BUSINESS PULSE : ORANGE COUNTY ISSUES & ATTITUDES : Why Firms Leave: Costs, Traffic, Environmental Curbs
Richard Wood figures it is only a matter of time before he moves his bathroom furniture plant from Anaheim to Mexico.
Wood, owner of Gaylan Industries, predicts that efforts to further restrict chemical emissions in the South Coast Air Basin will force him to relocate.
When that happens, he said, nearly all of his 300 Orange County workers will be laid off. About 30 employees will stay on at the company’s shipping and corporate headquarters, which will remain in Anaheim.
“Given my druthers, I would prefer to keep everything under one roof here. I’m a San Diego boy who moved to Orange County in the early ‘60s and to me, this is home,” he said.
Like Wood, most chief executives of manufacturing firms in Orange County are not eager to move. But most also believe that Orange County is losing its attractiveness as a place to do business for all but the cleanest and most technologically advanced firms, according to The Times executive outlook survey.
Survey results showed that 67% of the 195 manufacturing executives polled believe that Orange County is becoming less attractive for business, while only 18% said they believed the county is becoming more attractive and 15% said they saw no change.
By contrast, only 21% of executives in retail and service industries said they thought the county was becoming less attractive, while 54% said it was becoming more attractive and 25% said things are staying the same.
And although 69% of the manufacturing executives said they plan to expand their Orange County operations, 18% said they are planning to leave the county. That was a largest percentage among the other industry groups.
A small but steady outbound stream of lower-technology companies--most headed from Orange County to the Inland Empire or south of the border--has been triggered by rising land and labor costs, growing traffic congestion and environmental regulations.
The loss of some manufacturing businesses does not spell economic tragedy. Instead, it denotes “a transition from more traditional manufacturing to a cleaner and more technologically oriented manufacturing,” said Mark Mattingly, assistant vice president of Coldwell Banker in Santa Ana.
The county is losing some manufacturers such as wood and fiberglass companies that are trying to shake regional environmental regulations or searching for more plentiful low-skilled and unskilled labor. The county also is bidding farewell to large warehouse operations in quest of cheaper space.
But Mattingly said the void is being more than filled by the proliferation and expansion of electronic, biotechnology and computer firms that employ engineers and scientists hooked on the Orange County life style.
Mattingly said that during the first quarter of 1988, Orange County absorbed 3.5 million square feet of new industrial space, including new leases and purchases, thus keeping up the record pace set in 1987. Also, development of new industrial space continues to be brisk, with 2.6 million square feet under construction. Demand for manufacturing space is so great in the county, he said, that the average sales price has increased 10% to $71.29 per square foot in the first three months of 1988.
Of all the manufacturing buildings sold or leased in the county during the first quarter of 1988, Mattingly said, almost 80% were smaller than 30,000 square feet. He said this reflects the bountiful number of small firms in the county with developing technologies that have not yet become high-volume manufacturers.
It seems there are still plenty of companies willing to pay Orange County land prices--which can be two to four times the price of comparable land in Riverside and San Bernardino counties--either to keep their existing work forces or to be close to suppliers or customers.
Mike Hagan, president of Laguna Niguel-based Fluorocarbon, said his company operates manufacturing plants in various parts of the country. The Orange County operations, he said, serve the local aerospace and electronics industries and tend to manufacture products requiring exceptionally sophisticated engineering.
Although worsening traffic conditions in Orange County have made it more difficult for Fluorocarbon’s workers to get to their jobs, Hagan said he will stay in the area as long as his customers do. “Whether we go or not depends on whether our customers go,” he declared.
Companies that choose to stay in Orange County, however, must adjust to housing and labor conditions.
AST Research, for example, recently decided to move its computer-manufacturing operation from Irvine to Fountain Valley to be closer to where most of its workers live. A company spokesman said AST decided against moving outside Orange County because the county has a high concentration of computer companies and therefore an abundance of trained workers.
Few companies are leaving Orange County completely, real estate brokers said, because they want to retain the prestige associated with being headquartered in Orange County, or their corporate executives simply refuse to move.
But in a number of cases, companies are relocating all of their manufacturing operations, leaving behind their administrative, sales, and research and development arms. Or they are keeping existing Orange County manufacturing operations in place but planning growth elsewhere.
