Recession Strikes Minority Businesses With Extra Fury : Economy: Entrepreneurs who often face racial barriers find their problems compounded by downturn.

Allen Herbert had high hopes for his company, San Pedro-based Global Power Products, when he and his cousin founded it two years ago.

The 30-year-old black engineer managed to win contracts to supply electrical equipment to several major utilities and power companies, and revenues were pushing $180,000 a year. His goal for 1992? To break $500,000.

Then the recession hit Herbert’s three-person firm. Now, his goal is to survive.

“When there’s a recession for America,” Herbert said, “there’s a depression for black people.”

Economists and minority business leaders say the economic implosion in Southern California has hit minority businesses especially hard.

Southern California has one of the highest concentrations in the nation of businesses owned by African-Americans, Latinos and Asian-Americans. Among counties, Los Angeles ranks No. 1 in all three, according to U.S. Census data from 1987, the most recent available.

The vast majority of the region’s more than 210,000 minority-owned firms are mom-and-pop concerns, mainly in services and retail, and a disproportionate number are new, small and undercapitalized. They are the types of businesses most vulnerable to the drought of consumer spending--particularly in poorer minority communities--that has made this recession drag on.

Some optimists believe that minority-owned businesses--many started by immigrants--hold one of the best hopes for the revival of the region’s economy as it struggles not only with a painful downturn, but also with wrenching changes in industries such as aerospace and real estate that were the region’s strength.

“When the recession is over, we will find that the immigrant work force is one of the things we have going for us in the future,” said Joel Kotkin, a visiting fellow at Pepperdine University and senior fellow with the Center for the New West, in Denver.

For now, times are hard. And for many, that is nothing new, said Ana Barbosa, president of the 1,000-member Latino Business Assn. in Los Angeles.

“Small and minority companies have always been in recession,” she said. “We don’t know anything else.”

Onetime Los Angeles County Sheriff’s Deputy Connie Bass can attest to the difficulties a person of color faces starting up--and trying to stay in--a business.

With money from savings, friends and her daughter, the black woman in 1987 opened a gourmet cookie store in the Kenneth Hahn shopping mall in South-Central Los Angeles.

But it was a struggle. When no one bought her cookies, she began making sandwiches; when no one bought those, she began offering hot food.

“I was up at four in the morning to make it to the produce market to buy fresh vegetables, . . . and worked to midnight, sometimes seven days a week,” she said.

It was all to no avail. In February, 1990, she threw in the towel, just as the recession was getting under way. She blames lack of patronage from the community, lack of capital and high rents for her business’s failure.

Now, Bass and her daughter operate a catering business--while trying to repay more than $30,000 in debts from the store.

Looking back, she said: “I should have had $300,000. . . . That would have got me through the first three years.”

Unfortunately, such capital was nowhere to be found. Minority business people complain that they are more likely to be turned away by banks and other traditional sources of financing.

“One of the things that has always reared its ugly head . . . is a lack of access to capital and (low) levels of financial sophistication,” said Carlton Jenkins, a black and and managing director of Founders National Bank, a minority-owned Los Angeles bank dedicated to economic development in the community.

For minority entrepreneurs, race adds to the normal economic problems of running a business. “Anybody going into business has a tough time,” said Ron Clark, the black owner of Printco Graphic Arts, a printing company in Los Angeles. But “minorities will have a tougher time because of the racial things that add blocks or steps in the way that you have to somehow get around.”

When Clark co-founded his print shop in 1965, some firms would not even allow his company to bid on jobs because he is black, he said.

It was not until the early 1970s, when Pacific Bell awarded him a contract, that Clark was able to generate enough cash flow to win a little security.

“If I had been white at that time, it wouldn’t have taken us nearly as long to get to a place where we had a steady cash flow that we could depend on. But that was the hand that we were dealt,” he said.

Now, Asian-American businesses fear that burgeoning “buy-American” and Japan-bashing sentiment could stigmatize them, even if they are not Japanese.

“Asian-bashing could affect our ability to win contracts,” said lawyer Paul P. Suzuki, the Japanese-American president of the 300-member Asian Business Assn. in Los Angeles.

In general, the recession affects ethnic-owned businesses in Los Angeles as it does all businesses. In depressed industries such as defense, construction, commercial real estate or financial services, minority firms do not have a corner on suffering.

But the gloom has fallen heavily on ethnic groups that have clustered in particular industries.

Koreans and Korean-Americans own about 40% of the small liquor stores in Los Angeles County, said Ivan Light, a sociology professor at UCLA and author of “Immigrant Entrepreneurs,” a pioneering 1988 book on Korean entrepreneurs.

Meanwhile, Latino immigrants “play a crucial role in the gardening, leather, textile, furniture and lumber industries in Southern California,” wrote Kotkin and co-author Yoriko Kishimoto in their 1988 book, “The Third Century.” As the recession damages the real estate industry, the wreckage falls on those sectors of the economy.

Andy Molina, the Mexican-American founder and owner of Odyssey Co., said tough times have meant slow business for the El Monte-based manufacturer of office furniture.

This month, he was forced to lay off five of his 15 employees. Now he is offering longstanding customers a 10% discount on new orders to bring business to the 9-year-old firm.

“Even though we’re not making smash money or a smash profit, we have enough to keep the business going, and that’s what most of the small minority businesses do anyway when recession or hard times hit hard,” he said.

In Los Angeles’ garment district, the recession has spurred turnover even among the large number of Asian-American-owned factories that sprang up in the 1980s.

“During the past few months, between September to February this year, I’d say about 100 to 120 contractors have been switched over by new owners,” said John Cho, general manager of the Korean American Garment Industry Assn., a trade group.

