Over the past several years, the media has covered California’s suffering manufacturing industry. Experts were calling it a “business exodus”, with large companies becoming fed up with high taxes and wages, fleeing the state. They headed to more rural areas of the US, like Arkansas and Missouri, where they could accomplish a higher profit margin.
However, that’s not the case. While some large businesses have left the state, the majority still reside in California and contribute to its booming economy along with companies that have relocated to the state in recent years. “What isn’t always covered is in-migration and new business formation,” says Lawren Markle of L.A. County Economic Development Corporation, “and if you look at the numbers in total, there’s not as much outflow as the narrative might suggest.”
In fact, if it were an independent country, California would have the fifth largest economy in the world behind the US, China, Japan and Germany (http://fortune.com/2018/05/05/california-fifth-biggest-economy-passes-united-kingdom/). Closely behind are the economies of the U.K. and France, who California surpassed in the last year. Although it has many booming industries including the entertainment industry of L.A., California’s recent success is due to one industry – manufacturing. This is especially in LA County (https://laedc.org/wtc/chooselacounty/), where 12,500 establishments employ approximately 350,000 people.
Causes and Incentives
After a few years of an employment downfall, California enacted economic incentives to bring businesses back to the state. “We do have some minimum-wage increases that are rolling in over the next couple years that will put some pressure on some sectors like food processing,” says Markle, “but our utilities often work with manufacturers to help them look at power consumption to get better programs or find efficiencies to reduce costs.” Many programs are in effect, like the California Competes tax credit, which is an income tax credit for businesses expanding or relocating to California. Other tax and incentive programs offset the costs of high wages and taxes, making California a business-friendly state.
Another contributing factor is the young and highly capable workforce. Three major research universities are located in LA County – the California Institute of Technology, USC and UCLA. These three universities, along with UC Irvine and others, make LA County America’s leading center for 4-year colleges and universities. “Technology that spins out of those universities is ripe for commercialization” notes Markle. Approximately 1.5 million college graduates now live in the state after earning their degree.
Since L.A. County has such a large economy, it holds endless opportunity for its businesses. One benefit is the accessibility to international trade through the two largest seaports in the western hemisphere. Together, these ports handle 40 percent of U.S. inbound containerized freight. LAX is also a world hub airport that flies internationally to 78 destinations in 41 different countries. In addition to trade benefits, L.A. has a rich cultural mix that enables unique companies to thrive in the U.S. food and beverage manufacturing industry. “L.A. is a place where hundreds of languages are spoken, meaning there are big communities from many countries here. You may find a niche because thousands of Koreans live here, and a company may have a new take on Korean food,” adds Markle. These diverse businesses have more opportunity for success in L.A. than other areas of the U.S., and their popularity often spreads nationally.
A Hopeful Future
After years of offshoring manufacturing to China and other countries, California can serve as a case study for other states to bring production back to the U.S. It may be pricier to operate in California, but the majority of site investments today are based on location quality, not price. Home to a rich cultural mix, an innovative young workforce, and countless opportunities for trade growth and incentives, L.A. County may be in the midst of a manufacturing renaissance.