For State, Answer Is a Qualified Yes
It didn’t take long for Asia’s economic turmoil to spill into Lexington Scenery & Props, a Sun Valley creator of sets. Almost immediately, discussions on several new theme park and retail projects in Asia came to a halt, leaving Lexington in limbo over a region that accounts for 40% of its overall business.
But Lexington owners John Wright and Frank Bencivengo aren’t fretting. Although Asia’s problems will hurt, they think their 175-employee firm will be cushioned by the booming domestic demand for themed attractions, including parks, restaurants and, increasingly, retail stores. Moreover, Lexington had already turned its attention to Europe--a continent with a growing appetite for new entertainment.
“That’s probably the hottest market right now,” says Wright, who is moving quickly to get a slice of Hanover 2000, a major fair in Germany, and resort and museum projects planned in Spain and Italy.
Says Bencivengo: “The next three to four years should be very good for us.”
Lexington’s confidence says a lot about that industry, but it also illustrates why Southern California’s long-term prospects remain bright despite the clouds in Asia--or anywhere else for that matter.
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More and more, the Southland’s economy is being propelled by burgeoning information-driven industries such as entertainment and technology, which serve far more markets than do other types of businesses and are inherently more entrepreneurial.
In fact, as motion picture work brought tens of thousands of jobs after the region suffered heavy employment losses in aerospace, the economic landscape has come to be more dominated by smaller, faster-moving businesses than ever before. The rich flow of immigrants has added to the region’s dynamism, giving rise to a host of new ventures and filling jobs in scrappy but increasingly design-oriented industries such as apparel.
“The Los Angeles area is on the cutting edge of fashion and entertainment,” says Joe Mattey, an economist at the Federal Reserve Bank of San Francisco. “Looking ahead, I see that as a source of strength, even with what is happening in Asia.”
He adds: “Much of the world is trying to catch up to California.”
That’s not to say the Southland isn’t vulnerable. There are growing concerns about its labor force, and the region continues to suffer from imprecise data and poor perceptions about itself, its industries and jobs.
The disappearance of Fortune 500 corporations once based here also means more decisions affecting workers in the region are being made by people who live far away. Seattle-based Boeing, for example, after its acquisition of McDonnell Douglas, is now the area’s biggest private employer.
The problems in Southeast Asia and South Korea also can’t be taken lightly. Although most experts think those countries will come back stronger as they work through their currency and debt troubles, just as Mexico did a couple of years ago, the period before that happens may be long and painful. Many California companies have come to rely much more on Asia, whose growing markets greatly helped the state climb out of recession.
Consider the trade data. Merchandise exports accounted for $104 billion, or almost 11%, of California’s economic output last year, up from less than 8% in 1990, according to Howard Roth, an economist at Bank of America. About half of California’s exports now go to the Pacific Rim, twice as much as for the nation as a whole.
For those reasons, economists have shaved as much as a half of 1%, from their forecasts for California’s job growth next year. That’s as many as 65,000 new jobs. However, increased exports to Mexico and Europe are likely to soften the blow, and California is still expected to add more than 300,000 jobs in 1998.
Long-term projections by the UCLA Anderson Forecasting Project suggest that the state will outpace the nation in job growth through 2010, with entertainment and technology industries continuing to lead the way.
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Southern California’s advantage is that “it has established a predominant presence in global culture-related industries such as movies, television, multimedia, virtual reality and craft-based lifestyle products,” economist Joel Kotkin writes in his recent report “Southern California in the Information Age.”
Kotkin, senior fellow at Pepperdine University, says synergies with entertainment will benefit even traditionally low-tech industries such as furniture and apparel, which in fact have grown in the Los Angeles area as they have become more design-intensive and focused on selling Southern California’s renowned lifestyle, whether Hollywood, casual or its car culture.
Hartmut Schroeder, president of Long Beach-based Custom Fiberglass Manufacturing, makes Snugtop and Sportsman camper shells for trucks. Schroeder says the company, which he bought in 1989, grew even during the most recent recession, a fact he attributes to the increased attention to design.
