1998, 240 pp., Appendix 126 pp.
By: MARK DRAYSE AND DANIEL FLAMING, ECONOMIC ROUNDTABLE; MICHAEL
BELTRAMO, BELTRAMO AND ASSOCIATES; TOM JIROVSKY AND FRANK TAPLIN,
KOSMONT AND ASSOCIATES, INC.; DAVID RIGBY, UCLA DEPARTMENT OF
GEOGRAPHY; AND JOHN WILSON, USC DEPARTMENT OF GEOGRAPHY
Purpose
The South Bay Economic Adjustment Strategy has been prepared to
help elected officials, public sector staff, business leaders,
and citizens take coordinated, effective action to recover jobs
lost because of defense cutbacks. The strategy has been prepared
under a grant from the Office of Economic Adjustment in the Department
of Defense that was administered by Los Angeles County's Community
Development Commission. The South Bay Association of Chambers
of Commerce and South Bay Cities Council of Governments have participated
continuously in this project, providing information, access to
knowledgeable individuals in business and government, and critiques
of project data and strategy recommendations.
The most salient fact about the South Bay economy is the importance
of high technology manufacturing and services. The area's high
technology sector is a tapestry of industries linked to space
systems, aeronautical services, and aviation; its output includes
research and development services as well as production of electronic
and aerospace hardware and software. Despite ongoing decline in
defense procurement the South Bay remains the heart of Los Angeles
County's aerospace, defense and high technology industrial complex
and is a national center of aerospace, electronics, and communications.
This report provides a body of analysis and strategy recommendations
for supporting existing and emerging industries with innovative
partnerships between the private and public sectors and carefully
targeted public sector investments. The South Bay economy has
been seriously damaged by defense cutbacks and in the absence
of effective economic development strategies the risk is real
that a critical mass of high technology talent will exit the region
and opportunities for growth and diversity in the economy will
be lost.
The geographic scope of the South Bay, as defined for this analysis,
includes the following cities and communities: Alondra Park, Carson,
El Segundo, Gardena, Harbor Gateway, Hawthorne, Hermosa Beach,
Inglewood, Lawndale, Lennox, Lomita, Manhattan Beach, Palos Verdes
Estates, Rancho Palos Verdes, Redondo Beach, Rolling Hills Estates,
Rolling Hills, San Pedro, Torrance, West Carson, Westchester/Playa
del Rey, and Wilmington/Harbor City.
The national market for major aerospace products has declined
sharply during the last decade. Only space and civil aircraft
sales have not fallen substantially since 1987. The South Bay
has been hit extraordinarily hard by defense budget cutbacks resulting
from the end of the Cold War; however, the future forecast for
the South Bay is guardedly optimistic.
Department of Defense (DoD) policies have contributed to disproportionate
losses of defense jobs in the Los Angeles region. DoD encouraged
consolidation of the defense industrial base by allowing consolidation
costs to be charged to defense contracts. This provided a strong
incentive for firms to consolidate and position themselves to
dominate their markets. As these firms consolidated they often
did so around newer production facilities in other regions created
as a result of DoD's dual-source procurement policy.
The Space and Missile Systems Center (SMC) located at the Los
Angeles Air Force Base in El Segundo has a growing budget, spending
over $5 billion a year to plan and procure space systems for the
Air Force. The presence of SMC is clearly an asset for South Bay
defense-linked industries, although most prime contract funds
go to firms headquartered in other regions. From 1993 through
1997 SMC and its technical arm, The Aerospace Corporation, lost
more than 2,000 jobs. If declining government oversight of defense
procurement causes continuing attrition at SMC, the loss of a
critical mass of employees might make it feasible to move SMC's
work out of the Los Angeles region.
The South Bay faces strong competition from other regions for
production of satellites, but the market niche it has retained
supports a highly skilled labor force that is paid high salaries.
Growth at TRW and Hughes has offset losses at SMC and The Aerospace
Corporation. From 1993 through 1997, the combined employment of
these four anchor organizations in the South Bay space sector
grew by over 3,000 workers.
Pressures in the defense market are driving prime contractors
toward fewer suppliers, dramatically reducing the number of subcontractors,
although the overall percentage of revenues subcontracted has
remained roughly constant. The greatest opportunities for increasing
local subcontracts are at the third tier level, that is at the
level of suppliers to direct subcontractors.
The proposed acquisition of Northrop Grumman by Lockheed Martin
and completed acquisition of Hughes' defense segment by Raytheon
(over 2,000 lay-offs planned in the county, and 1,100 in El Segundo)
are not favorable developments for the South Bay. Raytheon's planned
lay-offs will reverse modest gains achieved by the South Bay's
aircraft sector since 1995. An aerospace industry analyst commented,
"the merger with Lockheed will take its toll on Northrop. The
eater gets healthy, the eatee gets torn to shreds." Recently announced
plans by Boeing to lay-off 6,200 workers in Southern California
offer further evidence of the difficulty of competing for and
retaining aerospace jobs.
