UNDERSTANDING THE RIOTS PART 5 : THE PATH TO RECOVERY : ECONOMIC RENEWAL : Out of the Ashes: Start Small to Rekindle the Future

In the understandable rush to “rebuild” the riot-scarred sections of South Los Angeles, we may be in danger of ignoring the more fundamental challenge of constructing a sustainable and prosperous regional economy. Only this larger goal can possibly provide the upward mobility for the vast majority of African-Americans, Latinos and Asians seeking job opportunities, while generating the resources necessary to help an underclass whose needs aren’t answered by economic opportunity alone.

The riots force Los Angeles to confront two alternative economic and social futures. In one scenario, perhaps now at hand, a weakening economy ensnares more and more of the African-American community, as well as Latino and Asian immigrants. With many whites and middle-class minorities fleeing to the suburbs and beyond, the city of Los Angeles would come to resemble once economically vibrant, now chronically depressed cities like Detroit.

But there is another scenario: The city’s diverse and talented populations begin to construct new industrial communities powered by smaller manufacturing firms. Attracted to the unmatched resources of the region’s huge manufacturing base, foreign and domestic companies boost their investments as they help to shrink the underclass through public investment and opportunities for self-help.

Viewed from this perspective, L.A.’s economic future will be determined more by the creation of small-firm industrial communities than by attempting to rescue a relatively small, largely dysfunctional underclass. Opening stores and concocting schemes for enterprise zones in the heart of the ghetto constitute only a small part of reshaping the region’s industrial profile.

The idea that smaller manufacturing firms can drive an industrial renaissance in Los Angeles is not a fantasy. Its origins already exist in the enormous variety of small manufacturing companies that increasingly represent the most vital part of the regional economy. Indeed, before the recession set in, the crucial role of smaller companies in generating economic growth was clear in such industries as aerospace and electronics. Between 1988 and 1990, according to a Center for the New West survey, while companies with more than 100 employees shed roughly 10,000 high-technology jobs, an equal number of similar positions were created by firms with fewer than 100 employees.

The potential for further development of smaller manufacturing firms, and thereby opportunities for the emerging middle class, in Southern California are prodigious. Already, in numerous fields--aerospace sub-contracting, computer hardware and software, textiles, biomedical technology, and electrical components--the region is home to a collection of world-class producers and an unrivaled labor base, ranging from the highest levels of sophisticated technicians to eager entry-level workers.

Despite the fashionable notion of the inevitability of a “post-industrial” future for Los Angeles, smaller manufacturing companies stimulate the regional economy far beyond that of traditional service firms and offer generally higher levels of compensation, as well as upward mobility, for their employees. The majority of the small machine-shop owners in the 150-member American Manufacturing Network, for example, are immigrants who started out as unskilled help at other shops and, over time, acquired the technical skills and business acumen to go into business for themselves.

The central role of smaller, entrepreneurial units--often run by former factory hands--is a worldwide phenomenon. For example, between 1954 and 1985, the high-growth era in Japan, the value-added contribution of firms with fewer than 300 employees rose from 42% to nearly 60%, almost twice the United States. Today, these smaller companies employ roughly 75% of Japan’s factory workers. Many large Japanese firms--Toyota and Hitachi, to name two--increasingly rely on these smaller firms, not only for most of their components but also for the innovations and designs that have resulted in such superb products as the Lexus.

Southern California possesses many of the same attributes that produced the spectacular economic boom in Japan. Like the Japanese work force in the early postwar era, which was undereducated but highly motivated, it enjoys a surplus of skilled and semiskilled workers--particularly Asian and Latino immigrants--eager to improve their lives and upgrade their skills. These demographics, as Japanese manufacturing consultant Kiyoshi Suzaki observes, give Southern California the edge over the Midwest, with its generally older, Anglo work force, and over Japan and Western Europe, which both suffer from a large shortage of motivated factory workers.

The region’s ethnic diversity, moreover, offers unprecedented entree to global resources and markets via networks of Latinos and Eastern Europeans, Chinese, Koreans and Japanese. Bitterness spawned by the riots has tempted some to deride L.A.’s role as “capital of the Pacific Rim.” Yet, the Los Angeles’ access to Pacific and Latin American markets and financial resources opens up possibilities that cities like Atlanta, St. Louis or Detroit, which have little Asian immigration or investment, could not hope to match.

Yet despite these enormous advantages, Los Angeles’ smaller manufacturers cannot achieve their fullest potential without substantial changes in both government policies and private-sector attitudes. Today, most small companies see government as an impediment--eager to regulate or tax them out of existence. Industrial entrepreneurs, for their part, remain largely unconnected, with limited knowledge about the potential human and other resources available in the region.

In other regions--including Japan, parts of Europe and the United States--small industrial firms have developed a more mutually supportive relationship with each other and local government. A key element of government policy has been to build networks of affiliated companies and foster cooperation between large and small firms in developing new markets and products.

Wherever smaller manufacturing networks have been allowed to flourish, they attract new business to their regions by offering products and services unavailable elsewhere. Also, because of their flexibility and capabilities, they can typically afford to pay higher wages, provide better benefits and devote more resources to training--all prerequisites for building a stable and equitable regional economy.

To realize a vision of Los Angeles as a center for multiethnic, small-firm manufacturing will require the adoption of a new capitalist paradigm, one aimed at replacing the current chaos and confrontation with a policy devoted to developing strong industrial communities across Southern California. Essential first steps include:

* Developing an index or “map” of the region’s manufacturing capabilities that can serve as a critical database for local industrial firms and for outside companies seeking to source products and services.

* Encouraging the creation of networks of small- and mid-sized company CEOs. The Southern California Technology Executives Network or the Asian-American Manufacturers Assn. in Silicon Valley are pioneering examples.

* Creating private cooperatives or other enterprises that can help local firms with basic services--marketing, quality control, production, technical expertise, and so on. These entities could bid together for work on such projects as the Boeing 787 or the new Airbus plane, as well as from a host of Japanese electronics manufacturers.

* Using major public works, like the Metrorail and electric trolley/bus projects, as a spur to enhance the industrial capacities of small, local producers. This can be done by providing incentives for prime contractors, domestic or foreign, to source with and transfer technology to local manufacturing networks.

* Using small-firm networks to create new “public-private” partnerships that directly provide information from growing, smaller companies to government officials so that they can develop training programs and devise regulatory and tax reforms best-suited to these firms, which are likely to produce the jobs for upwardly mobile, largely minority workers of the coming decade.

In the current political climate, an effort to foster the revitalization of our overall industrial base may seem less compelling than dramatic pronouncements about saving South Los Angeles. But in the long run, a commitment to build small-firm industrial communities throughout the region may prove the only way of providing hope and widespread opportunities for those who may otherwise swell the alienated underclass that now so profoundly threatens our future as a multiracial society.