Diversity of Business in Region May Spell Renewal : Economy: Defense and aerospace losses are not death knells, analysts say. Instead, they see a wake-up call.

The fear gripping many people as the defense industry declines is not just about jobs but that the whole Southern California economy may pull up tent poles and fade into the desert.

A cascade of national attention on Southern California’s problems has left the impression that the whole region--not just the defense industry--faces a dismal future.

What is really happening?

With the decline of aerospace, Southern California is going back to a pattern that predates World War II, to an economy based on a variety of industries and a tremendous assortment of small- to medium-sized companies.

At the same time, the region’s location in a changing world--and its own investments in becoming competitive for that global economy--suggest that Los Angeles and Southern California may be on the verge of renewed vigor.

Large forces are in motion, and the decline of defense--while staggering in its impact--will not be the only story of this decade in Southern California. The pattern is not so much converting defense to something else as finding new business opportunities in an active region.

“Defense conversion is a misnomer,” says Michael Armstrong, the chairman of Hughes Aircraft, which is venturing into direct satellite broadcasting, digital telephones and electric vehicle technology. “It should be called simply diversification.”

To be sure, the defense business is not going away. Northrop Chairman Kent Kresa sees trends favoring high-tech weapons able to attack at long range and spare American military lives. “California is well positioned for that because we have some leadership in advanced technology,” Kresa says.

But in the years ahead, the real opportunities may well lie elsewhere.

Consider entrepreneur Arthur (Jim) Goodwin, 50, who left a Defense Department software supplier in Rancho Cucamonga three years ago to buy into Taylor-Dunn, an Anaheim manufacturer of the kind of electric carts that are used in airport terminals and factories.

Since then the work force at Taylor-Dunn has swelled 35% to 200 employees, and revenue has risen 50% to $30 million as it has increased export sales--particularly to Mexico.

Playing by New Rules

A small company, Taylor-Dunn, but in many ways a model of what many Southern California businesses will be if they are to thrive in the years ahead: entrepreneurial, adaptive, focused on world markets and involved in the transportation industry.

Already business people sense new prospects emerging. Southern California Edison added 30,000 customers last year, and it will add 20,000 more this year as new businesses open up amid the worst local recession in 50 years, a time when companies normally turn out the lights.

SoCalTen, an organization of small company owners that has seen many defense supply members fail, is noticing a resurgence of newcomers in computer software “and especially in multimedia, where there’s a lot of potential,” said Bob Kelly, SoCalTen’s chief executive.

Orange County is seeing new medical instrument makers and biotechnology firms, according to Brentwood Associates, the venture capital firm.

There’s potential too in lower-tech industries. “Our food processing and apparel industries are going to flourish as Mexico’s standard of living improves and they buy more processed foods and clothing,” says UCLA economist William Ouchi, who now works at City Hall as a special assistant to Mayor Richard Riordan. The model is Los Angeles’ Casa Herrera, which ships tortillas to Mexico.

It has been pointed out countless times that a standard of living financed by $18-an-hour aerospace jobs cannot live by $5-an-hour garment work. But the argument is beside the point, many industrial experts believe.

Just as Pittsburgh, Pa., despite gloomy predictions after the decline of the steel industry, did not turn into a hamlet of hamburger flippers, so Los Angeles after aerospace will not become the sweatshop capital of the Pacific Rim.

The information industry capital might be more likely, analysts say. Since 1989, the electronics industry, which includes computers and parts, has been California’s largest employer--and its projected growth is impressive.

There are no miracles here. Small- to mid-sized entrepreneurial companies--whether machine shops in El Monte with a few dozen employees, or computer firms in Los Angeles with a few hundred--cannot blunt the effect of direct and indirect aerospace job losses in the hundreds of thousands.

Yet small companies are the agents of defense restructuring because they often employ the refugees from aerospace, patiently changing their “mind-set” from government to commercial work, where costs and timing count for more than technology and paperwork in triplicate.