“Don’t call it a camper shell,” he says, showing pictures of sleek, aerodynamically designed fiberglass covers that sell for as much as $2,000 each. Custom Fiberglass’ sales have grown from $9 million in 1990 to a projected $33 million for this year, and the company now employs about 220 people in Southern California.
Schroeder, a native of Bremen, Germany, who worked for 10 years in Houston’s oil industry before migrating to California, figures his company will be less vulnerable to down cycles in truck sales if he continues to create stylish products and seek out new markets abroad, as it has in recent years in South America and Europe.
“We’re in the fashion business,” says Schroeder, 47. “People talk about dressing up their trucks. That’s what we do.”
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In Los Angeles County, the motion picture industry has added an astounding 117,000 jobs since 1990, more than offsetting the number lost in aerospace in the early ‘90s. But could there be an equally dramatic and sudden downsizing in motion picture employment?
Perhaps, but most economists don’t think so.
Jon Goodman, director of USC’s Annenberg Incubator Project, says Hollywood certainly could make wrong choices that will turn off consumers and cost people jobs. But unlike the way it was with aerospace, which depended primarily on one purchaser--the federal government--entertainment has an enormously broad and ever-widening global customer base. With Hollywood’s wide-open, chaotically competitive and fragmented structure, she says, “you’re much less likely to see an entire industry suffer because of strategic mistakes.”
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The region’s new economy also relies more on workers who are independent contractors. For many, that means putting up with unpredictable paychecks and erratic schedules. But the upside is more flexibility and opportunities for workers, and, Goodman says, it also tends to mean more stable employment for the smaller core of regular employees at those companies.
However, no one really knows the extent of off-and-on contract employment in the various entertainment and technology industries--and that points to a serious deficiency: Southern California’s newly configured economy isn’t well measured.
As seen by standard government classifications, the Southland economy would actually appear less diverse today. With aerospace’s decline, there is less manufacturing. Layoffs and mergers among big banks and department store chains and a prolonged real estate slump have reduced the employment shares of financial services, retail trade and construction. Most of the job gains have come in services, a broad grouping that includes motion pictures and tourism and that now accounts for a third of the Southland’s job base. That compares with one-fourth at the start of the decade.
But Jack Kyser of the Los Angeles Economic Development Corp. says that fails to capture the depth and breadth of the region’s new economy. Software companies, for example, are clumped in the same group as advertising agencies and temporary-help firms--they are all part of business services.
Exports of films, engineering services and new-media aren’t measured, and employment data for many entertainment-based businesses, such as special effects houses and prop creators, are thrown into various industries.
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The misclassifications have repercussions. Lexington Scenery, for example, has long been classified as a specialty construction firm, although it does mostly design work. One consequence: higher costs for workers’ compensation coverage, Lexington says.
Beyond individual companies, experts say, the undercounting or misgrouping of jobs affects economic forecasts and may even influence the way bonds for the area are rated.
“If people think Los Angeles is a town where everybody makes money by cutting people’s hair, we are going to be sold short,” says Goodman. “In fact, this new economy is creating tens of thousands of solid jobs. It’s mostly ephemeral, in animation, multimedia production, areas not being counted as primary employment.”
Economists consider primary jobs those that create and add value outside of their local area, and each of these is thought to create three secondary jobs at places such as restaurants and doctors’ offices.
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Internal & External Communication, a multimedia company in Marina del Rey, exemplifies Southern California’s new economy, its growth and why its prospects are bright.
When Alexandra Rand, now 41, started the company 14 years ago, there wasn’t much demand for computer-based employee training programs. Personal computers were just taking off, and virtually all corporate training was done in classrooms.
But since 1993, IEC’s sales of CD-ROMs and other products have jumped 400% (to about $15 million this fiscal year), and Rand now employs 130 people, up from 40. Her diverse customer base includes Toyota, Federal Express and Citibank.
