Companies Lured From Tarnished Golden State : Economy: Recruiters target businesses in O.C. and elsewhere in California frustrated by increasing costs and regulations.
Charlie Dromgoole, president of the Abilene Chamber of Commerce, attended a convention in Anaheim last month to lasso a few local companies and herd them to the great state of Texas.
His line of work was becoming fiercely competitive, he said. Every state, city, county, and burg in the gall darn United States seemed to be hiring representatives to help coax companies into relocating, especially from California.
“Yep, it’s getting to be a dog-eat-dog world out there,” Dromgoole said in a gentle Texas drawl as he handed out complimentary jalapeno lollipops, “and California, right now, is wearing Milkbone underwear.”
Around his display at the Anaheim Marriott were more than 65 other booths set up by business recruiters from 28 states. They formed a gantlet of pitchmen who swarmed the handful of local business owners venturing down the aisles at any one time.
Though the number of businesses carted away by recruiters like Dromgoole is still minute, California stands on the threshold of an economic hemorrhage that threatens to prolong the recession and hobble the state’s ability to create jobs for an ever-growing population.
The symptoms are everywhere. Discontent with the business climate appears to be widespread. Headhunters from out of state are luring away more and more California companies with an economic trinity of decreased costs, lower taxes and less government regulation. The state budget is $11 billion in the red, and the economic slowdown is chronic.
With the Cold War over, many aerospace firms that once contributed to the region’s robust economy plan to move to other states or expand outside California, taking with them tens of thousands of good-paying jobs. Divisions of McDonnell Douglas, Lockheed, Northrop, Hughes Aircraft, Allied-Signal and Western Gear have already left.
More defections are on the way, and not just in aerospace. Polls and surveys suggest that as many as one-third of the state’s business owners and top executives are considering--to some degree--moving out of California or expanding their companies elsewhere.
On top of that, an undetermined number of firms, pressured by more competition at home and abroad, are consolidating operations, often closing down their more expensive California branches. Meanwhile, out-of-state companies are ruling out the possibility of moving here.
“I think the state is on the brink of an exodus,” said Robert M. Ady, president of PHH Fantus Corp., one of the largest relocation consulting firms in the nation. “Just recount the history of Michigan. It was a mecca of manufacturing in the 1950s, but the Southerners came calling, and calling. Eventually, they convinced a lot of people to leave. The situation is salvageable, but the state better get its act together.”
All of this has contributed to the view that families and business people are abandoning California in droves, hitting the road in their Fords, BMWs and Jeep Cherokees like so many upscale Jodes--the Depression-era clan that migrated from the Oklahoma Dust Bowl to California in John Steinbeck’s literary classic “The Grapes of Wrath.”
It never used to be this way. For more than two decades, the state was the destination of an onrushing crowd. Climate, geography, waves of innovative immigrants, high-tech industries and defense spending built the state’s economy into the world’s seventh largest--even larger than those of many European nations.
Today, the longest recession since the Great Depression of the 1930s has interrupted that phenomenal expansion, bringing job losses of at least 550,000 and unemployment rates approaching 10%.
Now, far more than in the past, business leaders and politicians are complaining about California’s “hostile business climate” and blaming it for some of the economic misfortune that has beset the state for two years. Their complaints are not new, just more pronounced as the recession has forced businesses to pay closer attention to the bottom line.
High on the list of gripes are one of the most expensive workers’ compensation systems in the nation; a thicket of government regulations; increasingly slow commutes that cut into working hours; the high cost of living; and haughty, insensitive bureaucrats unwilling to cooperate with business.
Particularly annoying is workers’ compensation insurance, designed to cover the expenses of employees injured on the job. California’s system, which the state Legislature is seeking to reform, has the third highest premiums in the nation and some of the lowest benefits.
The state also has liberal stress provisions which allow, among other things, fired employees to file claims for psychological problems caused by their termination. State figures show that stress cases alone have increased 700% from 1,282 in 1980 to 10,444 in 1990.
