For more than 40 years, Roger Clarke has been cutting gears at his North Hollywood business for aerospace companies and race-car builders.
Running out of space, the 68-year-old Clarke recently bought a nearby building as part of a major expansion of Clarke Gear Co. It should have been the capstone of his career.
Instead, the process for getting permits has turned into a nightmare. Not only is Clarke faced with regulations from multiple agencies, he is spending more on capital equipment in order to maintain a quality advantage over Chinese manufacturers who constantly threaten to undercut him.
“I am just a dumb sucker who keeps putting money back into my business so my employees have a job,” said Clarke, who inherited the business in 1961. “I am thinking, maybe I just should have taken the money and run.”
Clarke no longer buys into the California dream. He is not alone.
Buffeted abroad and at home, many of the state’s businesses enter 2005 at more of a trot than a gallop. Owners and managers now entering their 50s and 60s are looking more at exit strategies than the next big thing. Part of it, of course, is generational ambitions have a way of slowing down as hairlines start receding. But there’s more to it than tired bones.
Doing business in California is, well, a hassle. Almost more trouble than it’s worth.
Five years ago the unprecedented tech boom papered over a lot of the problems amid record profits and optimism, but that’s old news. Now, it’s a cavalcade of roadblocks all the regulations and red tape, to be sure, but also competition from overseas, off-the-charts home prices, two-hour commutes and astronomic workers’ compensation costs.
“The California dream is not dead, but it has changed,” said Kevin Starr, long-time chronicler of the state and author of “Coast of Dreams: California on the Edge, 1990-2003.” “It used to be something that was simply given to you. It has now become something to be struggled for.”
Interviewed by the Business Journal in October, Starr said the current environment is a throwback to the early days of California in the 1850s and 1860s. “I like to say that what a Spanish philosopher called the ‘Tragic sense of life’ is coming to California now. We had the earthquakes, the fires, the floods and all the social problems that came to the fore in the early 1990s. The dream is now really on the edge and we’ve got to work for it.”
‘It’s very difficult’
George Joseph, chairman and chief executive of Mercury General Corp., the Los Angeles automobile insurer, remembers arriving on the West Coast in 1949 after graduating from Harvard.
“I was able to come into an area like this with no money and no real skills and being able to develop a business on my own and see it prosper,” he said.
Joseph founded Mercury General in 1962 and built it into a $2 billion company over the ensuring decades, as his company and others benefited from the infrastructure spending boom under Gov. Edmund G. “Pat” Brown.
These days, it’s different. “It’s very difficult for me if I find a promising executive who lives in Georgia to try to bring him here and house him anywhere. And I look at every exit interview we do on employees we are losing. I am beginning to see more and more, ‘My husband is relocating to Arizona. I am moving to Las Vegas.’ People can’t live with increasing traffic congestion.”
Buddy Barksdale is another veteran businessman who has witnessed the changes. He owns an aluminum foundry in South Gate called Buddy Bar Casting Corp. that he founded with his father in 1951. It employs nearly 200 with annual sales of about $20 million.
“When I bought this little building down here, there was nothing. It was dirt roads. As far as getting a license from the city, that was a half hour job,” he recalled. “Now you can’t believe it. I would not start a business here.”
And yet, there is another side. Christopher Thornberg, senior economist at the UCLA Anderson Forecast, notes in a recent report that despite all the headlines concerning the state’s poor business climate, “California has actually been doing quite well overall the past few years. Regionally, Southern California continues to lead the way, while the Bay Area has begun a mild-but-solid recovery.”
And for all the crazy home prices and impossibly congested freeways, it is still a place that draws so many thousands from unskilled immigrants to would-be movie stars to leading-edge biotech researchers. The state has more businesses in the biotech and biomedical sector, in fact, than any other in the country, with big clusters of businesses in San Diego and the Bay Area. The Los Angeles region also has its share and is the home of Amgen Inc., the world’s largest biotech firm.
“California for CEOs is sort of the best of opportunities and the worst of opportunities,” said Larry Kosmont, chief executive of Kosmont Cos., a consulting firm. “It still represents the fifth or six largest market in the world and from that standpoint is a sellers dream, but on the other hand if you’re a business that makes a product and has a lot of employees it becomes a nightmare.”