The South Bay aerospace industry has an employment multiplier
of 2.65. For every worker in the aerospace sector, another 1.65
workers are employed elsewhere in the South Bay. The business
taxes generated directly by aerospace industry in the South Bay
declined from $109.0 million in 1987 to $56.8 million in 1996
(constant 1996 dollars).
Decline of production and employment in the aerospace industry
has resulted in the loss of billions of dollars of payroll from
the South Bay economy. Between 1987 and 1996, the total payroll
of the South Bay aerospace industry declined from $4.65 billion
to $2.09 billion (constant 1996 dollars). The payroll generated
in firms supplying inputs to the aerospace industry, as well as
the payroll generated in firms in which jobs were supported by
the expenditures of aerospace workers, declined from a total of
$4.90 billion in 1987 to $2.20 billion in 1996. Thus the total
payroll generated directly and indirectly by aerospace production
in the South Bay declined from $9.55 billion to $4.30 billion,
a loss of $5.25 billion annually.
The aerospace industry accounts for more than a quarter of all
of the nation's research and development expenditures, and a significant
share of these R&D investments have been made in the South Bay.
There is a clear public interest in transferring useable intellectual
property produced by defense research to commercial applications.
Many South Bay high technology firms have noteworthy opportunities
to commercialize technologies they have developed, at the same
time there are significant organizational and financial barriers
that may prevent commercialization. The public sector needs to
provide intelligent, attentive support for commercialization projects.
The South Bay has significant opportunities for large-scale technology
commercialization through space-based communication and information
systems. This can and is occurring through purely commercial projects
such as Hughes DirecTV as well as through use of defense-related
space systems for commercial purposes. Areas in which there is
overlap between defense-linked space and communications projects
and commercial opportunities include global positioning and communications
satellites, data and voice communications systems, and launch
systems, including the expendable evolving launch vehicle and
the space plane.
A major initiative by AlliedSignal in Torrance to manufacture
turbogenerators for ultra-low-emission, low-cost generation of
electrical power at businesses, factories, and remote locations
is now underway. Strengths of this project include knowledge of
the market they are entering, a carefully developed product that
offers advantages in cost savings and environmental benefits,
and willingness to invest significant corporate resources to bring
the product to market.
Northrop Grumman has been the beneficiary of the largest publicly
funded defense conversion project in Southern California, and
quite possibly the United States. Since September 1992, it has
received over $50 million in federal and local transportation
funds to design and build six prototypes of the Advanced Technology
Transit Bus at the company's South Bay facilities. The jury is
still out on whether this bus will successfully emerge from its
defense industry womb to become a commercial product that creates
jobs and improves the lives of bus riders in this region and elsewhere.
Barriers to technology commercialization vary from project to
project but frequently include: reluctance to be distracted from
core defense work; institutional memories of over-confidence and
subsequent failure in past commercialization efforts; insularity
from best practices in other industries; lack of familiarity with
commercial markets; failure to recognize that marketing is as
difficult, and requires as much creativity, as the technical side
of commercialization; expectation of predictable return and continuous
cash-flow (as provided by DoD), rather than willingness to make
investments based on calculated risks and wait for large, but
deferred, returns; lack of investment capital; financial structures
that require too much early return; and high overhead within defense
companies and reluctance to spin-off new entrepreneurial companies
with lower overhead and greater flexibility.
To investigate the importance of key South Bay industries in providing
jobs and revenue for the region, an input-output model of Los
Angeles County's economy was modified to represent the South Bay's
industry structure. Using this model of the South Bay economy
it is possible to identify the total employment, output and tax
revenue effects that result from growth or decline in specific
industries.
The number of jobs created per million dollars of investment in
the South Bay is highest in business services, hotels, retail
trade, and consulting and research. The first three of these industries
pay low average salaries. The number of jobs created per million
dollars of investment is lowest in petroleum products, utilities,
real estate, and aerospace. All of these except real estate pay
high average salaries.
The industries generating the largest dollar volumes of indirect
business taxes in the South Bay economy are real estate ($603.7
million), petroleum products ($474.5 million), retail trade ($456.4
million), air transportation ($356.8 million), and wholesale trade
($252.2 million). It should be noted that taxes paid by the real
estate industry are part of the facilities cost paid by all industries
occupying rented or leased space.
Imports into the South Bay economy are largest in the petroleum
products ($3.26 billion), aircraft, missiles, and space vehicles
($1.69 billion), scientific instruments ($1.34 billion), and air
transportation ($1.19 billion) industries. In sum these four industries
are responsible for about 54% of the region's imports.
