Mix of Factors Hit Manufacturers

By MARLA DICKERSON

Dec. 27, 2000 12 AM PT

TIMES STAFF WRITER

Early this year, local manufacturers such as furniture maker Larry Parnell were focused on tight labor supplies and rising wages--byproducts of a bustling economy.

Then came higher interest rates, a flood of cheap imports and an energy shock that has fouled production and sent power bills soaring. Add Wall Street turmoil that has shaken consumer confidence to the core. Suddenly, it’s as though someone hit the off switch on the nation’s growth machine.

“It’s scary how quickly the outlook has changed,” said Parnell, president of Ontario-based Oakwood Interiors, which has shed 80 employees from a peak of 500 earlier this year. “[Federal Reserve Chairman Alan] Greenspan has everyone scared to death and these energy costs are killing us. If we don’t get some relief soon, we could be in for some rough times.”

The millennium bug is putting the bite on local manufacturers heading into 2001. From aerospace to textiles, everywhere you look there are signs that the new year will be tougher than the last for blue-collar industries in Southern California, the nation’s leading manufacturing center. Costs are up, demand is slowing and foreign competition is relentless.

No one is predicting a recession just yet. But economists such as Jack Kyser, chief economist with the Los Angeles County Economic Development Corp., are busy revising their 2001 forecasts downward to account for the sudden confluence of negative forces. At the center of this convergence are the region’s 32,000 factories and 1 million-plus manufacturing employees, some already feeling the pinch of a slowing economy.

“We’ve gone from, ‘It’s the economy, stupid,’ to ‘It’s the stupid economy,’ ” Kyser said. “There are all sorts of domestic and international pressures hammering away at our manufacturing base.”

Chief among them is energy. California’s experiment with electricity deregulation already is being called the most expensive public policy miscalculation in state history. California businesses and residents paid $10.9 billion more for electricity last summer than in 1999. More rate hikes lie ahead to keep the state’s two biggest utilities afloat as wholesale electricity prices continue their wild climb.

But it’s not just the increased prices that hurt. For the state’s 1,200 or so “interruptible” customers--many of them manufacturers who must shut down or face heavy fines when power supplies get dangerously low--the recent winter power emergency has wreaked havoc on production schedules.

Take Oakwood Interiors, for example. The maker of high-end bedroom furniture has been shut down repeatedly this month, forcing the company to schedule an overnight shift to make up for lost hours. Squandered productivity and overtime pay are costs the company can’t pass along in an industry teaming with cheap foreign imports.

But electricity is only half of it. A dramatic spike in natural gas prices has Californians paying the highest rates in the nation because of surging demand, jam-packed pipelines and anti-competitive practices by some suppliers, according to allegations by state regulators. Spot prices at the California border have soared as high as $60 per million British thermal units in recent weeks, compared with just $3 per million BTUs a year ago.

The impact of stratospheric prices is already being felt in industries such as dairy, building materials, steel, paper and textiles that rely on natural gas to fire boilers, dryers and kilns. Temporary and even permanent plant shutdowns already have begun. Textile maker L.A. Dye & Print Works Inc., for example, shuttered one of its dye houses and laid off 40 workers earlier this month after watching natural gas costs soar from $132,000 in January to an expected $600,000 for December. Competitors may follow if relief doesn’t come soon.

“I have been in this industry since 1972 . . . and I’ve never seen such fear,” said Helmut Ackermann, president of L.A. Dye.

Troubles in textiles underscore big challenges for Southern California’s larger apparel sector heading into 2001. Employment in the Los Angeles garment industry dipped below the 100,000 mark this year for the first time since the North American Free Trade Agreement was enacted in 1994. Apparel employment in the county stands at 96,700, down 4,500 jobs from last year alone as production continues to flee south of the border.

Kyser of the LAEDC sees sector job losses slowing next year. But industry veterans say the larger pattern is firmly established: Los Angeles will continue to lose sewing jobs to low-wage foreign competitors over the long term. That will have policy implications for the region given that the apparel industry is the single largest manufacturing employer in Los Angeles County and a traditional entry point for unskilled immigrants.