Can-do climate
The last 25 years, in particular, have seen a roller coaster of economic conditions. Going back to the election of President Reagan in 1980, the state enjoyed a windfall from stepped-up defense spending in what turned out to be the waning days of the Cold War.
But it wasn’t just defense spending that propelled California’s economy to become the seventh largest in the world. Businesses of all sizes thrived in an entrepreneurial climate that was the envy of the world. It became axiomatic that California, particularly Southern California, was the place where a good idea and a bit of seed money could work wonders. And even when an idea didn’t take off, there would be encouragement to try a second and third time a far different attitude than the business establishments in more tradition-bound cities back east where big corporations typically ruled the roost.
“We are the king of the new business. California is the place where people come to start anew, and the international citizenry that come here are entrepreneurial,” Kosmont said.
But by the late 1980s, this period of inspired capitalism was about to hit a roadblock. It started with the end of the Cold War. Suddenly, the defense establishment didn’t have to be nearly as large as was envisioned just a few years earlier. Suddenly, massive weapons programs were slashed, shelved or eliminated altogether. With that downsizing came consolidations, layoffs and factory closures part of a national recession.
The defense industry’s retrenchment wasn’t the sole factor for California’s economic collapse in the early ’90s, but it certainly set the tone. Between July 1990 and July 1991, the state lost 100,000 jobs and a survey by the Business Roundtable at the time showed that 41 percent of the state’s business leaders surveyed were planning to expand outside of California.
Just as the national economy was showing signs of life, it would get worse here punctuated by the 1992 riots that obviously became an economic disaster for portions of Los Angeles, but more than that, set off a discordant tone for the area (only a few months earlier, Time magazine practically proclaimed the state on life support).
When the Northridge Earthquake pummeled L.A. in early 1994, social and economic pundits were practically writing off the place that only a few years earlier was the bellwether for the rest of the nation.
Economic realignment
That’s around the time the comeback began to take shape. Some point to the billions of dollars in federal and private money that came to into the area after the temblor as a crucial pivot point. Beyond pure dollars, the mid-1990s marked the beginnings of a subtle realigning of the area’s economy. Instead of defense taking a predominant position, local economists started trumpeting international trade, tourism, clothing design and light manufacturing.
These sectors had been there all along; what changed was their resilience amid shaky times and how they helped re-establish one of the world’s most diverse economies. Examples of success, especially among small- to mid-sized companies, were popping up in this newspaper and other publications, kind of a throwback to the 1980s when so many things seemed possible. You could almost see and feel the prosperity in restaurants, boutiques, auto dealerships, real estate brokerages.
Of course, the booming stock market didn’t hurt. With venture capitalists so flush with cash, it didn’t take much to get a business started. That created a credulousness that became instrumental in upending the boom a few years later. Indeed, it was in mid-2000 that warnings were being sounded about the stock market as well as the precarious foundation of so many start-up enterprises. It soon became clear that the northern part of the state would get the worst of the tech-related bust, but the economic retrenchment would impact everyone in California.
It really wasn’t that hard to figure out: When the stock market plummets, incomes do too. When earnings turn into losses (and losses turn into bankruptcy filings), those incomes fall even further. Suddenly, California found itself with much less money coming in from taxes and retail sales and not enough in reserve to make up for the shortfall.
If it were only a blip in the business cycle that would have made it painful but predictable. But this wasn’t any ordinary recession. Beyond the economic calamity of boom times gone bust was the fallout from 9/11, which devastated the airline and hospitality industries for more than a year and perhaps more devilishly, created an economic stupor that resulted in cowering rather than creating.
Last year, Arnold Schwarzenegger came riding to the rescue at least as it involved an entrenched and overreaching regulatory network. It soon became apparent, however, that there were some things even the Terminator couldn’t control.
Like China and its unrelenting transition to a full-blown marketplace economy. Who could possibly compete with wages that were averaging 65 cents an hour?
Like massive congestion that plays havoc on transporting products each day.
Like the state receiving only 77 cents in federal funding for every $1 sent to Washington.
Like energy prices that have soared to 190 percent of the national average.
Like the overall cost of doing business being 28 percent higher in 2003 than the average of seven states in the West.