Such workers’ compensation claims, and an administrative system that has virtually no mechanism to ferret out fraud, have resulted in widespread abuse, and business-paid insurance premiums that are three to four times higher than in other areas of the country.
“The state has simply developed a system to steal from business,” said Bob Kirkeby, president of Furniture Traditions in Orange, an oak bedroom furniture manufacturer considering a move out of state. “We have never had a serious injury here. Then, we fired three people. All of them filed workers’ compensation claims against the company days after their terminations.”
According to Kirkeby’s records, those stress claims cost his insurance company about $70,000 to settle, resulting in a loss to his company of about $300,000 in premium discounts.
Another constant source of discontent is the South Coast Air Quality Management District, responsible for enforcing ever tougher air pollution rules on everything from industrial polluters to back-yard barbecues.
Manufacturers say the high cost of providing air pollution control equipment sometimes makes it more economical to move or expand operations out of state. Other companies, particularly those using paints and solvents, also complain that production changes necessary to meet environmental standards make them less competitive by raising costs and lowering the quality of their products.
More irksome, business people say, is the government’s apparent unwillingness to cooperate with business to solve problems and the time it takes to get environmental and building permits necessary to build a new plant or expand operations. In many cases it can take months, even years, longer than in other states.
Typical, some business people say, is what happened to Fairchild Controls, a division of Fairchild Space and Defense Corp. In April, the company, with 450 employees, decided to move from Los Angeles County to Maryland. Division President Robert Brosius said California officials never responded to a call from the firm notifying them that Fairchild Controls was weighing a move.
“No one has cared whether these companies move or not,” said Richard D. C. Whilden, executive director of the Council on California Competitiveness, headed by former baseball commissioner and Olympics organizer Peter V. Ueberroth. “Maybe it’s not an ‘anti-business’ attitude, but a ‘who cares’ attitude.”
Aggravating the situation further is a national shift away from big cities. Facilitated by better communications and computers, some companies can easily relocate in rural settings and be rid of the hustle, pollution and high costs of a metropolis.
“Technology is allowing (industrial) power to be distributed and more equally dispersed in the United States,” said David Heenan, author of “The New Corporate Frontier--the Big Move to Small Town USA.”
“The whole downsizing phenomena is part of the process too,” he said. “In the old days, the corporate office was a pyramid likely to have 1,500 people. Now, it’s likely to have 100.”
Similar changes, Heenan contends, are occurring in manufacturing, which is automating assembly lines, decentralizing and parceling out production to subcontractors.
“Today, firms are finding that it’s more efficient to have something produced here, something produced there, and assembled elsewhere,” he said. “The old . . . production process of Henry Ford is nearing its end.”
Assuming nothing is done to retain companies, the potential consequences sound apocalyptic. Some business leaders say that manufacturing, with economic opportunity for unskilled and immigrant workers, will be carted away to other states or countries, never to return.
A large part of the middle-class, the small business owners and managers, the accountants and lawyers who service the manufacturing sector, will follow it. Soon wages will plummet because only low-skilled service and retail jobs, like sales clerks, car washers and short-order cooks, will dominate the economy.
Ultimately, they say, the Golden State might enter an industrial Dark Age, with an increasingly Third-World style economy, more polarization between rich and poor, and government services driven to bankruptcy by a shrinking tax base.
Across the state, the doom and gloom has been reinforced by scores of relocation consultants and corporate headhunters who look on California as a potential mother lode of disenchanted entrepreneurs and executives eager to pull up stakes. Utah, Texas, Washington, Idaho, Nevada, New Mexico and Arizona are among the top prospectors.
Nevada alone has budgeted $400,000 just to recruit in California. Arizona recently convened a special legislative session to pass a host of economic incentives to lure aerospace firms away from the Golden State.
When Texas Gov. Ann Richards heard that Texas was not among the four states Intel Corp. was considering for a $1-billion expansion, she rounded up an entourage of Texas mayors and flew to Intel’s California headquarters. The company’s executives say they were impressed by Richards, but were not ruling out California as a possible site.