The good news is that higher paying white-collar positions are growing in the industry, albeit not enough to make up for production losses.

“It’s a paradigm shift,” said Bruce Berton, an apparel consultant with Santa Monica-based Stonefield Josephson Inc. “Design, merchandising, sales, customer service, NAFTA specialists. These are the jobs being created here.”

Job losses have accelerated in the transportation equipment industry as well, L.A. County’s second-largest manufacturing employer with 66,300 workers. The bulk of those losses have come in aircraft and parts building, which has plunged to 48,100 jobs from an average of 58,000 last year.

Kyser points to fallout from defense consolidation, a trend that looks to continue. Just last week, Century City-based Northrop Grumman Corp. said it will acquire Woodland Hills-based Litton Industries Inc., a move company officials acknowledged will result in some layoffs.

Foreign competitors are also turning up the heat on the local industry. Airbus Industrie this month announced plans to build a super-jumbo jet, taking dead aim at Boeing Co.’s lock on that market. A trade dispute already is brewing over European government subsidies of the proposed plane, which could have important implications locally. Fuselages for Boeing’s 747 jumbos are built in Hawthorne by the Carlyle Group.

“What happens in Europe has real impact here,” Kyser said. “Our economy is subject to a lot of external forces.”

Southern California’s exporters certainly found that out in 2000. While U.S. exports picked up in the latter half of the year, thanks in large part to rebounding Asian economies, the swooning euro hindered shipments to Europe.

Oxnard-based Haas Automation, the nation’s largest domestic machine tool builder, has seen its revenue mix slip to about 25% international sales, down from nearly one-third a few years ago. The decline is due largely to a weak euro that has made Haas machines pricey in Europe, the company’s principal export market. New signs of a global slowdown don’t bode well for a swift recovery.

“We’ve had to absorb the currency losses,” said founder Gene Haas. “Our costs are going up, but we can’t even think about raising prices.”

That lack of pricing power continues to plague local manufacturers whether they are selling at home or abroad.

Maria de Lourdes Sobrino, owner of LuLu’s Dessert Factory, has seen the company’s labor, energy, raw material and transportation costs soar in 2000. She recently relocated the firm to Vernon from Huntington Beach after a costly and time-consuming search for industrial space, which is in critically short supply in L.A. County. All those increased costs have squeezed profit margins on the company’s signature gelatin cups, which retail for as little as 25 cents apiece.

With a minimum wage hike looming next week and energy costs looking like they’ll remain elevated well into 2001, Sobrino knows she needs to raise her prices. But with so many competitors vying for space on supermarket shelves, she’s reluctant to do anything to jeopardize her niche as a value-priced producer.

“I don’t want to do it, but our margins are literally pennies,” Sobrino said. “It’s either that or keep finding ways to get more efficient.”

Sobrino has already reduced her work force to about 80 employees from 120 by concentrating on automation of her facility. Such productivity gains have been key to the nation’s economic expansion and low inflation rates. But six interest rate hikes by the Federal Reserve since June 1999 have made it more expensive for companies to borrow money to keep upgrading equipment.

Oakwood Interiors’ Parnell has taken the same strategy as Sobrino, replacing workers with sophisticated machines. But he wants the Fed to cut interest rates in January more for its psychological than practical effects.

“The important thing is to restore consumer confidence before things get out of hand,” Parnell said.

“If consumers lock up tight, we’re all going to be in trouble.”

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L.A.’s Loss Is Neighbors’ Gain

Regional manufacturing employment has been sliding since 1998, a trend likely to continue in 2001. However, those losses will be centered in Los Angeles County, led by declines in the apparel and aerospace industries. A shortage of industrial space also is forcing companies out of Los Angeles County, which will help boost manufacturing employment in neighboring counties next year.

Regional manufacturing employment has been declining ...

Annual average manufacturing employment (in thousands)

Five-County Region

1998: 1,040.8

1999: 1,029.5

2000*: 1,029.1

...led by job losses in Los Angeles County ...

Los Angeles County

1998: 661.7

1999: 643.4

2000*: 629.9

... but neighboring counties continue to attract factory jobs.