A Diversifying Area Economy

By JAMES FLANIGAN

Aug. 13, 2000 12 AM PT

Southern California has had more than its share of boom times, but right now the economy is doing better than ever. The region, stretching from north of Los Angeles to the Mexican border, has a real chance to emerge in this decade as the most vital area in the world, measured in jobs, global importance and technological edge.

It could blow those opportunities, to be sure--the region is hardly bulletproof. It has an undereducated work force; poor schools, housing and transportation; and sluggish industries threatened by changing technology.

But today, fully recovered from a severe recession that ended only six years ago, the economy is markedly less vulnerable than it was in the late 1980s, when Southern California was still powered by government contracts for the defense-aerospace industry and when major banks and large companies ruled the business landscape, often with disdain for the small fry.

The economy has since been transformed, weaned from those traditional bulwarks and freed from many of the risks they posed. Small to medium-size companies populate its industries--more than 95% of the region’s firms employ fewer than 50 people. Unlike a decade ago, the region today relies on no single industry for more than 3% of its total employment.

Other differences are more subtle. Business moves at a quickened pace; competition is global and demanding. There are more rich people--and more poor people.

The region’s great imperative is to train its low-wage, undereducated work force to qualify for better jobs. Failure would mean a vast, permanent underclass for the region and the loss of industries to other places with better workers.

Already, employers are crying out for workers who can do assembly-line work, not to mention workers with special skills, even as hundreds of thousands labor at menial jobs for low pay.

Because of its mix of industries as much as its immigrant workers and entrepreneurs, Southern California’s economy has become massively diverse. It is hard to grasp in its entirety, but there are themes in its variety and complexity that reflect the region’s roots and point to the economy’s future.

Southern California remains a center of manufacturing, but with a different character than before. The Los Angeles metropolitan area, with 643,000 of its 4 million workers in manufacturing, still stands as the largest manufacturing center in the United States.

Ten years ago, jobs in aerospace and defense dominated manufacturing. Today the work is spread out among other technologies. The region is home to the most advanced manufacturing of fiber-optic devices for Internet transmission, for example. But often the technology and the workers in those pursuits trace their origins to aerospace.

In labor there is a disconnect. A decade ago, the Los Angeles region had a relatively high-wage economy. Now there is a stark division. The economy offers some of the highest-paid jobs on Earth, but also has almost 800,000 workers earning wages that place their families below the federal poverty levels of $16,700 a year. They are workers in the garment trades, warehouses, retail stores and restaurants.

Yet there are better jobs going unfilled in many industries. Anthony Magnone, manager of Serra Enterprise Industries’ electronic components plant in Van Nuys, says he would “welcome entry-level workers to good jobs if they could pass basic math and verbal tests.” He would pay $50,000 on the spot for a tool-and-die maker, he says.

New industries have arisen. A decade ago the region was a trade destination; now it is a hub of the global economy. Foreign trade has become a powerful economic driver, with more than $200 billion worth of goods flowing through the seaports of Los Angeles and Long Beach and a growing cargo of computer parts being exported and imported through Los Angeles International Airport.

And that raises a question of whether the region will build a new international airport to support the swelling trade.

No success is guaranteed, not even Hollywood’s. Production of movies, a mainstay of Southern California’s economy for almost a century, and TV shows has been slowly moving elsewhere in search of lower costs. And the industry is struggling to become the world center of the dawning Internet-based entertainment business; so far, news from that front is mixed.

But the region has adapted remarkably in other sectors. There was much hand-wringing when the region’s major banks and the nation’s largest savings and loans were bought up and their headquarters moved away over the last decade. Yet financing today is much more broadly available to small business than it was then.

Southern California, in short, is a global economy in a single region. And the best way to understand it is not from an aerial view a thousand miles up, but from specific businesses struggling and thriving on the ground.

Antex Electronics is a 24-person Gardena firm that is working furiously to fill a big order for terminals that will deliver music via the Internet to restaurants and stores. Antex illustrates the point that aerospace skills never leave Southern California, they just are transformed.

The company started in Culver City in 1954 as Electronic Switch & Controls, which made military aircraft parts for Lockheed, Douglas and Boeing until 1983. In the 1970s, it also began making manufacturing relays and timers for postal meters, copiers and other office machines as a sideline and converted that into its main business in the early 1980s.

Then in 1986, under James Antrim, a mechanical engineer who had acquired the company in a 1983 leveraged buyout, the company shifted again to making circuit boards for audio computer programs--for customers such as NCR and Bloomberg. It also changed its name to Antex Electronics.

And now, with an order from DMX-Music of Santa Monica, it is turning to what Antrim calls “single-purpose personal computers” that will enable DMX to pipe music via the Internet to commercial locations anywhere.

Not only has Antex changed and survived, it has spawned four other companies, as employees have left the firm to set up on their own in metal forming, relays and timers, and in audio cards as competitors to Antex.

Major aerospace firms continue to advance Southern California’s technological capabilities. TRW’s Redondo Beach-based space and electronics division still does pioneering government-financed work in satellite and fiber-optic communications.

TRW also has begun sharing technology and making investments in small companies, such as Multilink Technology of Santa Monica. Multilink, a start-up working on fiber-optic connectors for Internet communication, has attracted venture financing from Redpoint Ventures, also of Santa Monica, and from venture investors nationwide.

Thus does technological and entrepreneurial ferment drive the region’s economy.

Southern California’s universities have been responsible for developing the region’s technological prowess. But they have changed in the last decade from institutions financed largely by government programs, such as CalTech, or taxpayers--University of California and Cal State systems.

All of them have reached out to bolster their finances by organizing technology transfers and supporting entrepreneurial ventures by students and faculty.

