Experts Question Future of O.C. Manufacturing : Economics: The departure of some major manufacturers has raised a warning flag. The new service and retail businesses moving in typically pay less, produce less and hire far fewer workers.
Orange County’s economy, celebrated far and wide as one of the healthiest in the world, is beginning to look a little peaked to a small but growing group of economists and business people.
Warning signs have been developing for years: an increasingly congested transportation system, steadily declining air quality and housing prices that are beginning to exclude all but the wealthy.
The latest symptom was identified by Chapman College economist James Doti in his prediction last month that the number of manufacturing jobs in Orange County would decline this year for the first time ever. His forecast, however, is at odds with a state study that predicts a slight increase in manufacturing jobs in 1990.
But even if Doti is accurate, a decline in manufacturing jobs does not necessarily portend dire consequences for the local economy or even for all manufacturing within the county.
Instead, his is one of several voices that is beginning to raise questions about the long-range impact on the county of a shrinking manufacturing base. Among the concerns: What happens as the county’s vaunted economic diversity diminishes, and what kind of society will be left if much of the blue-collar middle class is driven away?
To be sure, Orange County’s economy and its business base still are growing. Just recently, for example, aerospace giant Rockwell International announced plans to move its corporate offices from El Segundo to Seal Beach, bringing 235 jobs into the county. And Toshiba Corp. last year said it would spend $9 million to expand its Irvine electronics plant, creating 145 manufacturing jobs by 1992.
Still, more manufacturing jobs are leaving than arriving, Doti maintains, and as a result, many of the new businesses coming into the county are simply replacing ones that left rather than helping the economy grow.
The county’s climate and lifestyle attract corporate executives who set up headquarters operations near their homes in Newport Beach and Irvine; its central Southern California locale makes it an ideal place for distribution and shipping businesses. Even some manufacturers--especially those in high-tech fields, which require a skilled work force--find the county a desirable place. But traditional labor-intensive manufacturers are increasingly finding the county a tough place in which to remain competitive.
Their departure--to other parts of California or to other states--represents a manufacturing drain that could portend a “frightening” economic future, says Mark Baldassare, a UCI social ecology professor and local opinion pollster. Orange County, he contends, “will become irrelevant to the Southern California economy if it continues losing manufacturing jobs.”
Litany of Problems
Ask Ray Jensen, owner of Automotive Parts Exchange in Orange. He began moving most of his business to Yuma, Ariz., this month.
The move, which will mean the direct loss of 370 jobs if the entire facility is relocated, was spurred by a familiar litany of problems: costly labor, expensive real estate, stringent regional pollution controls, a congested transportation system and housing so expensive that workers are fleeing the area.
The county’s 3.2% unemployment rate means that skilled manufacturing workers are no longer available at a competitive wage, Jensen said. In addition, California workers compensation insurance premiums, among the highest in the nation, are eating up his profits, as are tougher air quality rules.
By moving to Yuma--where rents are cheaper and a 25% jobless rate provides a plentiful labor pool--Jensen figures to save $12,000 a month in operating costs.
“I’m a native of Southern California, my family is native and most of my workers are natives, so you can imagine how much this move is hurting me,” he said. But the move means that his business--remanufacturing automobile starters and alternators--can stay competitive.
By the most conservative measure available, the loss of as many as 370 manufacturing jobs in the county also means the loss of as many as 237 related jobs in retail, service and construction, according to a U.S. Chamber of Commerce estimate.
Jensen’s company is one of just a trickle of businesses leaving the county. Business development experts say that there are in fact more firms moving into the county than out of it. The problem, experts say, is that most of the newcomers are in service and retail: accountants, lawyers, fast-food restaurants, hair salons, clothing stores and consultants.
And that is cause for worry. Service and retail businesses typically pay less, produce less and hire far fewer workers than those in manufacturing.
The number of manufacturing jobs as a percentage of the total work force in the county has been shrinking steadily since the late 1950s. Then, manufacturing provided about 40% of the county’s non-farm jobs. Now it represents only 22% of the non-agricultural jobs, according to the state Employment Development Department.
If Doti is correct and the county now faces an accelerated decline in manufacturing, the economy will become even more dependent on service industries. “And because the services are also dependent on manufacturing, we could lose some of those businesses too,” worries Leland Oliver, chairman of the Orange County Chamber of Commerce.
