s on their phones,” said GeorgePeabody, director of emerging technologies atMercator Advisory Group in Maynard, Mass.“They invested years and years and billions ofbillions of dollars building their capabilities andtheir brand. They don’t want to be lost in thebackground as consumers shift to mobile pay-ments.”

Like all banks, U.S. Bancorp faces revenuepressures. The bank has seen its fee incomeclobbered by a double whammy of decreasedcard transactions, due primarily to the weakeconomy, and tough new regulatory limits ondebit-card and overdraft fees. U.S. Bancorp’s in-come from service charges plunged 23 percentduring the first nine months of the year overthe same period a year earlier, the bank report-ed last month.

If consumers migrate to competing mobilepayment networks, the bank’s fee income willdrop even further, analysts warn. “They are ab-solutely under pressure to act and to act quick-ly,” Peabody said.

Logistical questions remain. For now, thebanks have been silent on exactly how theywillget themicrochips into the hands ofmillions oftheir customers. However, technology consul-tants said they expect the banks will distributethe chips directly to consumers at bank branch-es, or through themail. “Banks gave away toast-ers and teddy bears,” Crone said. “Why not mi-crochips?”

Once the handsets are in the hands of con-sumers, big-box retailers and fast-food chainswill face increased pressure to install the card

readers, predicts Deepak Jain, co-founder and chief executive of-ficer of DeviceFidelity. “You’regoing to see consumers walk in-to McDonald’s, see the technolo-gy, and then ask, ‘Why don’t theyhave this at Burger King?’ ” Jainsaid. “Once mobile is available,it will accelerate adoption on themerchant side.”

However, banks have to gettheir mobile payment systems upquickly if they hope to compete,analysts warn.

Thewireless carriers have a sig-nificant advantage over the banks,because they already have accessto their customers’ mobile phonenumbers and bank account infor-mation, Crone, the technologyconsultant, argues. That makes iteasier for wireless carriers to signup people for mobile payments

than the banks, which have to enroll customersone person at a time, Crone said.

Many peoplemay notwant to go through thetrouble of getting microchips from their banksif the wireless carriers introduce mobile pay-ment networks of their own, he said.

Bezard of Aite Group compared the race tointroducemobile payment technology to the in-troduction of wireless technology. At one time,consumers had to buy separate WiFi cards fortheir laptops. Now, the technology is alreadyinstalled in most computers, making the cardsunnecessary.

“What the banks are doing now could verywell be obsolete six to 12 months from now,”Bezard said. “The mobile payments world ismoving that fast.”

Chris Serres • 612-673-4308

and chief strategy officer at U.S. Bancorp.“Clearly, we’re seeing a younger generation

that uses mobile phones in a new way,” Mc-Cullough said. “For them, it’s a personal com-puter. It’s their home. And they clearly want touse it for their financial transactions as well.”

The technology is hardly new. For nearly adecade, banks and technology providers havebeen testing mobile payment systems, andpayments with smart phones are alreadywide-spread in Japan and South Korea.

Yet adoption in theUnited States has stalled.Mobile phone companies have been reluctantto spend the $10 to $20 per handset to installspecial microchips in handsets that can trans-mit and receive digital signals. And large retail-ers, in turn, have been wary of installing thou-sands of electronic readers — at up to $350apiece — that accept mobile payments untilthey see more consumers with the phones.

Currently, about 150,000 retail locationshave devices that accept payments with mo-bile phones using so-called “contactless” cardreaders that can read devices remotely. This in-cludes such major chains as McDonald’s, CVSPharmacy and Office Depot. However, thatrepresents less than 2 percent of all availablemerchant locations nationwide, according toBoston-based consulting firm Aite Group.

“There has been this real ‘chicken and egg’problem, where the merchants don’t see a val-ue in upgrading their technology until theysee more devices on the market,” said GwennBezard, research director at Aite Group.

But U.S. Bancorp and other large banks be-lieve they may have found a way around thetechnology hurdles. Instead of waiting for themobile phone makers to install the microchipsin handsets, they’ve turned to an outside firm,DeviceFidelity of Richardson, Texas, to pro-duce their own. Once inserted in a phone, thechips transform mobile phones into paymentdevices that can be used at large retail chainsthat have contactless readers.

For the iPhone, which does not have a slotfor the microchips, the banks are testing a spe-cially designed sleeve with amemory card thatslips over the phone.

