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South Bay Economic Adjustment Strategy

November 1, 1998 / By Daniel Flaming, Mark Drayse, Michael Beltramo-Beltramo and Associates, Tom Jirovsky-Kosmont and Associates Inc, Frank Taplin-Kosmont and Associates, David Rigby-UCLA Department of Geography and John Wilson-USC Department of Geography
Underwriter: the County of Los Angeles South Bay Communities and Community Development Commission
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South_Bay_Economic_Adjustment_Strategy_img_01Purpose

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.

Communities Included in the South Bay Defense Adjustment Analysis

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.

Defense Industry Findings

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.

Technology Commercialization

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 turbo generators 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.

Findings from Input-Output Modeling

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.

Proposed Anchor Industries

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

  • Aerospace
  • Computers, Electronics, Instruments
  • High Technology Services
  • Satellite Communications

TRANSPORTATION AND TRADE

  • Water Transportation
  • Air Transportation
  • Transportation Services
  • Wholesale Trade (Durable Goods)

ENTERTAINMENT AND MULTIMEDIA

  • Motion Pictures
  • 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.

Real Estate and Site Re-Use Findings

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.

South Bay Competitive Assessment

Overview

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.

ACTION PLAN

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.

Chapter Headings:

  1. Executive Summary
  2. Introduction
  3. Defense Analysis
  4. Industry Employment Trends 1983-1996
  5. Input-Output Study of the South Bay Economy
  6. South Bay Anchor Industries
  7. Redevelopment of Industrial Sites for Target Industries
  8. Competitive Standing and Prospects
  9. Action Plan
  10. Appendix (Volume II)
Area of Work: Economy
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