BRIGHTER OUTLOOK FOR CALIFORNIA : Playing a New Tune : Manufacturers Spending Again for Plants, Equipment

When Derrick McCoy, a 19-year-old student at El Camino College in Torrance, saw the newspaper ad, he couldn’t believe his eyes.

Best Buy Co., a national retailer of consumer electronics, said it was planning to open seven new stores in Southern California by November and would be having job fairs to hire 1,400 people.

He rushed right down to the Torrance Holiday Inn, where he waited in line last week with fellow student Billy Waters.

“When we saw the ad, we thought it was a lie at first,” said McCoy, who had become used to being rebuffed for jobs at other retailers. Other employers “usually say they’re not hiring--or if they say they are, they say it’s temporary.”

McCoy’s disbelief is understandable. He came of age in a California seemingly unable to shake a job-draining, confidence-shaking recession.

But today, the story is different. California is pulling itself out of its recessionary pit. Companies around the state are starting to spend money again: for new plants, new equipment and, to a lesser extent, new employees.

Though forecasts continue to predict slow, if any, overall growth in state employment or output in the next few years--and though news of layoffs, out-of-state defections and business closures continues--there are signs of life in specific sectors and areas of the state. These include retailers, entertainment companies and makers of everything from guitars to steel to drugs.

“We’re seeing some strong indications of recovery,” said Gary Conley, president of the Economic Development Corp. of Los Angeles County. “We have individual companies that are coming to us, both retailers and industrial companies, with specific plans for major expansion in the area. It’s particularly important that we’re seeing retailers, . . . because that is a strong sign of confidence in the economy overall.”

Phil Lee, regional manager of Minneapolis-based Best Buy, echoed that sentiment: “We’re optimistic. We’re prepared to come into California. . . . We’re a very cost-effective operation; we’re able to compete and withstand very low profit margins.”

A survey by Manpower International released last month found that 23% of California companies are planning to increase staffing levels in the last quarter of this year, whereas 12% plan cuts. The latter “is not a low number--but it is significantly better than it has been in the past,” said Sue Foigelman, the temporary employment firm’s area manager in Irvine.

Surprisingly, the outlook is particularly strong for Greater Los Angeles, where 27% of employers said they will be increasing staffing and only 5% said they will be cutting.

Economists attribute the renewed optimism to a variety of factors. The recession has driven land prices and rents to rock-bottom levels. Retail sales, meanwhile, have surged--in part fueled by the infusion of federal emergency money in the wake of January’s Northridge earthquake.

Legislative changes last year reformed the state’s fraud-ridden workers’ compensation system and provided tax relief to businesses. And some executives talk about a new attitude of accommodation toward business on the part of local and state officials.

As of the end of July, commercial loans by large California banks were up 8.9% above the level of a year before, said Lynn Reaser, chief economist at First Interstate Bancorp. That reverses a longtime trend of declining lending, she added.

“We’ve seen business loan demand increase this year, a sign of greater optimism on the part of companies,” Reaser said. “They’re investing in inventory and upgrading equipment.”

Which is not to suggest that California is out of the woods.

There are still important impediments to robust overall growth. The decline in defense and aerospace jobs continues, with new worries raised last week by the proposed merger of Lockheed and Martin Marietta. Rising interest rates threaten to derail a rebound in home sales. Housing prices remain near their recessionary lows. New residential and commercial construction remains weak. And companies are relying on gains in productivity rather than employment to increase output.

As a result of all those factors, the state’s economy continues to lag the rest of the nation.

Still, there are positive signs.

In Southern California, firms as diverse as guitar-maker Fender Musical Instruments in the Inland Empire, broadcaster CBS in Studio City and pharmaceutical manufacturer Vestar Inc. in San Dimas are planning major expansions.

Fender, the Arizona-based maker of a well-known line of electric guitars, is expanding its Corona manufacturing operations.

In a switch from what has come to be expected, Fender is moving some production from a plant in Oregon back to California, to a 103,000-square-foot building that the company bought next to its existing guitar plant.

In addition, the firm will build a second plant to make professional electronic sound equipment and amplifiers. When completed in the next six to 10 months, the new plant will generate 100 new jobs, with the potential for another 200 in the next few years.

Help from Corona officials in easing the permit process and surmounting other regulatory hurdles was key in persuading Fender to expand production in California, said Kurt Hemrich, Fender’s executive vice president.

