The L.A. Economy: Back to Basics
In the 1980s, Los Angeles seemed poised to assume its long-envisioned role as the corporate and business center of the North American end of the Pacific Rim. Today, the region more resembles the opposite: a production-dominated artisan economy, designing and manufacturing everything from garments to sitcoms to education software.
As smaller shops have proliferated, many of the once powerful players that fueled the region’s ascendancy after World War II--Hughes, Carter Hawley Hale, Unocal, Lockheed, Security Pacific and First Interstate--have either ceased to be, merged or moved their headquarters elsewhere. Today, not a single major bank, telecommunications giant or major department-store chain calls the nation’s second-largest city its home. “From a corporate point of view, L.A. has become a banana republic,” says Roger Friedland, a scholar at the Getty Center and an expert on corporate location. “From the Fortune 500 point of view, Los Angeles is now largely an absentee-owner economy.”
L.A.’s transformation to a high- and low-end production center presents a major challenge to regional policy-makers. For starters, a greater proportion of the key corporate decisions that will determine the region’s economic future are being made by outsiders. The fate of the region’s aerospace industry, for example, largely lies in the hands of Boeing managers in Seattle, now the region’s top manufacturing employer, of Raytheon executives in Lexington, Mass., who will manage the defense operations of the company’s latest acquisition, Hughes Electronics, and of Lockheed Martin’s corporate board in Bethesda, Md.
Even more dramatic has been the decline of L.A.’s financial sector. In 1985, according to a survey by the Milken Institute in Santa Monica, Los Angeles-based banks controlled about 6.5% of the collective assets of the nation’s top-50 banks. Today, Los Angeles, which accounts for about 3.5% of the U.S. gross domestic product, does not host a single bank in the top 50. The largest bank headquartered in the county, Sanwa Bank California, takes its orders from Osaka.
As the regional economy has recovered from the early ‘90s recession, the financial, real estate and insurance sectors have continued to lose jobs, dropping by more than 13,000 jobs between 1994 and 1996. Even Wall Street’s bull market has barely touched the region. Since 1991, according to a survey by Milken Institute economist Beverly Burr, L.A. brokerage employment has grown by only 7%, one-fourth the rate for the rest of the country. Overall, business-services growth since 1991 has been only 21%, roughly half the national average.
Fortunately, this weakness in corporate-related job growth has not extended to the production-oriented parts of the L.A. economy, particularly those involving design and artisan skills. “What we export to the rest of the world is increasingly creativity,” Friedland says, citing apparel, textiles, multimedia and entertainment.
The most recent real-estate trends reflect this economic shift. While office occupancies remain at about 20% downtown and in the high teens regionally, the vacancy rate for industrial, warehouse, and research and development space, according to the latest Grubb & Ellis estimates, has dropped to 6%, from more than twice that level in 1992. This growth has sparked a phenomenon many thought would never occur in the post-Cold War era: a new surge of industrial construction, encompassing roughly 12 million square feet in the five-county region, more than one-third of it in Los Angeles County.
Robert Bach, national director of market analysis at Grubb & Ellis, cites three factors for this growth: expansion of international trade-related activities, such as warehousing; the explosive growth of the entertainment/multimedia industry, and steady improvement in the region’s vast manufacturing economy, mostly in entrepreneurial companies.
A microcosm of this trend can be found in a stretch of real estate along the 405 Freeway in West Los Angeles. In the shadows of ‘80s high-rises with relatively high vacancy rates, an industrial district is virtually full of occupants, including many companies exemplifying L.A.’s artisan-led economy. Within a distance of a few blocks are located French Rags, a high-fashion knitwear firm, Modacad, a maker of computer-aided design systems and retail kiosks, and Los Angeles Pottery, which manufactures custom-designed pottery.
Los Angeles’ immigrant work force, often demeaned by advocates and detractors alike, has played a key role in the region’s production-led resurgence, particularly in the “soft-goods” industry. Four years ago, textile manufacturer Chris Stone began shifting his manufacturing to North Carolina but workers there, from craftspeople to designers, didn’t measure up to the standards of his L.A. operation. Ultimately, Stone chose to take his machinery out of his High Point, N.C., factory and relocate it into an expanded Vernon facility.