“The vultures are definitely out there,” said Ady of PHH Fantus. “With that kind of pressure, with that many recruiters, the exodus is almost a self-fulfilling prophesy. You start getting a lot of self doubts in business people.”
In a survey of economic development agencies across the country, The Times discovered that more than 450 California companies have either relocated or expanded operations in 30 states since 1988.
A preliminary study by the Economic Development Corp. of Los Angeles County found about 260 Southern California companies that had expanded into other states or relocated outside California since 1989. EDC researchers estimate that those departures cost the state at least 54,000 jobs, about 10% of the 550,000 jobs lost statewide during the recession and more than all the jobs lost in Orange County.
Southern California Edison Co., which has been researching business flight for almost a year, has tracked the loss of about 1,000 industrial facilities since 1980, most of them leaving in the last four years.
“This is not just the standard recession,” said Barry R. Sedlick, a business retention manager for Edison. “There was always optimism that the jobs would return after the downturn. Now, there is real concern that the jobs won’t be coming back.”
Sedlick said that from January, 1987, until July of this year, his company’s research shows that California suffered a net loss of 112,650 manufacturing jobs. The number of jobs lost through business departures or expansions outside California amount to 91,965--meaning that the job loss figure would have been trimmed by 84% if those companies had stayed in California or expanded their operations here instead of elsewhere.
A joint study by utility companies found that in Orange County, 94 companies have left the state or expanded outside California since 1987. There are about 66,000 businesses in the county.
The numbers leaving so far represent a trickle of California’s 730,000 businesses and 796,000 employers, but recruiters say that during the recession hundreds of firms interested in moving have contacted them about their states.
Perhaps more indicative of a problem are polls and surveys suggesting that one out of every five corporate executives or business owners is considering moving his or her company out of state or expanding operations outside California.
In Orange County, a 1992 survey by the UCI Graduate School of Management showed that 20.2% of the top executives at 124 firms with 100 or more employees said their companies were somewhat likely or very likely to relocate outside the county.
Of those executives considering a move, 63% want to relocate out of state, a major change from the 1991 UCI survey which indicated that only 21% were looking outside of California. Half of those firms reported that they had been contacted by business recruiters from other states.
Last year, a statewide survey of 1,462 firms conducted by the California Business Roundtable, an organization made up of major companies, indicated that one-third of those polled had plans to either move or expand operations out of state. The pollsters estimated an average loss of 189 jobs per company.
“The numbers actually leaving is the wrong focus,” said Julie Meier Wright, director of the California Department of Commerce. “As the economy turns around, the issue is not going to be how many companies will pack up and move, but how many companies will choose to expand outside of California.”
Critics, however, say there is a whiff of fraud in the idea that California’s economy is about to be dismantled. Social scientists and economists argue that the numbers leaving or expanding elsewhere are extremely small, and no one has compared the number of businesses starting up or coming to California to the departures to see if there is a net loss.
Reliable statistics are hard to find, and what is available does not come close to substantiating an economic exodus. Some recruiters even admit that only a handful of the many companies that contact them actually decide to move.
“The job losses here and across the U.S. are due to a lack of spending by consumers, the national recession, and defense cuts. You simply can’t find data to substantiate an exodus,” said Robert K. Arnold, a researcher at the Center for Continuing Study of the California Economy in Palo Alto.
Others say the so-called exodus is nothing more than hype to promote a longstanding and often thwarted business agenda to undermine environmental standards, reduce civil liability for corporations and cut employee benefits.
“Business and industry is trying to use jobs blackmail to get what they want,” said Tim Little, a spokesman for the Clean Air Coalition, an environmental group in Los Angeles. “They have to deal with regulations and permits in other states. I admit some things can be consolidated; others can’t. Some streamlining can be done. But you can’t document that these companies are running away from regulations.”