Dynamics of Mix
During the past few years, several of the county’s largest manufacturing employers have left the county: Weiser Lock in Huntington Beach, with 1,100 workers, and Northrop Corp. in Anaheim, with 1,600 employees.
In a county where 80% of all businesses have 10 or fewer employees, the loss of one large employer like Weiser may only be compensated for with the addition of dozens of small firms.
Even if Doti’s forecast misses the mark on a manufacturing decline, the state Employment Development Department’s forecast of almost stagnant growth and an anticipated drop in higher-skilled manufacturing employment raises two significant questions for a county in which manufacturing is becoming less and less important in the economic mix:
* Can Orange County maintain a dynamic economy with a shrunken manufacturing base?
* And why is manufacturing so critical in what many are calling the post-industrial age?
The why has to do with the strong supporting role that manufacturing plays in a balanced, healthy economy.
It is true that the total number of businesses in Orange County is at an all-time high--more than 80,000 are in operation this year, according to estimates from the county Chamber of Commerce and the privately published Contacts Influential business directory.
But it is also true that a lot of those businesses are service companies, formed to provide services to other businesses or to individuals: accounting and law firms, management consultants, organizational experts, printing and copying firms, catering companies, barbers, auto detailers--the list goes on.
Economists say that manufacturing is the force that drives the economy.
While manufacturing accounts for only about 21% of the gross national product, for example, manufactured goods account for 49% of the nation’s foreign trade income; service industries, by contrast, have a 19% share of foreign trade, said Denny Gulino, a spokesman for the National Assn. of Manufacturers.
More support for manufacturing’s claim to a major role in the economy comes from the U.S. Chamber of Commerce in its 1984 study of the impact of 100 new manufacturing jobs on a community.
The study found that 100 new manufacturing jobs create 64 non-manufacturing jobs--45 in the wholesale and retail trades, including entertainment and recreation; seven in transportation, and the remainder in finance, insurance, real estate, business repairs and services, construction and public administration.
Those 100 new manufacturing jobs also support seven new retail establishments, generate more than $2.4 million a year in personal income and account for more than $1.8 million a year in local retail sales.
Although the study was done six years ago, chamber officials say it is not outdated. If anything, they say, the effects are even greater today than they were then.
Thus, by the U.S. Chamber’s estimate, the 1,200 manufacturing jobs Doti predicts will be lost to the county by the end of 1992 will eliminate nearly $30 million a year in personal income and almost $19 million a year in retail sales from the county. There will no longer be a demand for almost 90 retail stores and about 800 non-manufacturing jobs.
But Doti thinks the chamber’s numbers are far too conservative.
Manufacturing workers in Orange County tend to be more skilled and highly paid than those in many other areas. And manufacturing firms here tend to be small and highly technical. Further, local manufacturers rely heavily on outside suppliers for raw materials, product components and such business services as payroll preparation, personnel administration and bookkeeping, thus creating more need for service businesses than do manufacturers in other areas.
“I would not be at all surprised if the multiplier effect (of manufacturing jobs) wasn’t more like 2 or 3 to 1,” he said.
And that means the impact of each lost manufacturing job could be three to five times greater than suggested in the U.S. Chamber of Commerce study.
Regional Upheaval
There are a number of areas, including entire regions, that have switched their economic bases from manufacturing to services--or from services to manufacturing--and survived, but almost all have undergone wrenching economic and social upheaval during the transition, said Robert Burchell of the Rutgers University Center for Urban Policy Research.
“New Jersey had a significant manufacturing base well into the 1960s, but since then has turned around almost exclusively to be a service economy,” Burchell said. “And what that has wrought, very clearly, is a dual economy. Those who can participate with two or more household members working in the service economy do fine. But when only one member can participate, they do less well, and those who cannot make the transformation from manufacturing to service jobs are bringing up the rear with incredibly shrunken incomes.”
A healthy business diversity has kept that from happening in Orange County, he said.
But manufacturing, the most rapidly shrinking part of the county’s economy, has always been part of that diversity.
Another region often compared to Orange County is the Boston metropolitan area, said Sara Johnson, an economist with DRI/McGraw Hill in Lexington, Mass.