“One must learn to do things more cheaply and quicker in commercial work,” says Richard MacNeal, chairman of MacNeal-Schwendler Corp., a Los Angeles maker of engineering software.

Commercial pay is typically lower than defense work--$8 to $12 an hour compared to $17 and more--but there can be offsets, such as profit sharing and shared ownership in fast-growing companies. It is a new experience for many employees but a pattern as old as industry in Southern California.

This has always been a region in which skills were brought together in a variety of industries, beginning with oil drilling and the movies as well as aviation in the early 1900s. “The skills of this area--working with precision parts and advanced materials, innovating computer technology and integrating complex systems--are not limited to machining parts for interceptor aircraft,” Ouchi says.

Rather, times and industries change, and the skills adapt. The major bet being made today is that Southern Californians will stretch their skills in advanced transportation. With the same determination it once used to attract the aircraft industry, Southern California is trying to become the world center for electric vehicle technology and manufacturing.

Impressive research and development efforts are under way, most notably at CALSTART, a consortium founded in 1991 by entrepreneur Lon Bell and Southern California Edison that now includes more than 40 companies, five utilities, four universities and numerous public and private agencies.

Funded partly by the Defense Department’s Advanced Research Projects Agency, CALSTART is supporting research on batteries, fuel cells and natural gas storage modules while pushing for prototype low-emission vehicles to be built.

Its timing is impeccable, says Allen J. Scott, an economic geographer at UCLA who has led major studies on advanced vehicles for the transportation authority.

“The development of an electric vehicle industry in the near future is scarcely in doubt,” Scott says. “Already, prototype production is under way in several places, here and abroad.” That means Southern California will have a fight on its hands to become the center for such technology.

So state government and industry leaders have launched Project California, a blue ribbon committee that will try to coordinate development efforts on low-emission vehicles and computerized highway systems.

While the focus is long term, some of those developments are already in operation or just around the corner. Truckers can now keep track of fleets nationwide through global positioning systems using satellites and sensors. Hughes Aircraft and Rockwell International lead in such technology.

And the day is coming fast, say researchers at Sun Microsystems’ El Segundo office, when sensors in the road will constantly monitor the location of your car and its surroundings, allowing up-to-the-minute maps of traffic ahead or off-highway locations you need or want to visit.

What it all adds up to is that a whole new industry, based on the information technology capabilities of Southern California companies, is being born even as defense cuts back.

And the focus on transportation is integral with the most impressive but unheralded fact about Southern California: It is now engaged in a public works program of truly historic dimensions. The Metropolitan Transportation Authority is spending $183 billion over the next couple decades on ports and airports, transit projects and highways.

The already-earmarked government funds should work out to $6.1 billion a year, Scott calculates. “That’s two-thirds of what the Defense Department spent in this area in 1990.”

Roads to Prosperity

It is the kind of infrastructure renewal that continues in good times and bad and that historians look back on to mark a rise of a region or nation. New York building its subways at the start of the 20th Century, and after that becoming the financial capital of the world, is an example of what this kind of infrastructure program can do.

The current infrastructure program, says historian Kevin Starr of USC, author of several histories of California, is a case of “Los Angeles making itself competitive for the planet.”

The recently opened Century Freeway, which links Los Angeles International Airport with the region’s industrial belt, was but one step, Starr explains. It will be followed by rail corridors and transit systems to move goods and people across the region more efficiently and therefore allow Southern California to carry on trade cheaper than other cities.

This region has formidable assets for trade. The combined ports of Los Angeles and Long Beach move more foreign commerce in and out than any other U.S. port by a wide margin--double the value of New York’s commerce and quadruple Seattle’s or Houston’s. LAX originates more passengers than any airport on Earth--and a new regional international airport will be built in the next decade.

Those assets account for an incredible variety of business and make this region the distribution center for expanding markets in Latin America and Asia. That’s why experts on the local economy predict that by 2000, one in six jobs in Southern California will be involved in foreign trade.

Trade covers a multitude of jobs, notes Michael Tennenbaum, a Los Angeles investment banker, “from crane operators lowering containers onto ships in the harbor to truck loaders and warehousers, customs brokers, insurance agents, commercial bankers, investment bankers, lawyers.”