Later this month, hundreds of U.S. Bancorpemployees will begin testing the new mobilepayment technology in stores and fast-food res-taurants across the country. If the trial is suc-cessful, U.S. Bancorp may begin distributingchips to customers in less than a year, bank of-ficials said.

New servicesU.S. Bancorp executives said they see mo-

bile phones as a launching pad for a host of oth-er services that, they hope, will build custom-er loyalty. For instance, the bank is exploringthe idea of a “mobile shopping concierge” thatwould send coupons tailored to their customers’

And one day, analysts predict, mobile pay-ments may supplant the more than 1 billionplastic cards currently in Americanwallets. Forlarge banks, that’s a significant threat. Banks col-lect nearly $50 billion a year from retailers fromso-called “swipe,” or interchange, fees. Theystand to lose much of that revenue if consum-ers buy items on competing mobile paymentsystems.

The banks have to move fast. This summer,AT&T and Verizon Wireless, the nation’s big-gest wireless carriers, established a joint ven-ture with Discover Financial Services. Thereare concerns among banks that these carri-ers will develop a mobile payments systemthat will bypass the one long used by the largebanks, in which transactions are processed byVisa andMasterCard.

Retailers, too, are getting in on the act.Starbucks already accepts mobile payments atmore than 1,000 of its stores nationwide. TheSeattle coffee chain allows customers to pay fortheir lattes and espressos using prepaid cardslinked to an application on an iPhone or Black-Berry. A special reader scans a bar code dis-played on the phone’s screen.

Analysts expect other large retail chains tointroduce mobile applications of their own.Richard Crone, a technology consultant fromSan Carlos, Calif., predicts the top 50 retailerswill have a smart phone application that allowsformobile payments by the end of the year. As aresult, millions of transactions that once mighthave gone through bank payment networkswillinstead be processed directly at the point of saleby the merchants.

“Mobile payments is a disruptive technologythat could level the playing field between banksand non-banks,” Crone said. “It’s going to be amad scramble to see who deploys this technol-ogy first.”

Bill Gajda, head of mobile for Visa, predictsthat mobile phones will even-tually resemble consumers’ ac-tual wallets. People will havesmart phones loaded with a mixof store loyalty cards, like that of-fered by Starbucks, mixed withmobile payment offerings fromthe large banks and credit cardcompanies. “We’re at a transitionpoint,” Gajda said.

For retailers, the key attrac-tion of mobile payments is speed.Clerks don’t have towait for shop-pers to fish around in their wal-lets for their debit cards, and thenwatch as people try to swipe theircards correctly and enter PINnumbers into card readers. Trans-actions that might have taken aminute or more to process cantake just a few seconds with a cellphone, resulting in shorter linesand more sales, analysts say.

Seeking Gen YFor the banks, the race is about more than

just preserving billions of dollars in transac-tion fees. It’s also about attracting and retainingyounger customers who are far more attachedto their mobile phones than their elders.

A recent survey by Boston-based strategicconsulting firm Mercatus LLC found that al-most 80 percent of those between the ages of 18and 34will usemobile financial serviceswithinfive years. When given a choice, younger peo-ple are more than twice as likely to leave theirwallets at home than their mobile phones, re-cent surveys have found.

Banks that fail to continually upgrade theirmobile banking services risk losing “Genera-tion Y,” or the children of the baby boomers,saidMacMcCullough, executive vice president

ø PHONES FROM D1

A NEWWAY TO PAYA NEWWAY TO PAY

Photos by GLEN STUBBE • gstubbe@startribune.com

After swiping his iPhone at the register, Venturo received amessage sayingthe transaction had gone through.He then checked his account balancewithU.S. Bancorp.

a dwindling part of its business for sever-al years. ATVs nowmake up 65 percent ofthe company’s sales.

“We had some outside consultantscome in, and their initial thought wasmaybe Tennessee or Texas. Then, whenwe ran the numbers to compare costs, itwasn’t even close,” Wine said of the deci-sion that was two years in the making.

Osceola, which will close by 2012, waspicked because unlike Polaris’ other plants,it doesn’t assemble vehicles. It producescomponents, more of which will be out-sourced, in somecaseswith suppliers closerto theRoseau, Spirit Lake andMonterrey fa-cilities. The changewill allow for faster andcheaperdeliveryofpartsandallowPolaris tobemoreflexibleandadjustproductionmorequickly to changes inmarket demand.