UC San Diego pioneered such programs in the 1980s when it launched the Connect program to bring university researchers together with the worlds of business and finance. One result is the vibrant concentration of biotechnology companies in La Jolla.

Not all academic efforts are so successful, however. Lower down the economic scale, where poor students need basic skills and companies need workers, the educational system is failing badly.

And here is where Southern California’s vulnerabilities are greatest.

Not even the community college system can keep up with changing technology. “The colleges don’t teach the systems people need to know for today’s manufacturing,” reports Linda Wong, of the Community Development Technologies Center, in Los Angeles, a California state agency working to improve training and job creation.

Partly to blame are attitudes among leading businesspeople that manufacturing is giving way to information industries and so workers don’t need basic training. But nothing could be further from the truth, which is that Southern California’s varied industries need workers with up-to-date knowledge.

In San Bernardino County, huge warehouses are being built to serve online retailers such Toysrus.com and Amazon.com.

“Inside those buildings, blue-collar workers are confronted with computer screens, GPS locaters, laser scanners and other equipment,” reports economist John Husing, who specializes in the Inland Empire. “The workers are well-paid--$3,000 a month--but they’re required to be comfortable with technology.”

Education is everybody’s solution to the problem of low-wage labor, but it’s a long-term solution. Labor unions have stepped up to win higher pay and recognition for some low-wage occupations--janitors recently. If the economy is going to rely on low-wage workers for menial tasks, they must be able to bargain for better pay and conditions.

The motion picture industry is one in which unions are traditional. As technology changes, allowing work to be done at locations outside Southern California, film unions are objecting. Strikes are occurring and more are threatened for next year.

Yet despite a shift of some production to Canada, employment in movie and TV production in the Los Angeles area last year was double that of 10 years ago.

But Hollywood’s entertainment leadership faces a more ominous threat than union unrest. The risk is that the film industry will become irrelevant as new forms of Internet entertainment burst on the scene. Music executives’ confused reaction to Napster and other gambits in online music distribution unmasked business leaders who simply didn’t understand a new technology.

Now experts are scoffing at the notion that Hollywood will simply inherit Internet business because it possesses storytelling “content.” A forthcoming study from Larta, a private-industry group with California state backing, will warn that the film industry could fade in importance as technology shifts away from it.

The industry could help itself by recognizing that “the Internet is not television,” says David Goldhill, chief executive of Rotor Inc., a 3-year-old firm that represents both the threat and the promise of technology to Hollywood.

Rotor, in Hollywood, has developed software enabling Internet presentations to be interactive. Rotor is introducing a pilot of its software to TV producers and stations this fall. ‘I like the word participatory,” Goldhill says. “Audiences will participate in programs in ways we don’t yet know.”

Rotor, nurtured with $20 million of investment from its managers and from Norman Lear’s Act III Communications, also points up a great change in Southern California’s financial arena over the last decade: Investment is finally available for young companies.

Investment is pouring into this region. Redpoint Ventures, a successor to Brentwood Associates, has just received more than $1 billion for its newest venture capital fund. Michael Tennenbaum, a Los Angeles investment manager, has received $1 billion for a new fund from Mass Mutual Insurance and U.S. and international investors.

“The money wants to be in Southern California to be exposed to opportunities,” Tennenbaum says.

Mid-size institutions such as City National Bank and Imperial Bank, considered also-rans a decade ago, have grown prominent by lending to small to medium-size businesses. “We can lend expertise as well as money to smaller companies,” says Russell Goldsmith, president of City National.

Catering to an even more specialized market that scarcely existed a decade ago is East-West Bank, an institution that is testimony to the trade juggernaut that is reshaping the region.

Trade through the Los Angeles customs district has roughly doubled in the last decade, surpassing New York. The seaports have boomed, as have countless rail and freight-handling companies that take half of the incoming cargoes out through San Bernardino to the rest of the United States.

Even more remarkable has been the explosion of two-way trade in computer parts between Taiwan and Chinese American firms in the San Gabriel Valley. Last year, $15 billion worth of semiconductors and computer parts was exported on aircraft flying out of Los Angeles International Airport and $12 billion worth of the same products was imported through LAX.

One reason for the two-way flow is that a computer put together in Monterey Park may have parts from several countries in Asia and from the U.S. And shipments from Asia to Latin America are routed through the San Gabriel Valley. “Southern California is the hub,” explains Roy Han, marketing director of MTC Corp., a city of Industry distributor of computer hard drives.

A lot has changed in the last decade to give Southern California’s economy its present vigor. Muchwill change in the next decade as the region’s population, now 18.6 million, including San Diego, grows another 3 million.

The region will be urgently called upon to solve housing and transportation problems, to raise living standards for many of its people. Southern California is big enough to be the world’s most important local economy. The coming years will tell if it’s smart enough.

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Moving On Up

Los Angeles County is the elephant in the living room among the five Southern California counties of Orange, Ventura, Riverside, San Bernardino and L.A. Its population is expected to pass the 10-million mark in 2001. Orange County is where the money is, with the highest per- capita income among the five counties. For all counties, the recession of the early 1990s hit the housing markets hard.

Population For five-county area

Forecast for 2002: 17.4 million

Average per-capita income (In thousands)

For five-county area Forecast for 2002: $28,758

Housing permits( Number issued per unit, in thousands)

For five-county area Forecast for 2002: 66,402

*Forecast

Source: Los Angeles County Economic Development Corp.

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Southern California Economy

For years, Southern California’s economy was ruled by aerospace ...

In 1980, aerospace accounted for 6.3% of employment in L.A. and Orange counties; in 1999, it was 2.8%.