Andrew Kim is one of the longtime operators who is hurting.

Kim, a Korean immigrant, founded Lanco Fashion Co. in 1978. The sewing contractor employs about 150 workers, mainly Latinos, and grosses between $150 million and $200 million in annual sales.

Kim’s business had been growing steadily, but the growth abruptly slowed about two years ago. Orders fell about 30% as clothing sales plummeted, Kim said.

The heightened competition has increased abuses of labor laws in an industry plagued by them, state inspectors say--from the payment of subminimum wages to failing to carry workers’ compensation insurance. To combat such abuses, the state conducted a recent series of sweeps through Los Angeles’ garment district to identify violators.

Eventually, minority firms--particularly those owned by Latinos and Asian-Americans--may be in a better position than non-minority businesses once a recovery gets under way, some observers argue.

They point to factors that produced strong growth in the 1980s: a continuing influx of immigrants and capital, particularly from Latin America and Asia; growing trade with the Pacific Rim and Mexico, and the flexibility of small businesses to adapt to a changing economy.

Before the economic downturn, Asian-Americans and Latinos opened more firms in the state-- and the nation--than members of other ethnic groups, as their respective populations grew. In California, the number of Asian-American and Latino-owned firms each grew by more than 75% from 1982 to 1987, according to census figures.

“By the mid-1980s, Koreans boasted the highest self-employment rate of any immigrant group, and a rate of business ownership nearly 50% above the national average,” Kotkin and Kishimoto wrote.

The same forces should fuel future growth. “As the minority population continues to grow, certainly the number of minority-owned businesses will continue to grow,” said Richard Stevens, chief of research with the U.S. Commerce Department’s Minority Business Development Agency.

As in the 1980s, some Asian-American entrepreneurs will benefit from the availability of financing through ethnic credit associations, such as the Korean kye, and a heavy infusion of Pacific Rim capital from cash-rich areas such as Hong Kong and Taiwan.

At a recent Los Angeles banquet of the Chinese American Bankers Assn., representatives from 32 banks attended--banks with deposits of around $8 billion in Southern California, said Harold Chuang, the Taiwanese-American chairman of American International Bank in Los Angeles.

In the future, Asian-American- and Latino-owned firms also can be expected to benefit from trade ties with Asian and Latin American countries.

In just the last three years, California’s trade with Mexico has tripled, from $3 billion to $9 billion, said attorney Duane Zobrist, president of the U.S.-Mexico Chamber of Commerce. And the proposed North American Free Trade Agreement will accelerate that expansion.

It is important, though, not to lump minorities together, Kotkin said. When discussing African-Americans, Asian-Americans and Latinos, “we’re talking three different stories.”

In particular, the growth of African-American firms may not keep pace with that of Latino or Asian-American businesses. The number of African-American companies in California grew just 23% from 1982 to 1987, the census reported.

African-Americans start from a greater economic disadvantage than any other ethnic group, with the exception perhaps of American Indians, said Carl Dickerson, president of the Black Business Assn. of Los Angeles, whose membership fluctuates between 500 and 1,000.

Population growth in the African-American community has not and probably will not parallel that of other minority groups, he said. “How many immigrants are coming in from Africa?” Dickerson asks. “Zero.”

Blacks also often have the least access to capital, lacking domestic and foreign sources. Failed cookie-store owner Bass is representative of the many African-American entrepreneurs who say they started their businesses with savings, loans from family members or second mortgages on their homes; few are able to obtain financing from traditional sources such as banks.

Still, black-owned companies, like other minority firms, have benefited from public contracts awarded under programs designed to bolster minority enterprise.

Despite the recession, the state’s seven major utilities managed to boost the amount of money they awarded to minority-owned firms in 1991 to more than 20% of the contracts awarded, two years ahead of a state-mandated schedule.

Such programs promise to spur minority enterprise in the future-- if they are allowed to stand. “They’re vital,” Dickerson said. “They afford a small-business person the opportunity to compete on an equal basis for part of the public’s business.”

But set-aside programs have come under attack. The U.S. Supreme Court ruled in 1989 that some government minority set- aside are too rigid and that others are unjustified, absent a demonstration of past discrimination against minorities.

Moreover, a federal program aimed at awarding defense contracts to minority firms has come under fire from Pentagon officials and minority business leaders.

Not all minority businesses are hurting. Troy J. Davis, 61, said his 150-worker systems engineering firm, S. Systems Corp. in Inglewood, has seen steady growth in annual revenues, to $8.36 million in 1991 from $7.8 million the year before and $7.3 million in 1989.

The growth has come in spite of the fact that S. Systems, founded in 1977, relies mainly on defense and government contracts, where cutbacks have hamstrung larger firms, the African-American businessman said.

“It’s the big companies that are getting killed in this economy because of their high overhead and higher cost of doing business on a day-to-day basis,” he said. “And I try to keep myself lean and mean.”

Minority Business

Southern California has one of the greatest concentrations of minority-owned companies in America, according to 1987 census data, the most recent available.

FIRMS SALES EMPLOYEES PAYROLL (IN MILLIONS) (IN MILLIONS) Asian and other 91,488 $9,396.8 93,198 $904.8 Latino 90,227 $5,349.5 56,720 $726.1 Black 30,923 $1,684.5 14,873 $229.5 Total 212,638 $16,430.8 164,791 $1,860.4

NOTE: Includes the Los Angeles-Long Beach, Anaheim-Santa Ana, Oxnard-Ventura, Riverside-San Bernardino and San Diego metropolitan areas.

SOURCE: U.S. Census Bureau