Recession Hits Minority Businesses Head-On : Economy: Most of the firms in Southland are small, new and undercapitalized. But their vulnerability may also hold a key to region’s recovery.
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 engineer, an African-American, 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. And now his goal is to survive.
“When there’s a recession for America,” Herbert says, “there’s a depression for black people.”
Economists and minority business leaders say the economic implosion that has decimated Southern California has hit minority businesses especially hard.
Southern California has one of the highest concentrations of black-owned, Latino-owned and Asian-owned businesses in the nation; among counties, Los Angeles ranks No. 1 in all three, according to to U.S. census data from 1987, the most recent available. Orange County ranks fifth in Asian-owned businesses and sixth in Hispanic-owned businesses, the bureau says.
In fact, five Southland counties--including San Diego, San Bernardino and Riverside--are among the top 25 in the nation for minority-owned firms.
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 business 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 once 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,” says Joel Kotkin, a visiting fellow at Pepperdine University and senior fellow with the Center for the New West, in Denver.
For now, however, times are hard. Many struggling minority-owned businesses face the issue of race when they branch out to other businesses to supplement their dwindling income, says Alfredo M. Amezcua, a director at the 400-member Hispanic Chamber of Commerce of Orange County.
Erni Davis, a nurse of 30 years’ experience, can attest to the difficulties a person of color faces starting up a business and trying to keep it going.
With money from savings, Davis, who is black, in 1988 opened a medical recruiting agency in Costa Mesa.
She says there was a wealth of opportunity to provide nursing and medical support staff to doctors and hospitals in Orange County. And she was right. Business was so good that the following year, she started a publishing business catering to the pleasure boat industry.
Everything was sailing smoothly until she tried to obtain a loan to expand her new business. Bank after bank turned her down. In January, 1990, when President Bush’s luxury tax kicked in, the recession followed and her publishing firm faltered.
“I worked day and night, six days a week to save it,” Davis says.
It was to no avail. In May, 1991, she stopped publishing to keep her recruiting agency going in a faltering economy.
“In retrospect, I wouldn’t have expanded into the publishing business if I only knew that the economy was going to turn down and that it would be impossible to get $250,000 in funding,” she says.
Unfortunately, such capital was nowhere to be found. It is a common complaint among minority business people that they are more likely to be turned away by banks and other traditional sources of financing than whites are.
“One of the things that has always reared its ugly head . . . is (a) lack of access to capital and (low) levels of financial sophistication,” says Carlton Jenkins, an African-American 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. “Before the recession, minority companies got the hard jobs nobody wanted,” says Rosemary Ruiz, president of Independent Forge Co., a company in Orange that supplies aluminum parts to the aerospace industry.
“Now, everybody wants those hard jobs and, being a Hispanic company, it makes it harder for us because of the racial factor,” she says. “We almost have to give away the contract to keep our people working.”
When Ruiz co-founded Independent Forge in 1975, some companies would not even allow her firm to bid on jobs. She spent hours in the lobbies of many major contractors “begging for work,” but they told her that none was available.
Later, she learned that there were many jobs available, but the contractors were awarding them to her competitors, “who are all white,” she says.
Finally in 1980, a sympathetic senior executive from the Boeing Co. in Seattle put her company on a list of suppliers allowed to bid for Boeing contracts. She immediately won a contract to supply aluminum forging parts that went on the wings of the Boeing 737s.
“The bottom line is we were Mexican-Americans and we were women in a man’s world,” says Ruiz, who felt that she could have gotten the contracts earlier if she were a “white man.”
And for Asian-American business owners, there is a fear that burgeoning “buy-American” and Japan-bashing sentiment could unfairly stigmatize them, even if they are non-Japanese.
“Asian-bashing could affect our ability to win contracts,” says lawyer Paul P. Suzuki, the Japanese-American president of the 300-member Asian Business Assn. in Los Angeles. “When we compete with other ethnic organizations, black or Hispanic, Asians may feel a little bit slighted, because international competition generates animosity against us as a group.”
In general, the recession’s effects on ethnic-owned business in Los Angeles mirror its impact on all businesses. In depressed industries such as defense, construction, commercial real estate or financial services, minority firms certainly don’t have a corner on suffering.
But the gloom has fallen heavily on ethnic groups that have clustered in particular industries.
Koreans and Korean-Americans, for instance, own about 40% of the small liquor stores in Los Angeles County, says Ivan Light, a sociology professor at UCLA and author of “Immigrant Entrepreneurs,” a pioneering 1988 book on Korean entrepreneurs. Koreans also cluster in the garment industry, in mom-and-pop grocery stores and in small retail services, such as dry cleaning--all areas of the economy that are suffering, business leaders say.