Despite concerns about the business climate, Arnold and others contend the state’s lure has hardly vanished. It is located on Pacific Rim trade routes, making it attractive for industry, and the state has an enormous consumer market with a population of about 31 million that is still growing.
California remains a magnet for immigrants from Asia and Mexico, and the latest population statistics continue to show an influx of newcomers from other states and countries. Though somewhat slowed, it is still a net gain.
Recent projections by the Southern California Assn. of Governments predicted that Southern California alone will add 7 million people by 2010, the equivalent of two Los Angeleses.
Despite problems with public education, there is still a highly skilled work force, produced by some of the nation’s best colleges and professional schools.
Last year--in the pit of the recession--an estimated 191 new corporate facilities and expansions occurred in California, ranking it fourth in the nation for such activity, according to Conway Data Co. of Georgia. Sixty-two of those were manufacturing plants.
Conway Data gathers national statistics about corporate and manufacturing facilities. To be counted, the expansion or new facility must involve at least a $1-million investment, the hiring of 50 or more employees, or construction of at least 20,000 square feet of space.
Although manufacturing construction in Southern California dropped 62% from 1991 to 1992, there were still 148 new manufacturing-related projects started during the first five months this year, according to Dodge Construction News, which tracks building activity. In Orange County, Dodge reported 12 manufacturing projects for the same time period.
According to Fortune Magazine, 33 of the nation’s 100 fastest growing companies in 1991 were headquartered in California. Arizona, Nevada and Utah, supposedly some of the state’s biggest competitors, had none on the list. Similarly, Forbes magazine reported that 42 of the best 200 small companies in the nation in 1991 were in the Golden State.
“The markets are here, because who wants to live in Nevada?” said William T. George Jr., communication director for the California Manufacturers Assn., which has about 1,000 member companies. “The climate and all the traditional things that make it attractive are still in place in California. There is a vibrancy no one can match--an innovative spirit no one can match. California is still a manufacturing hotbed of the United States.”
State and local governments are now trying to use some of California’s traditional selling points in an effort to resell the state to business. That has been combined with a growing, but still nascent, effort to overcome some of the area’s perceived shortcomings.
“I wouldn’t paint a bleak or black picture for California,” said Thomas Sutton, chief executive officer of Pacific Mutual Insurance Co. in Newport Beach and a member of the California Business Roundtable. “But we need to address our problems realistically. Those are workers’ compensation, health care costs, and the complex regulatory and permitting process.”
Already pending before the Legislature are scores of bills to reform workers’ compensation. The Air Quality Management District recently held public hearings to find out how air pollution regulations and the permit process affect the economy and local businesses.
And Gov. Pete Wilson in December, 1991, convened the Council on California Competitiveness, headed by Ueberroth, to make findings about the state’s business climate and ways to improve it. The council’s voluminous report was released in April and recommended a host of ideas from revamping workers’ compensation to customer service training for government officials.
The state Department of Commerce has begun expanding job training programs, offering tax breaks to companies, trying to help businesses through bureaucratic red tape, as well as contacting firms interested in relocating with a new Business Retention Unit.
“You don’t have to leave California to find a small town,” said Wright of the Commerce Department. “When you look at the totality of the state, we can compete with anywhere in terms of cost, climate and work force. Look, we are a marketplace of 31 million people. We are culturally and ethnically diverse, and a stronger global player than other places.”
Locally, groups such as Partnership 2010, initiated by Orange County Supervisor Harriett M. Wieder, are trying to increase communications and cooperation between government and business. The cities of Westminster, Santa Ana, Huntington Beach, Yorba Linda, Anaheim and Orange have offered help in renegotiating leases, expediting permits and millions of dollars in funding as incentives to stay.
If such efforts prove inadequate and the Legislature doesn’t act, Whilden of the Council on California Competitiveness predicts there will be ballot measures launched next year in an effort to get reform.