And the economy there is in a shambles right now.
“It probably is time for concern,” Johnson said. “When economic growth slows across the U.S., boom places like Orange County slow down a lot more dramatically than bust places.”
There are parallels between Orange County and the Boston area, she said, in the growth over the past decade of the service and electronics industries in both places.
Extremely low unemployment rates like Orange County’s have been experienced in Boston as well. Last year, fast-food restaurants and other lower-paying retail businesses in that city were importing workers from out of state to help meet the demand for employees.
That has since ended, however.
“Now the computer industry has excess capacity and faces a much more competitive situation, so companies are no longer enjoying large profit margins and are facing more pressures to streamline and cut back,” Johnson said.
She said she does not see the problems being as great in Southern California “because, in terms of economic growth, the area continues to draw new population, and that isn’t the case here.”
The Population Factor
But while some parts of Southern California--especially the Inland Empire, Ventura County and the Simi and Antelope valleys--are drawing new residents, Orange County has begun slackening off.
The Chapman College Center for Economic Research forecasts that population growth from people moving into Orange County will fall to almost zero this year and could well head into negative numbers in 1991 or 1992.
Over the next decade, Doti said, the county’s population increase will all be accounted for by growth in the under-10 age group. “And they don’t buy houses or cars or go to restaurants or support many of the services and retail businesses” that make up so much of the county’s economic base, Doti said.
“We are pushing a big part of the 20- to 35-year-old cohort out of the county and into Riverside and San Bernardino,” said UCI social ecologist Baldassare. “And it is more likely that the jobs will move out to them in the future than that they will move back to fill slots that are emptying in Orange County.”
Doti holds out hope, however.
Although the county’s employment has stopped its rapid growth and although manufacturing will shrink, he said, the jobs that remain and that are being pulled into the county will be highly skilled and generally well-paid corporate, service, research and technical and medical manufacturing.
“And the thing I’m most optimistic about,” Doti said, “is the incredible opportunity for global trade and Orange County’s logical role as the West Coast center for the Pacific Rim trade.”
But global trade is based on manufactured goods, not consulting and management services, said Baldassare, whose research specialty is the changing suburban environment.
“The entire state’s economic future rests in its ability to conduct international trade,” he said, “but Orange County will be missing a major element without a manufacturing base. It is manufactured goods that will be traded to Europe and Asia--there’s just not a big overseas market for California attorneys and consultants.”
That is conjecture. But there are economic events, “happening right now, that are more frightening when you consider the county’s future,” Baldassare said.
To turn around its manufacturing decline, the county must counter aggressive recruiting efforts from other metropolitan areas. Yet the county’s major outreach tool, the Economic Development Council, has been allowed to die.
“And while other areas are recruiting employers away from us and taking them to the Inland Empire and the Central Valley and Arizona,” Baldassare said, “we are busily trying to find sites outside of Orange County for our airports and jails and affordable housing. That’s not the kind of thinking that gave us the diversity that has made this such a healthy economy.”
While jails and airports and low-cost housing developments may be undesirable to existing residents in the immediate area, Baldassare said, “they create a demand for services and manufactured goods that create jobs for the regional economy. By moving such things into Riverside and San Bernardino, we are creating a situation that will come back to haunt us.”
THE FUTURE OF MANUFACTURING IN ORANGE COUNTY
Storm clouds on the county’s once-golden horizon are prompting some manufacturers to seek sunnier business climates. And economic forecasters are predicting little or no growth in this vital economic sector over the next few years as manufactures flee high labor costs and stringent environmental rules.
STATE ESTIMATE
The state Employment Development Department predicts that manufacturing in Orange County will continue to grow by 2% between 1989 and 1992.
In percentage change, 1989 to 1992 Non-durable goods: +11.2% Durable goods: -2.3% TOTAL: +2.0%
CHAPMAN ESTIMATE
But economists at Chapman College see a net loss in manufacturing jobs for at least the next three years, with a net decline of 0.5%.
In percentage change, 1989 to 1992 Non-durable goods: +8.4% Durable goods: -3.8% TOTAL: -0.5%
THE PRICE OF RELOCATION
Officials of one large county manufacturing firm that has recently moved to Arizona agreed to share the results of their site selection study on the condition that the firm, which employed about 1,000, not be identified.