In terms of total dollar volume, the key export sectors for the
South Bay were scientific instruments ($4.04 billion), aircraft,
missiles and space vehicles ($3.30 billion), air transportation
($3.23 billion), petroleum products ($2.43 billion), and real
estate ($1.08 billion). These five sectors accounted for about
57% of the region's total exports.
Based on an analysis of the South Bay's industry structure and
the employment and payroll characteristics of South Bay industries
the following industries are recommended as anchor industries
for targeted business attraction and retention programs :
HIGH TECHNOLOGY
TRANSPORTATION AND TRADE
ENTERTAINMENT AND MULTIMEDIA
Each of the proposed anchor industries pays average to above-average
wages and salaries, meeting criterion for job quality. Also, the
anchor industries are highly concentrated in the South Bay (high
technology and international trade) or the Los Angeles area (entertainment
and multimedia).
Recommended linked industries to be retained and attracted in
conjunction with anchor industries are: Metals and Machinery industries
including manufacturers of aluminum castings, airframe fasteners,
aircraft forgings, and machine shops; and Financial Services industries
including banking, credit agencies, and insurance carriers.
One key to the South Bay's future is to remain a high-value-added
location where high productivity together with an appealing quality
of life justify paying higher land and labor costs. One of the
complaints most frequent heard from expanding and relocating companies
about Los Angeles County concerns the lack of modern, master-planned
office and industrial parks. The lack of a sufficient number of
such facilities puts the South Bay at a competitive disadvantage
with Orange County, the Inland Empire, and the west San Fernando
Valley.
Huge growth of the South Bay industrial and office inventory in
the last 30 years, together with housing and retail, has left
few significant undeveloped parcels. Most new office and industrial
development is actually infill redevelopment of older sites. Infill
development occurs in an environment that is rarely subject to
master planning with strong site layout, landscaping, service
facilities and similar amenities. Infill development can be attractive
and successful, but only with strict planning guidelines.
Large-scale master planning makes expansion easier for growing
firms. Master planning can also be a vehicle for expanding the
range of industries attracted to a property -- development controls
allow different types of operations to co-exist, and they also
can attract firms to formerly less desirable locations. Property-specific
master planning efforts will often be appropriate, preferably
with cooperation of owners. In the absence of such action, developers
will build the product that can obtain financing most easily,
and cities may not control the process until it is too late for
changes.
The South Bay is one of the most depressed office markets in the
region, suffering from heavy dependence on aerospace. With approximately
22 million square feet of rentable space, the South Bay office
market comprises about 15 percent of the Los Angeles County inventory.
There was been little new construction from 1992 to 1996 as vacancy
remained above 20 percent and rents relatively low. However, as
the economy has recovered, vacancy has edged downward, with the
lowest vacancy rates found in El Segundo and Torrance. The outlook
for continuing absorption of most vacant space is strong, although
some available space is poorly configured for smaller companies
that now dominate the rental market. Further increases in rental
rates are necessary to spark significant new construction.
With approximately 165 million square feet of space, the South
Bay industrial real estate market comprises approximately 21 percent
of the Los Angeles County inventory. With little new construction
and healthy demand, overall vacancy rates have declined from above
12 percent to below eight percent. Much of the current inventory
is considered obsolete: it lacks the high ceilings, landscaped
settings, truck docks and other features that users want. This
factor and the low vacancy rates are already resulting in new
construction. Positive trends in trade activity and construction
of the Alameda Corridor also suggest a strong outlook for the
industrial market. Impediments include a shortage of master-planned
industrial park sites.
Major employers see the South Bay is seen as a high-end business
environment and a generally desirable place to do business. Strengths
identified by employers include a large pool of skilled and experienced
workers, universities that provide needed training, a good work
ethic, a strong supplier base, large investments in industrial
facilities, presence of the Air Force Base and Aerospace Corporation,
transportation infrastructure, and attractive neighborhoods with
a high level of public services.
Weaknesses include lack of affordable housing, traffic congestion,
long commutes from areas where housing is affordable, and perceptions
that affordable communities have substandard schools as well as
high crime rates, gang activity, and poor air quality.
International Trade
The South Bay is at the center of the region's transportation
logistics hub. Virtually every national retailer has a distribution
center in the region. A key requirement of transportation logistics
and a strength the South Bay is the capability to maintain and
coordinate a high level of communication with each component of
the goods movement network, including the manufacturer or wholesaler,
legal and financial entities, ocean or air shippers, customs officials,
truckers, warehouses, rail roads, and the buyer. All of these
are in close physical proximity in the South Bay.
The Los Angeles Region in general, and the South Bay even more
so, have a shortage of banks with strong international capabilities.
Active financiers who understand international trade are very
important for completing and managing international transactions,
which of necessity entail bridging at least two currencies and
legal systems with instruments such as letters of credit and sales
contracts.