“The concept of lead time is very impor-tant,” Wine said. “It affects the amount ofcash you have to have tied up in inventory.”

The two U.S. facilities will be remod-eled so they each can assemble, paint andweld every type of Polaris off-road vehi-cle, not just certainmodels as they do now.The company will invest about $6 millionat the Roseau plant to make the changes.

Polaris will join a host of other U.S.manufacturers that have established facil-ities in Mexico. Manufacturing accountsfor the largest portion of U.S. direct in-vestment in Mexico, rising 9 percent tomore than $24 billion last year, accordingto the U.S. Commerce Department. U.S.automakers have had plants in Mexico forseveral years. In addition to Polaris, othermanufacturers that have announced planstomove facilities toMexico in the last yearincludeWhirlpool Corp. and Dell Inc.

The fear of violence hasn’t caused anymajor businesses to pull up stakes, al-though it has put some on edge. Morethan 25 percent of companies respondingto a survey earlier this year by the Ameri-canChamber ofCommerce ofMexico saidthey were reconsidering investments inthe country because of safety concerns.

Althoughmanufacturing inMexicowillbe new for Polaris, it won’t be for Wine.Before joining the company in 2008 heworked at United Technologies, wherehe ran plants in Monterrey, Matamorosand Victoria. Before that he worked forDanaher Corp., where one of his jobs wasrunning a plant inMexico City.

Polaris’ Mexican plant also is part of abroader strategy by the company to expandits footprint beyond North America. Thisyear Polaris enhanced its distribution net-work inEuropeandenteredtheChineseandBrazilian markets. Overseas sales made upabout 16percentofPolaris’ total revenue lastyear, but thecompanyhopes to increase thatto about 25 percent in the next fewyears.

Side-by-side ATVs, which allow a pas-senger to sit next to the driver, are a keypart of Polaris’ growth plans in NorthAmerica and overseas. Core ATV saleshave fallen in the past few years for Po-laris and the industry as awhole, but salesof side-by-side vehicles have continued toincrease. The company estimates that theoverall side-by-sidemarket has a five-yearcompound annual growth rate of about 11percent. At Polaris, side-by-sides haveoffset soft sales of core ATVs, recentlyfueling most of the 49 percent increase insales for the off-road vehicle segment inthe third quarter.

Honda leads theoverallATVmarket, butPolaris is No. 1 in side-by-sides, with NorthAmerican market share approaching 40percent, according to James Hardiman, ananalyst with Longbow Research in Inde-pendence, Ohio. But the competitive land-scape is changing.Earlier this yearBombar-dier Recreational Products Inc. (BRP) be-gan producing its first side-by-side ATV ata plant in Juarez, Mexico, where it has pro-duced single-rider ATVs and personal wa-tercraft for about four years.

“They’re putting themselves in apositionto have a cost advantage on us,”Wine said.

BRP already leads Polaris in snowmobilesales, and its Sea-Doo brand is No. 1 in per-sonalwatercraft, abusiness thatPolaris exit-ed in 2004 after several years of losses. BRPspokesman Chaz Rice said the Canadiancompany has been pleased with the initialresponse to the new side-by-side ATV, theCan-AmCommander. “Somepeoplehadde-posits on it formore than a year,” he said.

The most powerful Commander modelhas a 1,000cc engine designed to appeal tosandduneriders intheSouthandSouthwest,thesamefast-growingmarketsPolariswantsto target. Thatmarket iswhat ledThief Riv-erFalls-basedArcticCat Inc. to startmakingits own engines at a St. Cloud plant becauseprevious supplier SuzukiMotor Corp. in Ja-pan didn’twant tomake them.

Polaris’ most powerful side-by-sideshave 800cc engines, and the company de-clined to say whether it’s working on a1000cc machine. But it does believe thatrealigning itsmanufacturing, including themove toMexico,will keep the companyonthe right path.

“We’re making this decision from a po-sition of strength, and because wewant tomake sure we’re still strong five, 10 yearsfrom now,”Wine said.

Susan Feyder • 612-673-1723

ø POLARIS FROM D1

PolarisCEOdefendsplans forMexicanplant

Dominic Venturo,U.S. Bank’s chief innovation officer, seesmobile payments as a launching pad for other services.U.S. Bancorp is exploring the idea of a“mobile shopping concierge” that would send coupons based onwhere their custom-ers shop andwhat they like to buy.