LABOR COSTS MAKE THE DIFFERENCE:
In millions of dollars:
Orange County San Diego Arizona $24.7 $23.7 $22.2 Misc. operating costs 4.0 4.4 4.3 Labor costs 7.4 6.0 4.6 Material costs 13.3 13.3 13.3
MOVING COSTS
(Millions of dollars)
San Diego Arizona Land 3.9 1.8 Building 5.3 3.6 Personnel relocation 0.4 0.2 Equipment relocation 0.8 1.1 Employee training 0.8 0.2 Annual operating costs 9.4 7.9 Labor: Direct 2.1 1.6 Labor: Indirect 2.2 1.8 Labor: Fringe benefits 1.6 1.2 Mean hourly wage 6.47 5.03 Benefits as percentage of wage 38% 34% Workers Comp. 10.29 4.13 /$1,000 of payroll Unemployment ins. 161 98 per employee per year Est. monthly 3.5% 1% employment turnover Factory site appreciation: 1st yr. 0% 0% 2nd yr. 3.0% 0% 3rd yr. 7.5% 3.0%
WHAT 100 NEW MANUFACTURING JOBS MEAN TO A COMMUNITY
Aggregate personal income: $2.45 million
New retail establishments: 7
Retail sales: 1.86 million
NON-MANUFACTURING JOBS: 64 Wholesale & retail trade, etc.: 45 Transportation: 7 Insurance, real estate and finance: 3 Business repairs, services: 3 Public Administration: 3 Construction: 3
Population increase: 202
Family units: 102
School enrollment: 61
Source: U.S. Chamber of Commerce
MANUFACTURERS LEAVING THE COUNTY OR EXPANDING ELSEWHERE
Here is a list of Orange County-based manufacturers who have closed or relocated operations since 1988: Company: Allergan Eye Care* OC Location: Irvine Product: Eye Care Relocation Site: Texas Expansion Site: OC Jobs Lost: 210 Company: Automotive Parts Exchange** OC Location: Orange Product: Engine Parts Relocation Site: Arizona Expansion Site: OC Jobs Lost: 200-350 Company: California Yachts*** OC Location: Tustin Product: Boats Relocation Site: Expansion Site: OC Jobs Lost: 138 Company: Cimco OC Location: Costa Mesa Product: Plastics Relocation Site: Expansion Site: N. Carolina & Corona OC Jobs Lost: Company: Diceon Electronics* OC Location: Santa Ana Product: Computer Parts Relocation Site: Expansion Site: OC Jobs Lost: 100 Company: Emerson Computer Power* OC Location: Santa Ana Product: Computer Aids Relocation Site: Tijuana Expansion Site: OC Jobs Lost: 125 Company: Gradco* OC Location: Santa Ana Product: Copier Parts Relocation Site: Japan/Korea Expansion Site: OC Jobs Lost: 100 Company: Laura Scudder OC Location: Anaheim Product: Snack Foods Relocation Site: Utah Expansion Site: OC Jobs Lost: 300 Company: NI Industries*** OC Location: Brea Product: Auto Wheels Relocation Site: Expansion Site: OC Jobs Lost: 160 Company: Northrop OC Location: Anaheim Product: Aerospace Relocation Site: Hawthorne Expansion Site: OC Jobs Lost: 1,600 Company: Orbit Instruments*** OC Location: Cypress Product: Aerospace Relocation Site: Expansion Site: OC Jobs Lost: 40 Company: Collins Defense Communications OC Location: Santa Ana Product: Electronics Relocation Site: Texas/Iowa Expansion Site: OC Jobs Lost: 530 Company: Smith International OC Location: Newport Beach Product: Oil Tools Relocation Site: Texas Expansion Site: OC Jobs Lost: 150 Company: Weiser Lock OC Location: Huntington Beach Product: Locks Relocation Site: Arizona Expansion Site: OC Jobs Lost: 1,000 Company: Xidex*** OC Location: Irvine Product: Computer Disks Relocation Site: Expansion Site: OC Jobs Lost: 800 * Move involved only part of the company.
** Company has not yet decided whether to shut down entire OC operation.
*** Closed OC operations but did not relocate.
Source: Los Angeles Times files