Regulatory burden
John DeWitt, chairman of J.E. DeWitt Inc., has been doing his own calculations. The family-run company is a South El Monte-based distributor of gasoline and other petroleum products that was founded in 1945.
“There are a lot of extraneous things you are dealing with that have nothing to do with taking care of your customer,” he said. “You could go in and get a permit to do something relatively simply. You didn’t have 37 agencies there to make things better for everybody and guarantee their own jobs.”
Not long ago, DeWitt penciled out how much he was paying the government in taxes, license and permit fees and other expenses compared to every dollar kept for profit and payroll. The result astounded him: $10.40 for every $1.
It’s not as though DeWitt decries all regulation. He can remember as a teen-ager running track at Whittier High School and barely being able to breathe. “My grandkids have better air,” he acknowledged.
Economist Esmael Adibi, director of the Anderson Center for Economic Research at Chapman University, agreed that California businesses face lots of regulations and extra costs, but added that it goes with the territory in a huge, complex state with a mature economy and all the predictable side effects of pollution and traffic congestion.
“Doing business in California has become much more difficult than it was 10 or 20 years ago, relatively speaking, but part of it is understandable,” he said.
So here it is, 2005, and most of the projections call for another decent year. There will be thousands of new jobs created and, by and large, companies will make money. “The forecast for California has 2005 being a solid, but not spectacular, year,” said UCLA’s Thornberg in his recent forecast.
George Ayoub pretty much agrees with that assessment. He is chief executive of One Lambda Inc., a biotech firm that manufactures a test that ensures transplanted organs are compatible. The UCLA spinoff was established 20 years ago and he has no plans to go anywhere.
“We have been very successful and profitable,” said Ayoub, whose high margins enable managers and high level researchers to draw six-figure salaries. “I really feel that biotech will be a growing industry in California. A lot of it may be: It’s a place for entrepreneurship.”
That confidence has been boosted by the recent passage of Proposition 71, which sets aside $3 billion for stem cell research over the next decade. It could likely make the state the leading stem cell center in the world.
Even farther in the future: hopes that nanotechnology, which aims to create medical treatments and even manufacturing processes on the molecular level, will lead to a renewed tech boom.
Yet for many others it’s a tough road and hard work, a good idea and a few dollars will only get you so far.
“We are living off the investments made by our parents. But if you are going to be a high-cost state you have to have something that gives you an edge,” said Victor Weisser, president of the California Council for Environmental and Economic Balance, an advocacy group that promotes reasonable environmental regulations.
‘I don’t live large’
The solution? Cope the best way you can.
DeWitt recently invested in a remote tracking system that allows him to know where the company’s 40 tanker trucks are at any given time. It’s part of a plan that will have the fleet make its deliveries against the prevailing flow of traffic.
“We try to figure out how to be more efficient and avoid the traffic. If you go against traffic you are going to save time,” DeWitt said, noting one side benefit: it could help in the event of a terrorist attack.
Meanwhile, Clarke’s gear grinding business has not responded with layoffs as a way of cutting costs. Most of his employees have worked there for decades, and losing them is the last thing Clarke wants to do.
Instead, he is making big capital investments in the hope it will improve efficiency. The business claims to have the most sophisticated gear cutting and grinding equipment on the West Coast.
Clarke figures he takes “maybe 100 something home” out of his gear business, compared to other business owners who take a half million dollars or more. “I have always had food on the table, and I don’t worry about my credit card bills. But I don’t live large. I don’t take vacations,” he said.
Barksdale made the difficult decision to self insure his foundry in order to lower workers’ comp costs. It’s a more complicated process, but one that he hopes will put a stop to the hemorrhaging. “You work really hard, and you take your profit and give it (workers’ comp insurers) and hope you still have some left,” he said.
For Robyn Zander, it’s all about figuring out a way of making it work.
She’s general manager of Dynatek, a Glendora maker of electronic aftermarket parts for motorcycles, ATVs and other recreational equipment that has decided to take the high road against low-price Chinese-made products by keeping manufacturing domestic. But there’s a price to be paid: requiring employees to fund a bigger share of their health care costs.
“You charge your employees a little more and then you explain why: ‘If I can’t charge you more,'” she said, “‘either I have to lay you off or go out of business.'”
