Column: The demise of a California tech company raises questions about the future of U.S. manufacturing
The shelves adjacent to the factory floor are growing bare. Old equipment is piling up in corners, destined for the scrap heap. Out of a workforce that once had reached 650 people, 15 remain. Most will be gone by New Year’s Day.
On the factory’s front wall facing the street hangs a bright yellow banner reading: “Out of Business Sale. All must go — Office, manufacturing tools, computer.”
The banner marks the final stage in the life span of Pioneer Magnetics, a maker of high-tech power supply units that deliver stable and reliable electricity to run sensitive electronic equipment.
“The world has changed for Pioneer, and for me,” Jerry Rosenstein told me.
Our model was to have many happy customers, minimal profit and longevity. We provided jobs for thousands of people over the years.
Jerry Rosenstein, president and CEO, Pioneer Magnetics
Rosenstein, 74, is president and CEO of Pioneer, which was founded in 1957 by his late father, Allen, a UCLA engineering professor. The firm has occupied its Santa Monica quarters for some 50 years. I last wrote about Rosenstein and Pioneer in 2012, when the topics included the challenging economics of manufacturing in the modern world, including the pros and cons of outsourcing manufacturing to China.
Pioneer was struggling even then, but the last six years have taken a final toll. The challenges range from the hyper-local (the dearth of convenient parking in Pioneer’s mixed industrial and residential neighborhood requires some employees to clock out several times a day to feed parking meters on nearby streets) to the relentless pressures of global competition. There’s also an immutable law of nature: aging. “Key staff were retiring or (sadly) dying,” Rosenstein mentioned in the email in which he notified me of his decision to shut down.
These issues and others, Rosenstein says, prompted him to seek a buyer for Pioneer more than a year ago. He settled on privately owned UST-Aldetec Group, which bought Pioneer’s assets in late December 2017 and will absorb its manufacturing and sales into its own operations in New Jersey.
“We have a million dollars’ worth of test equipment,” he says. “We called Caltech, UCLA, Cal Poly — we couldn’t give it away.”
This is a bittersweet transition for Rosenstein, in part because it marks the end of a business model that gives him pride.
“Our model was to have many happy customers, minimal profit and longevity,” he told me from behind a desk cluttered with, among other things, a ceremonial power supply unit — one of several that the company produced for its most loyal customers, big electronics firms such as Intel and Siemens whose testing equipment ran on Pioneer equipment. This one was produced to mark the milestone of 750,000 power supplies produced, and it’s adorned by reproduced signatures of about 60 Pioneer employees.
“We provided jobs for thousands of people over the years,” Rosenstein says. He recalls how Pioneer was run as a family affair — and not just his family, though his daughter Shira is an executive at the firm. It wasn’t unusual for Pioneer to employ two or three generations from the same family. “We support nepotism,” he told me in 2012, with a smile.
Pioneer’s formula stood it in good stead for decades. At its peak, the company recorded annual sales in the neighborhood of $30 million; they’re now $3 million to $4 million. The company was profitable for 55 of its 60 years, Rosenstein says, but not for the last two or three.
Its model is increasingly unsustainable in the modern American economy, Rosenstein says. “The American model now is charge more, lower your costs and get rid of people,” he says. “That’s the world we’re heading toward.”
By 2012, only a few employees were hand-building products in Santa Monica, down from a peak of about 60. Pioneer ceased all manufacturing in June.
Outsourcing yielded some cost savings, but it wasn’t a panacea, Rosenstein found. The process required a great deal of managerial oversight from Santa Monica and frequent field trips by Rosenstein and his top managers. “You cannot imagine the overhead in support time,” he told me in 2012.
Ultimately, he says now, “there were too many obstacles hitting at the same time.” Start with competition. Chinese manufacturers have gotten better at design and engineering, Rosenstein says. “Did they reverse-engineer? Maybe,” he says, referring to the process of breaking down a rival’s product to understand how it’s designed and made, the better to replicate it. “Do they have financial backing” from the government? “Yes.”
But the key to the Chinese manufacturing advantage may lie elsewhere. Chinese manufacturers pay workers $4 to $5 an hour; in the U.S., even minimum-wage staff will soon be paid $15 an hour, plus benefits that Rosenstein calculates raise the compensation for factory workers to $40 to $50. Pioneer offers employees a 401(k) retirement plan and health insurance; after falling for several years, premiums for the latter are again on the rise, even for skimpier benefits than in the past.
There’s no escaping the fact that “even if we build something in China and sell it for $1,000, a Chinese company can sell it for $300 to $400,” he says.
Then there’s the cost of necessary modernization. “This is an old facility,” Rosenstein says. To produce the next-generation products his customers will demand, the plant would have to be reconfigured to accommodate more automation, at an estimated cost of $1 million. “There was no budget for such an endeavor.” Add millions more to hire engineers to design the new products.
Meanwhile, the company has been facing pressure to relocate. Some of this pressure came from Rosenstein’s family members, who are owners of the premises Pioneer occupies. They’re all aware that the properties could be redeveloped for higher-value multi-story mixed commercial-residential use. Residential property owners aren’t especially content with an industrial factory in their neighborhood, even though it’s “benign and doesn’t pollute,” Rosenstein says.
He says he doesn’t disagree with the desire to capture higher property values. But the prospective relocation posed other problems — chiefly that there was nowhere to move to that wouldn’t vastly inconvenience many employees. Rosenstein thought about moving to the San Fernando Valley, the South Bay or Vernon. “But here we’re equidistant from where our people live,” he says.
City, county and state agencies all took a stab at helping Pioneer address some of its local issues, but none had workable solutions.
“The state and the county have programs to increase efficiency, but we’re already efficient,” , Rosenstein says. Placing Pioneer within an enterprise zone would have yielded tax abatements, but the state’s local enterprise zone program was ended by Gov. Jerry Brown.
Bankers were cool to a quest Rosenstein launched about two years ago for borrowed capital. “If I could have borrowed,” he says, “I would have retooled, hired the engineers, changed the factory layout, paid the going rate to keep people working.” Eventually, he concluded, “All the doors were closed for me.”
When I asked Rosenstein if he thought there was still a place in the American economy for a company like Pioneer Magnetics, he replied with an emphatic yes. For one thing, its employees and former employees have skills they still wish to use and that businesses must still need. Only a month or so ago, he says, a group of former employees came to him with the request that he start a new company. Some had had 30 or 40 years’ experience at Pioneer.
“They didn’t care what we’d make,” he says. “Clothing, gadgets — anything. It wasn’t that they needed the money — this was their life.”
Rosenstein is not sure what he’ll do in his post-Pioneer career. He turned down a couple of prospective buyers because they expected him to continue managing the company. Though he says he’s “definitely not ready to retire,” that was more of a commitment than he wanted to make; he sees himself more in a consulting role. A former teacher, he’s interested in writing — last year he self-published an illustrated children’s book entitled “The Christmas Tree That Nobody Wanted,” which he envisions as possibly the first of a series on how to deal with disabled kids.
Rosenstein makes clear that he doesn’t blame anyone for the lack of answers to Pioneer Magnetics’ multiple issues. “The county and the state wanted to help,” he says. But companies like Pioneer are not targeted for business-development programs as much as entertainment and digital technology firms, which seem, well, cleaner.
“There’s no glamour in what we do,” he says. “Maybe you need companies like Pioneer to have an advocate. There’s no caring for small businesses like ours.”