Entertainment and Multimedia
Historically, trade expands around crossroads -- in the case of
the South Bay this might be where bandwidth offered by satellites
joins content produced by the entertainment industry. The proposed
Dreamworks Studios in Playa Vista and Manhattan Beach Studios
will give the South Bay two important centers in the regional
entertainment sector and could stimulate new start-ups. The South
Bay commercial satellite industry as well as its nascent entertainment
industry both stand to benefit from closer ties through which
companies learn how to work together in ways that reduce each
other's risk and increase each other's audience.
Institutions for Private-Public Cooperation
In interviews with community leaders and aerospace representatives
a parallel insularity was noted: aerospace companies are not aware
of the kinds and combinations of economic development tools that
could be used to assist them, and a lack of outreach from local
government was noted by nearly all large aerospace firms. It is
important for the South Bay's future that city, county, state
and federal policy makers build direct communication with their
counterparts in high technology firms and respond credibly to
mutually compatible goals with an eye toward building long-term
trust.
The South Bay Cities Council of Governments and South Bay Economic
Development Partnership are promising forums for addressing subregional
issues. The Council of Governments can be the South Bay's cornerstone
institution for creating, sustaining and implementing a long-term
strategic vision of how the region should manage adversities,
uncertainties, and opportunities for recovering from defense cutbacks.
Infrastructure
The South Bay is highly reliant on surface streets for traffic
movement, and there is significant congestion on some key arteries,
which should be the major focus of transportation system improvement
strategies. The South Bay does not have a well-developed infrastructure
for broad-band information transfer and communications. For computer
users, absence of broad-band capabilities means long intervals
spent waiting while information is up-loaded or down-loaded at
relatively slow rates of speed now permitted by copper telephone
wires.
Workforce
The South Bay provides the place of work for approximately 37%
of the county's aerospace workforce. Restructuring and shrinkage
of the aerospace industry during this decade has had its most
severe impacts on production workers because procurement of manufactured
defense products has declined much more rapidly than research
and development activities. Occupations such as assemblers, machine
operators, and mechanics have declined by a significantly larger
percent than managers, engineers and computer scientists. The
bad news, however, is that those managers, engineers and scientists
who were laid-off had much more difficulty finding new jobs in
their fields than production workers.
Ten areas of action are recommended for implementing the South
Bay Economic Adjustment Strategy:
1. Establish a forum of policy-level local, state, congressional
and corporate officials that meets monthly or quarterly and works
together to build private-public consensus and act on common interests.
2. Promote growth of anchor industries by: creating university
internships in international trade; assembling highly competitive
export packages that include both manufactured products and services;
strengthening international banking services; developing training
programs for demand occupations in multimedia industries; and
providing business outreach services to link multimedia companies
with available business assistance and economic development programs.
3. Expand the South Bay subcontractor base by promoting participation
of small and medium size firms in the California Manufacturing
Technology Center's aerospace supplier technical assistance program;
promote contact between different tiers of aerospace contractors;
encourage more South Bay businesses to participate in the Small
Business Innovation Research program; and utilize information
and contacts available through South Bay technical trade associations.
4. Address infrastructure needs through a financial, technical
and organizational strategy for building broad-band communication
infrastructure to serve the South Bay, and city coordination to
prioritize street improvement needs, share information about improvement
plans, and advocate jointly for funding to meet highest priorities.
5. Support high-end re-use of available sites by adopting narrowly-targeted
tax incentives for high-benefit industries; expedite new development
by adopting mechanisms to avoid individual project-level mitigation
negotiations wherever possible; search for major sites that can
be master planned for office and industrial projects; create a
task force of city planners and local developers to examine obstacles
to successful re-use of key sites; and use local funds and additional
grants for site-specific master planning for sites that have regional
significance.
6. Support worker retraining by making it possible to access information
on 2,000 training programs, costs and placement outcomes for each
program through the internet.
7. Improve educational opportunities for children of Air Force
families through support and assistance from South Bay school
districts and/or support for a charter school that provides high
quality education for children in the San Pedro area.
8. Create reliable South Bay data sources by training city staff
who oversee collection of business license data in proper industry
classification procedures, and use this information together with
other data sources to monitor implementation of this strategy
and identify new opportunities for economic development.
9. Initiate marketing and outreach efforts to strengthen ties
with aerospace prime contractors headquartered in other regions,
bring space communications systems and motion picture production
companies together, bring second and third tier contractors together,
and promote participation of South Bay firms in export training
programs.
10. Promote growth in high technology industries by opening access
to aerospace patents; recruiting and screening entrepreneurs to
commercialize promising technologies; provide technical assistance
and financing for start-up companies; and facilitating site expansion,
development and worker training by existing high technology companies.