What has fueled IEC’s growth? The proliferation of personal computers in the workplace, but also the company’s ability to design programs that are not only technically rich but also creative and fun to use.
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Rand sees no slowdown in growth, particularly as Web-based training develops.
“Because California has a reputation for being leading-edge in technology, entertainment and communications, we also have somewhat of a natural competitive advantage over firms in other parts of the country,” Rand says.
But as it is for many company executives, Rand’s biggest worry is finding talented people with technical and creative ability--in her case, in animation, programming, graphics and writing. In the last year, she says, IEC reviewed 23,000 resumes for 100 positions. “We have three full-time recruiters,” Rand says.
The erosion of public school education is widely seen as the primary risk to the Southland’s economic future.
“Every time I travel overseas, they always talk about how great the weather is here, how great the diversity is, but they also say, ‘It’s too bad about the crime and education,’ ” says Dominic Ng, president of East-West Bank in San Marino, the largest Chinese American bank in the nation. In Hong Kong and Taiwan, Ng says, “they know the Southern California education is deteriorating.”
Another competitive threat is the Southland’s relatively high cost of living. Southern California’s housing market has begun to rebound, and although more people are once again moving into the state than leaving, there have been few signs of any overheated real estate or investment activity.
“L.A. has always gone through a period of cycles where costs get out of hand, then it suffers,” says Mark Zandi, chief economist at Regional Financial Associates in West Chester, Pa. “As good times return, will housing and labor costs again get out of hand?”
At the moment, the Southland appears to be in good shape, and Zandi suggests that the economic picture looks even more promising given the preponderance of smaller businesses.
According to his analysis of federal and state data, the greater Los Angeles area--particularly the Inland Empire and Ventura County--relies more heavily on businesses employing fewer than 250 people than do most other regions in the nation.
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Even with consolidation rapidly occurring in some industries, trades such as toy wholesaling and apparel--which now employ more than 156,000 people in Los Angeles County--continue to be dominated by entrepreneurs, mainly immigrants.
“It is still operated by private companies that understand that product is fashion-driven and one needs to change quickly and react to trends,” says Lonnie Kane, president of Karen Kane, a fast-growing ladies sportswear maker in Vernon.
Gary Schlossberg, an economist at Wells Fargo in San Francisco, says the fact that California was able to remake itself “points to the agility of the state’s economy.”
“I attribute it to the strong entrepreneurial and small-business strength and flexibility,” he says. “The small business sector is more of a driving force in Southern California, and the fact of the restructuring points to the strength and bodes well to handle any change in the economy.”
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Who the Leaders Are
Large companies led the 1991-93 recession with massive cuts, but small businesses have been the fuel behind the region’s comeback. The Southern California economy now relies more on small companies than do those of most other regions in the country, as the once-dominant aerospace and financial services corporations have given way to more entrepreneurial industries such as motion pictures and apparel.
Small businesses lead in job growth ...Average annual growth rates for Southern California:*
Companies with 1 to 249 workers
1987-90:+2.3 1991-91: -1.7%
1994-97: +2.7% * Companies with 250 or more workers
1987-90: +2.3%
1991-93: -5.2%
1994-97: +0.99% ... and a greater share of employment in the region is in smaller firms.
Share of total employment by business size in 1997:
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Companies with Companies with 1 to 249 workers 250 or more workers United States 71% 29% Southern California 75 25 Chicago 70 30 Dallas 72 28 Miami 75 25 New York 67 33 Seattle 74 26
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Some sectors in Los Angeles County have been gaining jobs, but others have been losing them:
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1990 1996 % change Direct international trade 188,500 252,000 +34% Motion picture/TV production 143,000 224,300 +57 Apparel manufacturing, design, wholesaling 127,200 156,300 +23 Technology, including aerospace 282,800 183,400 -35 Financial services 138,500 108,300 -22 Wholesale trade 248,200 205,600 -17
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*Los Angeles, Orange, Riverside, San Bernardino and Ventura counties
Sources: Regional Financial Associates, Los Angeles Economic Development Corp.