“You have to get a crisis before things start to happen,” Whilden said. “Another year or two of decline will put us in such a fiscal bind that people will replace the Legislature or put initiatives on the ballot to get something done. . . . I think it will get worse before it gets better.”
Vanishing Jobs
Orange County lost more than 1,187 manufacturing jobs during the first seven months of the year due to companies expanding or relocating outside the state. 1987: 5,844* 1992: 1,187** * Mostly McDonnell Douglas, other aerospace jobs ** Through July 31 Source: California Industry Migration Study, by Southern California Edison and other utility companies
Business Unhappiness
Local executives think Orange County is becoming a less attractive place to do business, but most do not contemplate moving. When the UCI Graduate School of Management asked 184 corporate executives about the business climate here, most said it is becoming less attractive; in 1991 a plurality said that their opinion about the county had not changed.
Failing Attraction
Do you feel Orange County is becoming more attractive, less attractive or is it about the same for your company?
More Less Same 1987 36% 31% 33% 1988 33% 32% 35% 1989 33% 36% 31% 1990 23% 39% 38% 1991 21% 35% 44% 1992 6% 57% 37%
Relocation Expectations
How likely is it that your firm would relocate in the next five years--very likely, somewhat likely or not likely?
Very Somewhat Not likely likely likely 1989 12% 12% 76% 1990 13% 15% 72% 1991 9% 16% 75% 1992 7% 13% 80%
Those considering relocation outside Orange County mention these destinations: Outside California: 62% Riverside County: 25% Los Angeles County: 13%
Leaving California
Statewide, one company in four is considering relocation. Roughly a third of those will move all their operations, the balance only a portion. Manufacturers are far more likely to entertain thoughts of leaving than other types of businesses.
Does your company have plans to relocate operations outside the state? All companies: Yes, all: 8% Yes, some: 15% No: 77%
Manufacturers: Yes, all: 15% Yes, some: 22% No: 63%
Others: Yes, all: 2% Yes, some: 9% No: 89%
The following percentages of companies say they plan to expand their operations outside California with, again, manufacturing concerns in the lead.
Does your company have plans to expand operations outside the state? All companies: 24% Manufacturers: 32% Others: 17%
Comparing States
California business leaders complain the Golden State is losing its competitiveness with other parts of the country. A partial comparison of economic factors in California and the states it competes with for jobs and industry (base year is 1990):
California Nevada Taxes: States with lower taxation 27 1 Workers’ compensation insurance: 47 24 States with lower premiums Avg. hourly manufacturing wage: $11.16 $10.33 Value added: Dollars worth of $5.18 $3.11 product for each dollar in wages paid Energy costs: per million BTUs $6.61 $7.27 (British Thermal Units) Average house price: $242,000 $93,000 (Orange County) (Las Vegas) Avg. per capita income: $16,188 $15,414
Arizona Taxes: States with lower taxation 30 Workers’ compensation insurance: 28 States with lower premiums Avg. hourly manufacturing wage: $9.93 Value added: Dollars worth of $5.23 product for each dollar in wages paid Energy costs: per million BTUs $7.31 (British Thermal Units) Average house price: $84,000 (Phoenix) Avg. per capita income: $14,906
Utah Idaho Washington Taxes: States with lower taxation 42 21 38 Workers’ compensation insurance: 6 22 34 States with lower premiums Avg. hourly manufacturing wage: $10.14 $10.21 $12.14 Value added: Dollars worth of $4.83 $4.40 $4.23 product for each dollar in wages paid Energy costs: per million BTUs $5.11 $5.69 $4.66 (British Thermal Units) Average house price: $69,400 $69,200 $142,000 (Salt Lake City) (Boise) (Seattle) Avg. per capita income: $13,482 $15,208 $15,300
Sources: 1992 Orange County Executive Survey, the UCI Graduate School of Management; California Business Climate Survey by Mark Baldassare & Associates; Grant Thornton Manufacturing Climates Study; National Assn. of Realtors; U.S. Census Bureau
Researched by DAN WEIKEL / Los Angeles Times
