California’s Industrial Giants Are Not the Future : Economics: Declining big companies, like Hughes, want something for nothing. Why not reward smaller firms who like doing business here?
Southern California’s economy is suffering a torture of a thousand cuts, but few have been more keenly felt than the recent announcement by Hughes Aircraft that it will transfer more than 4,000 defense jobs to Arizona. In blaming the move on the state’s business climate--skyrocketing worker’s compensation expenses, high land and labor costs, regulatory excesses--Hughes officials triggered yet another round of California-bashing. In so doing, they diverted attention from much more pressing industrial challenges that, if unanswered, could cause even greater economic pain down the road.
Hughes’ decision is being used by some as a clarion call for fierce competition with other regions for the diminishing number of jobs offered by the world’s largest multinational firms. While many business and political leaders jump at this strategy, it should be noted that large employers like Hughes are highly skilled at exploiting hard times to obtain tax and regulatory relief without making any regional commitments in return. Concession after concession will not deter these companies from moving to poorer, more politically pliant regions or countries should the opportunity arise.
Desperate though the economic times may be, no advanced industrial society can maintain a high-quality standard of living by chasing after these declining large firms. America’s Fortune 500 companies have shed more than 4.5 million workers since 1979; they are currently cutting close to 2,200 jobs a day. Also, most of these companies produce standardized products that can be easily copied and manufactured more cheaply almost anywhere else in the world. To offset their inflexibility, these firms increasingly lower their wages and demand relief from even reasonable social and environmental standards. Building an economy around such companies would lock in the decline of California, if not of America.
There is an alternative in Southern California: stimulating the growth of flexible, generally smaller companies that collaborate to manufacture specialized, high value-added products for world markets. This strategy has the advantage of promoting firms that are growing and adding jobs because they can adapt to, or even drive, rapidly changing world markets. Since the late 1980s, for example, virtually all the new manufacturing and high-tech employment in California has been generated by smaller companies.
Since these companies turn out products that can’t easily be copied, they are less concerned with reducing wages than maintaining a top-quality work force and collaborating with firms that share similar characteristics. They thus have strong incentives not to move or reduce local standards of living when adverse market or regulatory conditions develop. The growth of such firms enables many many regions, like those in Japan or Germany, to combine high wages, high costs and significant environmental and safety safeguards with extremely competitive, stable local economies.
This is not to say that the business climate is only a small part of the story. Irrational air-quality regulations and worker’s compensation fraud are serious problems in California. But it is too easy to seize on such issues and avoid the more pressing need to provide resources for California’s growth firms.
Pretending that worker’s compensation, for example, rather than the end of the Cold War, corporate miscalculation and a national recession, is to blame for more than a fraction of job losses in Southern California is simply irresponsible. Other states touted as pro-business havens, including Florida before Hurricane Andrew, Alabama and Arizona, have been hit about as hard as California. Tucson, the city that “won” the Hughes project, has lost 20% of its manufacturing work force in recent years. In such an environment, reforming the business climate is like fixing a flat tire on a car without an engine.
Allowing bureaucratically encrusted companies to influence, or even dictate, the state’s economic future is the most short-sighted of strategies. Like Hughes, California’s growth companies dislike excessive regulation, but they are much more interested in access to capital, health care and insurance, or technical support, industrial networking, and regional and international trade promotion. Large, declining firms typically seek to extort concessions from troubled regions, thereby harming more committed firms by destroying local business confidence.
This problem is perhaps best illustrated by Michigan’s experiences with Hughes’ parent company, General Motors. In the last 10 years, GM became a one-company rolling recession, laying off more than a quarter-million workers. It blamed virtually anything--Japanese competition, an under- or overvalued dollar, unions, education in America, environmental regulation--but its own inflexible, bloated management for its distress. Once the center of U.S. automobile production, Michigan suffered a kind of living death as whole generations of workers lost jobs and migrated in search of work, while GM moved plants southward or to foreign countries in search of cheap labor.
Michigan leaders, Republican and Democrat, worked assiduously to appease GM, expecting that the company would reward their efforts with redoubled loyalty to the region. The state’s business tax was restructured to satisfy the Big Three’s professed needs; the auto companies secured widespread real-estate, labor, investment and regulatory relief.
Nothing worked. Michigan lost more than 500,000 jobs in the 1980s alone, as GM and other large firms relentlessly moved assembly plants out of state, and increasingly procured high-valued-added components from Japan and other more flexible manufacturers.
Meanwhile, some 11,000 smaller, specialized companies in industries like robotics, precision machining and plastics added more than 275,000 industrial jobs to Michigan’s economy. As a former head of the state’s Department of Commerce now observes, “The old paradigm that saw the Big Three or Fortune 500 companies as the sun around which everything revolves is dead. It only results in guaranteeing your rate of decline. The future remains in manufacturing, but (in Michigan) that simply is no longer centered on the Big Three.”
The parallels between Michigan’s experiences in the 1980’s and California’s current problems are striking. Like automotive firms in Michigan, Hughes and larger aerospace companies were once the undisputed linchpins of the local economy. Entrepreneurs like Howard Hughes, Donald Douglas and John K. Northrop were the state’s equivalents of Henry Ford and GM’s Alfred Sloan.
Yet, like their Detroit counterparts, many Southern California aerospace giants have lost their commitment to their home region. Some, like Hughes, were bought by non-California conglomerates; no amount of local regulatory reform is likely to keep them from moving parts of their companies to other states or countries. The aerospace production California retains will depend on developing specialized skills and products not available from large aerospace firms anywhere else.
If helping smaller companies gave Michigan an economic future, it is all the more appropriate for Southern California, home of the nation’s largest single concentration of smaller, growing manufacturing firms.
Despite the nearly universal gloom about Southern California’s economy, few regions are inherently better suited to compete in a world of smaller, flexible firms. What’s needed is the political and economic will to serve the needs of these local companies, for whom doing business here is not a burden, but potentially the best of all possible worlds.