A sampling of small companies offers a glimpse at the new realities of Southern California business:

* Selling to world markets is the real defense conversion, says Jim Goodwin of Taylor-Dunn. The Anaheim company now gets $9 million of its sales from abroad, including $5 million from Mexico, where it has been selling electric carts despite a 20% Mexican tariff.

“NAFTA (the North American Free Trade Agreement) will help expand our Mexican sales,” says Goodwin, a UC Berkeley electrical engineer who was born in La Puente and has started or run 13 companies in his 50 years.

Goodwin says Southern California’s infrastructure will be all the more valuable as Taylor-Dunn’s business grows in Europe, Asia and Latin America. Also, he believes that the work force is top notch. Taylor-Dunn shares 25% of its pretax profit, allowing each employee to add 15% to his or her income. “The people make a business successful, nothing else does,” Goodwin says.

* Said Hilal, founder and president of Applied Medical Resources in Laguna Hills, notes that with the cutbacks in aerospace there are excellent personnel available for a growing company like his--5 years old, its sales of surgical devices are running $1 million a month. There is also an established network of hospitals. “To be able to talk to doctors at UC Irvine and Hoag and Mission is of great value,” says Hilal, a Ph.D. from USC who came to Southern California from Lebanon as a teen-ager.

* If the skills are all around you, there’s no need to have them all on your payroll. Kingston Technologies of Fountain Valley has become one of the fastest-growing companies in the United States by utilizing a network of the region’s capabilities. Started six years ago, when co-founder David Sun developed a way for personal computer owners to add capacity inexpensively, Kingston handles design and quality control on its computer products and farms out everything else, from manufacturing to selling to other companies throughout Southern California.

Kingston has grown very rapidly to $450 million in sales and 250 employees. But since it is interdependent on suppliers, “you can see our company as 250 employees or as part of a 10,000-employee network that includes manufacturers and dealers all over this region,” marketing director Ron Seide says.

Indeed, Southern California has so much that other states make overtures to businesses that are out of fashion. Fortune Manufacturing is a South El Monte supplier of heavy metal parts for commercial aircraft.

Fortune, which will have $1.7 million in sales this year, down from more than $2 million in 1992, has only 18 employees. Yet President David Miltenberger has received overtures from Georgia, Utah, Colorado, Nevada and Arizona. “I tell them, ‘Look guys, I don’t have that much to offer,’ ” Miltenberger says. “I’m not going anywhere, but it makes you think.”

Presumably those other states agree with Miltenberger that commercial aviation will recover by 1997 and his business will be a good one. “There will be fewer competitors when the upturn comes,” he says.

Ben Jackson, president of Jackson Aerospace of Gardena also sees tough times lasting until 1996 or 1997, he but believes that he can survive supplying bolts and fasteners to Northrop and TRW.

Yet success for the region is still uncertain. “We have fierce competition,” says investment banker Tennenbaum, who heads an economic study committee for Riordan. “We must address the problems of crime and taxes and costs.”

But at least from here on, Southern California will base its economy on a healthy variety of businesses rather than the concentration on defense that has caused its current hangover. “The era of big military contracts was a distortion,” says Starr, who is just publishing his third history of California, “The Dream Endures: California Through the Great Depression.”

“This has always been a place of light assembly and industrial variety.” In other words, in our past lies the future.

About This Series

Today’s story is part of an occasional series, “Farewell to Arms: Reinventing Southern California After the Cold War.” As the massive defense buildup that shaped us wanes, The Times examines a region adjusting to a new and uncertain way of life.

* Today: Looking beyond the rhetoric of defense conversion

* Tuesday: Three companies stake out strategies to survive

Messages for the Future

Sen. Barbara Boxer (D-Calif.)

In the ‘80s, there was an enormous increase in the military budget, and I cannot fault anyone for fighting for jobs for California as long as that budget was there. But now we need to move on.

