A Plea From the Business Front Lines

Listening to John Levy describe his three decades in business, you have to be impressed by his sheer resourcefulness.

By most conventional measures, Reflex Corp., the private pet supply manufacturer Levy founded, is a tiny enterprise. With $10 dog and cat collars and leashes its main stock in trade, the company rings up sales of $2.5 million to $3 million a year. He imports almost all of his raw materials from China, and employs a workforce of 28 to assemble the fabric strips and metal or plastic attachments into finished products, package them, and market and ship them to thousands of veterinary clinics across the country.

Over the years he has survived dramatic changes in the pet supply business and in veterinary practice, fought competition in his niche market from global corporations, responded to all the little changes in distribution practices that can turn a razor-thin profit margin into an unsustainable loss.

Each time he came up with an inventive solution to protect his business or, on occasion, shift into a new one. He has earned patents on two products that remain his core inventory -- one a reflective ID tag for dogs and cats, the other an integrated ID and adjustable collar.

“I’ve had management issues in here, and inventory issues,” Levy, 52, told me a few days ago in his office in an industrial park in Carlsbad, in northern San Diego County. Levy, a trim man with close-cropped salt-and-pepper hair, was dressed comfortably for work in a Hawaiian shirt, shorts and sneakers. The bicycle he rode to work was parked in the foyer, and surfing art decorated the office walls. “In theory we should be a very profitable organization. Now the problem we have is the cost of doing business in California.”

I had stopped by to see Levy after he wrote me to describe the frustration of watching colleagues in the San Diego business community pack up and move their plants out of the state.

One of the first in the latest economic cycle was Buck Knives Inc., whose painful decision to relocate to Idaho after nearly 60 years in California was chronicled in these pages by my colleague Marla Dickerson a few months ago. More recently another of Levy’s neighbors quietly announced plans to move all manufacturing and distribution to the Midwest.

Some people may find it easy to dismiss the concerns that drive such ventures out of California as the bellyaching of business magnates who can afford to pay their employees a decent wage and furnish them with such essentials as health insurance, but simply choose not to do so. And it’s fair to say that any company with more than 200 employees that isn’t already providing them with health insurance -- as a controversial state law signed Sunday by Gov. Gray Davis would require them to do by 2006 -- may be the kind of business that costs California taxpayers more than its jobs are worth.

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Effect of State Mandates

But Levy doesn’t fit in that category. He runs a small, profitable company whose employees make more than the minimum wage. For years he returned 9% of Reflex’s earnings to his workforce as profit sharing; a few years back, he cut the profit sharing to 3% and used the rest to establish an employee health plan. (His workers can enroll their families at their own expense, using pretax earnings.)

So it’s not as though the state’s latest business mandates -- including two minimum-wage increases since 2001 that have raised the floor to $6.75 an hour, and the health insurance rule, which would be imposed on all but the smallest California businesses on a sliding schedule and with various conditions over a period of years -- necessarily have a direct effect on his company. But he argues that they have a powerful indirect effect, in part because they tell businesspeople how little thought Sacramento politicians devote to what the industrial economy needs to thrive.

Even though Reflex suffers from some of the inherently high costs of doing business in California, including high property values, electricity prices and workers’ compensation costs, Levy makes it clear that shifting his production overseas isn’t a plausible solution for him.

He illustrated his quandary by placing two woven-nylon dog collars between us on his desk. One was manufactured as a finished good by his Chinese supplier, which quoted him a unit price of 50 cents to 72 cents each; the other was assembled at his factory, at a cost of $1.

“That’s a pretty compelling reason to go offshore,” he says. Counterbalancing it, however, is his need for a flexibility that he can meet only by keeping production in-house. Levy says that to remain competitive he must maintain an inventory of hundreds of patterns and colors. Some of these might sell only 25 or 50 units a year, but he still needs them at hand if his customers ask. “If I go to my offshore supplier and say, ‘Make me 25 of the paw-print-patterned collar,’ they’d say, ‘We’ll make you a minimum of 2,000 to 5,000.’ But if I order 5,000 and can’t sell them, I’m dead.”