The dry-cleaning business is down about 30% in the past year, says George Ma, editor of Cleaners News, a Korean language newsletter of the Korean Drycleaners & Laundry Assn. of Southern California in Fullerton.
In the past year, about 100 Southland dry cleaners closed, half of them owned by Koreans, he says.
“Customers tell our members that they have less clothes to clean because they don’t eat out or go partying as often anymore,” Ma says.
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 demolishes the real estate industry, the wreckage falls on those sectors of the economy.
In the garment districts of Los Angeles and Orange counties, 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,” says John Cho, general manager of the Korean American Garment Industry Assn., a Los Angeles trade group. “A lot of old-time owners or smaller ones have gone out of business and been taken over by new owners.”
Sang C. Rhee is one longtime operator who is hurting. Rhee, a Korean immigrant, founded D&L; Inc. in Westminster in 1979. The sewing contractor employs 60 workers and grosses about $1 million in annual sales. His plant is a single-story factory in a small garment industrial district in Little Saigon.
Rhee’s business had grown steadily over the years, but the growth significantly slowed nearly three years ago when the government raised the minimum wage and the recession began. Orders fell about 20% as clothing sales plummeted, Rhee says. He saw many garment factories fold as increasing competition from foreign contractors forced him and other contractors to lower their production costs--mainly by layoffs and cutting wages.
Even after he shed 25% of his work force in the last 12 months, Rhee does not foresee an upturn soon, either.
“There seems to be no future for greater growth in the garment industry,” he says. “Demand from apparel manufacturers continue to be low because consumer spending is flat.”
The heightened competition has increased abuses of labor laws in an industry already plagued by them, state inspectors say--from the payment of sub-minimum wages to failing to carry workers compensation insurance. To combat such abuses, the state conducted a recent series of sweeps through L.A.’s 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 underway, 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% in 1982-87, 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,” says Richard Stevens, chief of research with the U.S. Commerce Department’s Minority Business Development Agency.
As in the 1980s, some Asian entrepreneurs will benefit from the availability of financing through ethnic credit associations, like 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, says Harold Chuang, the Taiwanese-American chairman of American International Bank in Los Angeles.
In the future, Asian- 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, to $9 billion from $3 billion, says 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. When discussing African-Americans, Asian-Americans and Latinos, “we’re talking three different stories,” Kotkin says.
In particular, the growth of African-American firms may not keep pace with that of Latino- or Asian-owned businesses. The number of African-American companies in California grew just 23% in 1982-87, the census reported. (UCLA’s Light argues that the data underreport the pace of growth, failing to reflect one-person businesses such as child care and home repair.)
In any case, blacks start from a greater economic disadvantage than any other ethnic group, with the exception perhaps of American Indians, argues Carl Dickerson, president of the Black Business Assn. of Los Angeles, whose membership fluctuates between 500 and 1,000.
Population growth in the black community has not and probably will not parallel that of other minority groups, he argues. “How many immigrants are coming in from Africa?” Dickerson asks. “Zero.”
Blacks also often have the least access to capital, lacking both 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 total, 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 says. “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 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. Critics have alleged that lax administration has allowed improperly qualified and non-minority-owned firms to win contracts.
And some minority firms say they have lost business as states and local governments slash budgets.
Not all minority businesses are hurting. Troy J. Davis, 61, says 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 even though S. Systems, founded in 1977, relies mainly on defense and government contracts, where cutbacks have hamstrung other, larger firms, the African-American businessman says.
“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 says. “And I try to keep myself lean and mean.”
Minority Firms in Orange County Southern California leads the nation in the number of minority businesses and in the amount of revenue they generate. Orange County ranks second in California and fifth in the nation. Although minority firms have been hit hard by the recession, most believe that they have a better chance of weathering the storm than big companies because they have lower overhead and are generally leaner. Number of Minority-Owned Firms: Top Five Counties in the United States 1. Los Angeles: 142,580 2. Dade, Fla.: 55,712 3. Harris, Texas: 34,354 4. Cook, Ill.: 32,563 5. Orange County 26,190 2.140 Top Five Counties in California 1. Los Angeles: 142,580 2. Orange: 26,190 3. San Diego: 19,342 4. Santa Clara: 19,146 5. Alameda: 17,471 Top Five Cities in Orange County 1. Santa Ana: 3,518 2. Anaheim: 3,051 3. Garden Grove: 2,337 4. Huntington Beach: 1,607 5. Westminster: 1,482 Ethnic Dollars Asian- and Pacific Islander-owned businesses account for 65% of the revenue generated by minority firms in Orange County. (Figures indicate revenue in millions of dollars.) Asian, Pacific Islander: $1,400.0 Latino: 640.6 Black: 81.2 Eskimo, Aleut, American Indian:16.7 Source: U.S. Bureau of the Census, 1987