The bottom line in creation of jobs. One way is defense conversion. I say it can work. When I was running, I said, “If you can build a bomber, you can build a bus.” They are using Stealth technology right there in the Los Angeles area. It’s very exciting.

Conversion is a part of what we need to do. But it isn’t the silver bullet. There isn’t a silver bullet. You’ve got to do everything. You can’t put all of your eggs in conversion just as you shouldn’t have put all of your eggs in one company or the (defense) budget.

Sen. Dianne Feinstein (D-Calif.)

Of course Ronald Reagan is a Californian, so California got a number of advantages from the defense buildup. Defense jobs are tens of thousands at a time, and they are good jobs, they are well-paying jobs, and people can support a family and own a home and all the rest of it. When you lose them in large numbers, it’s a major problem.

Defense conversion that produces more minimum-wage jobs that people can’t live on, or more hamburger-turning jobs, isn’t really what we need. We need the research and development to create the peacetime equivalent of defense-type jobs: blue collar, white collar, machinists, engineering. As a country we have never put into R & D the kinds of tax incentives, and the commitment by industry, to really build a better mousetrap.

It’s survival. People have to understand that this is survival. I’m the first one to say that I am not thrilled with the defense conversion programs that are taking place.

Richard Riordan, Los Angeles mayor

I go back to my basic theme that the best way to get business back is to make the city safe and be friendly to business. We need venture capital money to help start small businesses because small minority-owned businesses that grow to medium size and larger businesses are going to be the salvation of Los Angeles. Defense conversion is going to be a very small part of it.

When you look at a defense company, it just doesn’t work to change that high-tech culture to consumer-type applications. The solution is that individual employees in those companies must become entrepreneurs.

No region in history would have ever turned down this type of business, even knowing in the future that they were going to lose it.

This region was being subsidized by high-paying blue collar jobs. And as I’ve said before, it was to build things to kill people. It had to end, and it did end.

Caspar W. Weinberger, former defense secretary under Reagan, now chairman of Forbes Inc.

This is the first time we’ve made such a deep cut in the military at a time when the country is in a recession. That’s why a lot of the conversion talk is chimerical. What good does it do to train me to be an auto mechanic, when you’re training me to be an unemployed auto mechanic?

I’m not saying you should have a defense budget that’s a jobs bill. But my worry is we’re not a spending enough (on defense).

The build down is much too rapid, much too strong. I don’t think the world situation justifies it. We have potential problems in North Korea, Iraq is not subdued, Iran is always troublesome. If we had to do in 1997 what we did in the Persian Gulf two years ago, we couldn’t do it.

Larry Berg, USC political science professor, formerly on the governing board of the AQMD, where he dealt with aerospace firms

I happen to think the restructuring going on in this industry now is the best thing that’s happened in this state. Hopefully it won’t come back, or we’ll have to deal with it (again). This economy built on defense was a false economy from Day One. Very little concern about cost or ultimate efficiency . . . the bubble was bound to burst.

There was never anything free market about the entire defense industry from Day One. They started out with the federal government basically giving them everything you need to start a company. If you want to look at corporate welfarism . . . money was not the object. Now if they adopted the same philosophy on cleaning up the environment, you’d win it, you’d do it.

I’ve given a number of talks to defense industry groups over the years. Ronald Reagan spoiled them. No, that’s not right. He ruined them.

Lorraine Sadler, the administrative officer at the Air Force’s Plant 42 in Palmdale

People who work in aerospace know it’s feast or famine. People here to from contract to contract. This community, aside from Edwards, Antelope Valley, Palmdale, Lancaster, the economy comes from Plant 42. Right now, even though employment kind of goes up and down, it does remain fairly stable, which is surprising in these times--8,000 employees now. They contribute about $299 million in payroll and about $21 million in local contracts.

We may not have a Cold War, but don’t you think the affairs of the world are just as, in fact maybe even more, unstable, with everything going on in other countries? It may not be the one focus on communism, but there’s so much going on, and so much turmoil. And we never know if we’re going to be thrown in it or not.