He also might save money by moving production out of state, but that would entail sacrifices he chooses not to make. “Do I want to live in Chicago? No.” He cocks a thumb in the direction of his factory floor, where two dozen workers had just returned from a lunch break. “All these people here put me on the beach,” he says, “and it’s my responsibility to keep them in their jobs.”

What grates on Levy and others in his position is the notion that the governor and the state Legislature feel compelled to dictate how they will run their businesses and manage their employees, generally without understanding that the costs of state mandates fall disproportionately hard on small manufacturers.

“California manufacturers are not asking for handouts, simply the ability to be competitive,” he says. “To be competitive, employers realize the need to provide good, quality jobs because we can attract productive workers by doing so. We do not need Sacramento or Washington mandating social engineering within the workplace.”

From his vantage point, this smacks of politicians responding to those who contribute the most money to their campaigns. To a business owner confronting the dysfunctional workers’ compensation system or a health-care mandate, the villains in the special-interest parade are lawyers, unions, insurance companies and the physicians’ lobby. A voter confronting different issues might well summon up a different roster to abominate. But the crucial point Levy raises is that the political process, awash in donated money, is no longer capable of disinterestedly weighing real solutions to real problems.

By most objective yardsticks, California business conditions have not deteriorated appreciably over the last five years, especially when measured against conditions across the country. In some categories -- cost of unemployment insurance, property taxes, access to a huge consumer market -- the state is among the best for business, according to a recent survey out of Washington by something called the Small Business Survival Committee. In others -- workers’ compensation, electricity costs -- it may be among the toughest. And in many others -- sales taxes, health-care spending -- it’s squarely in the middle.

Yet there’s no question that most in the California business community believe that conditions have become much more hostile. Numerous economists and state officials have told me over the last few months that the discontent they’d been hearing from small businesses had risen dramatically, even before recall rhetoric stoked the fires. A lot of this had to do with the workers’ compensation crisis, which hit almost every business hard on the ledger sheet.

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The Ill Wind of Politics

Much of it, however, had to do with the isolation of Sacramento politicians from the grass roots, which is what Levy put his finger on.

“At the end of day, the fundamental problem of our political process is fund-raising,” Levy says. “Do we have to spend these billions electing our politicians? How would the candidates look if everybody had a level playing field? If Arnold Schwarzenegger didn’t have $13 million, would he be winning the election? Maybe not. Maybe Californians would be saying, ‘We like Tom McClintock more.’ Only when we eliminate the current fund-raising status quo, and establish a publicly financed election process, will politicians cease to be beholden to special interests.”

The recall campaign might have been an opportunity to reopen these lines of communication, but that opportunity was wasted. Although job growth was trotted out as a putative central issue, almost a mantra, by most of the leading gubernatorial candidates, this discussion really was waged on very narrow grounds.

There was plenty of chatter about the loss of manufacturing jobs and the needs of entrepreneurs, but almost no exploration of what small manufacturers need from state government, and certainly no awareness that there can be many different kinds of entrepreneurs, with very different needs.

An entrepreneur building a factory to make surfboard cases, say, might need a ready supply of inexpensive manual labor, and is going to be hurt by an increase in the minimum wage that places California’s figure above the national average. An entrepreneur designing electronic chips might require a building full of electrical engineers, and won’t be helped by policies that turn the University of California into the University of Idaho, or that limit the ability of talented but penniless students to acquire higher education. An entrepreneur with a truck farm might depend on migrant workers to be competitive in the marketplace, and thus, presumably, is undermined by policies that demonize illegal immigrants or bar them, on specious national security grounds, from applying for driver’s licenses.

Thus far, the candidates for governor have shown that they’re able to pay lip service to the concerns of California businesses. But they have yet to demonstrate that they fully understand where the real hurdles to growing a business in this state lie, and which should be removed, and which should be balanced against the benefits they provide for taxpayers as a whole. Unless that happens (to paraphrase the writer Anatole France), the recall election will have brought California’s businesses no more relief than a sick man gets from turning over in bed.

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Golden State appears every Monday and Thursday. Michael Hiltzik can be reached at golden.state@latimes.com.