This rediscovery of L.A.’s advantages is taking place even in industries--most notably, furniture--that were thought to have left the region for good. For example, Virco Manufacturing in Torrance, a furniture maker, left Mexico for California after learning that new technology and a better-trained work force here more than compensated for the region’s higher labor costs.
Design skills have proved critical to the turnarounds of many furniture companies. The industry, which lost 11,000 jobs between 1981 and 1991, now appears to have stabilized. “We’re finally beginning to see increases,” says UCLA researcher Steve Herman, who has studied the local furniture industry for RLA. “The end that’s getting better is the design end. The companies that have more innovative, creative styles are pushing the design edge along.”
The biggest artistic star in this industrial-real-estate recovery has been entertainment and multimedia companies, which often prefer old industrial and warehouse space to high-rise offices. These companies are largely responsible for the huge 35% increase in absorption of industrial properties last year in the San Fernando Valley as well as the rapidly improving Westside.
How should regional policy-makers respond to L.A.’s artisan economy?
Since most of Los Angeles’ promising industries--design-oriented manufacture, multimedia and entertainment--remain here to tap the region’s talent pool, the first priority for policy-makers should be to assure that the pool remains full. Toward this end, training and education opportunities, particularly for working-class youths, should be dramatically expanded. To thrive as an artisan economy, Los Angeles needs not only more computer programmers, designers and digital animators, but also skilled mold-makers, machinists, bookkeepers and technicians.
Furthermore, as a region increasingly dependent on the “kindness” of strangers, officials must devise ways to make this city more attractive to both large corporations and providers of sophisticated business services. In a misguided effort to attract federal dollars, many of the region’s leaders have become addicted to “whining” about L.A.’s many woes rather than dealing with more critical issues like its bloated bureaucracy and regulatory and tax burdens.
Reflexive negativity has helped turn the region into something of a corporate backwater. Companies, even in the entertainment business, complain that L.A.’s poor national image makes it far more difficult for them to attract top software programmers, executives and marketers. Consider: Only 5% of last year’s graduates of Stanford Business School moved to Southern California, compared with nearly 40% staying in the north and another 20% relocating to New York City.
This pattern cuts across the board of advanced-business services, leaving L.A. companies at a disadvantage in accessing top-ranked marketing, media and financial resources. As a result, L.A. industries that are also national leaders generally have a harder time garnering both national media coverage and financial backing than their competitors elsewhere.
“The one thing a place like Silicon Valley has been successful at is building an infrastructure that goes beyond the original entrepreneur,” says Activision CEO Bobby Kotick. “Right now, L.A.’s still largely an economy of little shops.”
Kotick cites one major reason for this “little shops” phenomena: Northern California firms attracted more than $1.2 billion in venture capital, compared with only $240 million for Los Angeles and Orange County, which together have an equally large high-tech sector. This disparity dampens the long-term growth prospects of many of the region’s most dynamic economic sectors.
One result is that many of L.A.’s most promising companies are bought long before they can evolve into a local version of Microsoft, Sun Microsystems or Netscape. Last year alone, two of the region’s emerging multimedia superstars, Knowledge Adventure and Davidson, were acquired by CUC International, a Connecticut-based marketing conglomerate. Two of Orange County’s leading high-tech firms, AST Research and Kingston Technologies, also have been effectively taken over by corporations from outside the region.
This same pattern of acquisition from the outside can be seen in other fields, including entertainment, aerospace, microcomputers and biomedical technology. Although in many, if not most, cases production will remain in the area, these mergers inevitably shift the weight of corporate decision-making away from CEOs committed to this region, further eroding the corporate and business-service base.
Over the past three years, the artisan-led production economy has helped Los Angeles recover its economic momentum, providing new jobs and generating sizable wealth for the region. But it alone cannot fully restore our economic health until the region begins developing, once again, a strong base of larger corporate entities capable of luring sophisticated business services and financial power back to the region.