“California surprised us,” he said. “It turned around, seemed to pursue us and (was) eager to have us expand here.”

In Studio City, CBS is spending $30 million to expand its 30-acre Studio Center, where television programs for CBS and other networks are produced in 16 studios.

Over the next two years, the network will build seven new studios and three sets of production offices, and also a bridge across the Los Angeles River to link the new facilities with the old.

The expansion is just one of many in the entertainment industry, a sign of Hollywood’s robust economy.

“We’re turning away business right now, to the tune of between $3 million and $4 million a year,” said Michael L. Klausman, president of CBS Studio Center. “That’s kind of sad.”

Exports are responsible for the gains at Vestar, which sells 100% of its injectable anti-fungal drugs outside the country. “Business is growing, “ said Michael E. Hart, executive vice president and chief financial officer. “We’ve gone from $4 million in sales in 1990 to an expected over $40 million this year.”

The firm is spending $30 million to buy state-of-the-art equipment, double its space and quintuple its manufacturing capacity. Construction is scheduled to be completed this month. The expansion will add 20 to 25 high-paid jobs to the current 150 in San Dimas when regulatory approvals are complete in another six months.

Vestar decided to expand in Southern California because it relies on proximity to researchers at Caltech and Cal Poly Pomona, because land prices were cheap and because it can draw on skilled employees from all over the region, Hart said.

Smaller firms such as Vestar are doing much of the growing in California.

A survey of more than 650 California small businesses in April by the National Federation of Independent Business found optimism at its highest levels since October, 1992. The confidence level dipped slightly in July but remains relatively high, said Jeff Van Hulle, a research fellow at the federation.

The Construction Industry Research Board reports that requests for industrial building permits were up 52.3% in the first six months of 1994 compared with the year before. With construction of office buildings and retail space still depressed, the growth indicates a surge in development of manufacturing and industrial space, economists said.

Southern California Edison Co. alone is working with Southland firms considering 130 possible expansion projects.

“A lot of companies that during the recession postponed decision making also postponed investment in new plants,” said Barry Sedlik, Edison’s manager of business retention. “They’re now in the process of making that decision.”

He added that the Rosemead-based utility is seeing fewer firms that are weighing moves out of state, though nearby states such as Nevada, Arizona and Utah continue to recruit heavily. “Companies are taking a second look at California,” Sedlik said.

BHP Coated Steel Corp., for example, is building a $60-million manufacturing plant in Rancho Cucamonga for a subsidiary that will produce metallic-coated steel products. When completed next July, the BHP Steel USA plant will create 100 high-wage jobs and produce 150,000 tons of steel a year.

The firm considered building the plant out of state. But President Jerry Smith said BHP Steel got help from one of the state’s special task forces, dubbed “Red Teams,” which sat down with executives to work out a way to cut through the regulatory bureaucracy.

“We got our environmental permits in less than a month,” Smith said. “Also, the city of Rancho Cucamonga was very helpful, and we got permits in six weeks that normally take two or three times as long.”

California had some inherent advantages, as well. The company, owned by Australia’s Broken Hill Proprietary energy conglomerate, likes the state’s varied customer base, which helped BHP Steel ride out the recession without losing sales.

“This is such a diverse state that when one industry is down, you still have the flexibility to move to other (customers),” Smith said.

Similarly, Punch Press Products, a metal stamping firm in Vernon, is building a new 38,000-square-foot manufacturing plant, with additional space for new offices, next to its current 100,000-square-foot facility. The new plant is scheduled to be completed in October.

As did BHP Steel, Punch Press was able to weather the recession in part because of the diversity of its customer base, Vice President Ron Ryan said. Sales have gone from about $12 million four years ago to about $23 million this year. Though the current expansion won’t result in new jobs, the firm has about doubled its staff in the last few years to 220 workers.

“We’re committed to the Los Angeles area,” Ryan said, “. . . because we have a good customer base . . . (and) good employees who are trained and live in the area.”

Growing Again

When the final numbers are tallied, 1994 will be an up year for California’s long-sickly economy, forecasters say. And the Western Blue Chip consensus of economic forecasts says 1995 growth will be more vigorous.

Annual Percent Change ’93 to ’94 ’94 to ’95 Personal 3.8% 5.0% Income Retail Sales 3.3 4.8 Employment -0.1 1.1 Population 1.4 1.4 Growth Housing Permits 24.0 27.9

Sources: Economic Outlook Center, Arizona State University