Joe Smith, Coldwell Banker’s specialist in providing real estate services to companies moving to Tijuana and San Diego, said he knows of about 10 manufacturing firms, mostly in electronics, that are negotiating to move some of their operations from the vicinity of Orange County’s John Wayne Airport to Mexico. “They won’t be leaving,” he said. “They’ll be shrinking.”
Smith said these companies are frustrated by a shortage of factory workers who typically can’t afford Orange County housing prices and are discouraged by the hassle of commuting from less expensive neighborhoods in Los Angeles and the Inland Empire.
Moreover, he said, manufacturing companies want to cash in on the rising land prices that have been transforming the industrial area near the airport into high-rise office complexes.
“Most of the industrial users around the airport are sitting on land worth $20 a square foot on up. It is land they couldn’t afford if they tried to buy it today,” Smith said. So they are selling the land in the airport complex to office developers and acquiring manufacturing land in Mexico for $2 to $5 a square foot, he said.
Barry Heppenstall, vice president of manufacturing for Smith International, a Newport Beach manufacturer of oil-drilling bits, said that the company is planning most of its production expansion in Oklahoma rather than Orange County.
“Almost everything you look at in Oklahoma is cheaper than here,” Heppenstall said. “Electricity costs are about a third, labor costs are 30% to 40% cheaper, and factory construction costs about 60% less, not taking into account lower land prices.”
Similarly, Don Kohlman, sales and service manager for Irvine-based Erickson Yachts, said that 11 months ago the company opened a plant in Tijuana to build a line of smaller and less expensive sailboats because the company couldn’t afford to expand in Irvine and remain “price-competitive.”
Other companies said that the South Coast Air Quality Management District’s latest crackdown on air pollution will make it difficult for them to maintain operations in Orange County or anyplace else in the AQMD’s purview, which also includes Los Angeles, San Bernardino and Riverside counties.
The state Legislature last year reorganized the district board and gave it new rule-making authority in an attempt to upgrade air quality in the South Coast Air Basin, which now falls far below the national standard.
Larry Bowen, the air quality district’s director of rule development, said the district is in the process of toughening regulations on industrial emissions, beginning with furniture companies and other firms that use organic solvents. The proposed regulations, if adopted by the district governing board, would impose the strictest requirements on companies that want to expand or move to new locations in the basin.
Furniture and cabinet manufacturers and other firms that coat wood products would be required to reduce emissions by 80% over the next two to six years, Bowen said. That would be accomplished by taking a combination of steps such as the use of different materials, installation of mechanical emission controls and adoption of new operating procedures.
“The new regulations will probably put us out of Orange County in the next five years,” said the general manger of a shutter company that employs 135 workers in Orange and has seen its business grow by 25% a year.
The manager, who asked not to be identified, said that regulations being proposed by the air quality district staff would require the company to reduce its emissions over the next two years at a cost that the company considers prohibitive.
A year ago, he said, the company began getting ready to move by buying a small factory in Tijuana. He said he is now training Mexican residents to form a new work force.
“Anybody in the furniture or paint business is going to have to move,” Gaylan Industries’ Wood said of the potential effect of the proposed emission regulations. Wood said he has encountered no trouble recruiting factory workers for his Placentia plant, which makes oak bathroom furniture and fixtures. But he said the proposed air quality regulations could send him packing.
Bent on expansion, Wood said he is scouting for a factory location in Mississippi or Virginia. Also, he said that three years ago he opened a small factory in Mexico and recently broke ground on another, larger plant there.
“We will double our current size within the next 15 months and double again within the next 36 months,” he said.
“We are growing, but we are not growing in Orange County.”
WHAT THE FUTURE HOLDS
Most executives expect to expand their Orange County operations, but some say they will relocate elsewhere.
Corporate Plans
Orange County Operations Reduce Expand Relocate All CEOs 13% 76% 11% NO. OF EMPLOYEES 50-99 10 79 11 100-249 15 75 10 250 or more 14 72 14 INDUSTRY Construction 27 64 9 Manufacturing 13 69 18 Retail/Service 7 88 5 FIRE * 14 82 4
* Finance, Insurance or Real Estate Reasons for Relocation
Among those planning to relocate, costs of doing business and living were most commonly cited.
Cost of doing business: 28%
Housing and living costs: 22%
Transportation: 16%
Labor supply: 16%
Local ecoonomy: 5%
Other: 13%
