News Column

Doing Business in California May Be a Challenge, but Some Stick it Out

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Oct. 14--The hardships of running a business in California make for an all-too-familiar tale, and Charles Hewett can recite it as well as anyone.

"The price of labor is a lot higher in California," said Hewett, chief operating officer at a genetics research firm called the Jackson Laboratory. "The hurdles we have to work through, in terms of permitting, are more challenging and more expensive."

Jackson isn't going anywhere, though. Just the opposite: It's spending $27 million to expand its Sacramento lab and create another 60 to 80 jobs.

Jackson is growing because of the region's skilled workforce and wellspring of scientific knowledge. "UC Davis is a terrific source of employees for us," Hewett said.

What's happening at Jackson speaks volumes about that complicated creature known as the California business climate -- and illustrates how the economy is evolving.

The state's undeniably high cost structure is creating gaping wounds in the job market. Comcast Corp. just announced it will close its California call centers; Campbell Soup Co. is closing its Sacramento plant. Campbell's shutdown is especially painful, eliminating 700 high-paying blue-collar jobs that will be difficult to replace.

That doesn't tell the whole story, though. On the whole, California is creating jobs faster than the national average. There are legions of companies that are prospering in the state, high costs and all.

Many of them are newer, "knowledge-based" companies that tend to rely on brains more than brawn. They make specialized products and provide services not easily duplicated elsewhere, such as the research mice with designer DNA produced at Jackson Laboratory.

The cost equation for these companies is different. They pay higher wages and don't have to watch their pennies as closely as, say, Campbell Soup. Like Jackson Laboratory, which is headquartered in Maine, they come to California because it's a state where technology thrives.

"There are very definite attractions that cause companies to start up or come to California," said Jock O'Connell, an economic consultant in Sacramento. "The companies that are attracted to California ... need a highly educated, technically oriented workforce."

Often these companies cluster together -- most famously in Silicon Valley, but also in places like the Grass Valley-Nevada City area, home to a group of companies that make sophisticated routers, which are the switchers for TV broadcasters.

One such company is Ensemble Design Inc., whose 50 employees include high school graduates and college-educated engineers. Customers pay as much as $5,000 for a piece of equipment the size of a paperback, and Ensemble president David Wood doesn't mind paying production employees as much as $24 an hour.

"Do people here make more than people in other places? Yeah," Wood said. "However, if we have done a good job stepping up to our role as an employer and provide them with the tools and the training ... they are worth that much money.

"I just don't go for the 'California's too expensive,' " Wood added. "But I'm not making cans of soup."

Manufacturing jobs fall

That's exactly the point: What's good for some companies isn't so good for others.

For an old-line business such as Campbell, facing thin profit margins and iffy growth prospects, cost is everything. It's the reason Campbell said last month it will close its plant in south Sacramento.

The announcement came the same week Comcast revealed it was moving 1,000 call-center jobs out of state. But it was Campbell's announcement, bringing to an end 65 years of manufacturing on hardscrabble Franklin Boulevard, that seemed to hurt the most.

Although California has added 300,000 jobs in the past year -- making it one of the top-performing states in the nation -- manufacturing isn't keeping up. About 7,000 factory jobs have disappeared in the past year. More than 700,000 factory jobs have vanished since 1990.

The decline is troubling because of manufacturing's traditional role as an economic anchor, particularly for those without a college degree.

"There's always that perception that a manufacturing job is a gateway to the middle class," said Eduardo Martinez, a forecaster with national economic consulting firm Moody's Analytics.

At the same time, California has made significant gains in "advanced technology" -- companies that rely heavily on technology. The trouble is, many of these companies, like Ensemble, are relatively small.

"They don't employ a lot of workers because of robotics, automation," said Michael Bernick, a former director of the California Employment Development Department. "That's all fine, but they don't have the jobs of a Campbell's plant."

The news from Campbell Soup and Comcast revived the age-old debate over California's business climate. Some critics suggested Campbell's departure was a response to AB 32, the state law that will soon force hundreds of big industrial firms to limit their greenhouse gas emissions.

The Campbell plant isn't subject to the restrictions, however. And many experts said the plant's shutdown is really emblematic of a long-term economic trend that extends beyond California's borders.

Low-cost competition

About one-third of the nation's factory jobs -- around 6 million in all -- have disappeared in the last 30 years. Companies making commodity products with low margins have trouble surviving in the United States in general, and high-cost states like California in particular.

Campbell said production at the Sacramento plant will shift to lower-cost plants in Texas, Ohio and North Carolina. Company officials would not go into specifics, but Sacramento officials said the plant's unionized workforce, earning as much as $20 an hour or more, was a factor in the decision.

"The main question with the Campbell's plant may be not why it is closing, but how it has survived so long," Bernick said.

Traditional manufacturers can still scratch out a living in California. But it's hard. Just ask the people at Form & Fusion Manufacturing in Rancho Cordova.

Founded in 1970, Form & Fusion is an old-fashioned metalworking shop, making car parts, brackets, tool boxes and more.

Its 48,000-square-foot plant is noisy, grimy and lacking in glamour. Profits are squeezed out like the products -- little bits at a time.

"Every time you hear the noise," said co-owner John Hancock, shouting over the din of a metal stamping machine, "you're making a dime."

The company pays decent wages -- $13 to $30 an hour, plus benefits -- and has withstood the worst the recession could dish out. Hancock said Form & Fusion lost money in 2009 and 2010 but has returned to profitability, thanks in part to a new line of partitions, cabinets and shelving it makes for commercial vans.

"We're able to find ways," he said.

Still, the company is in a relentless fight to stay competitive against manufacturers in lower-cost states such as Ohio. Form & Fusion had to downsize during the recession, and now outsources some of its assembly work to China and Mexico.

"It's a struggle," said co-owner Dave Lewis. "How cheap can you do it and stay in business?"

Hancock said California's business climate doesn't do Form & Fusion any favors. Utility bills are high, state taxes are maddening and the regulations aren't easy. Just the other day, the company had to spend $407 for new signs warning employees about hazardous waste. No one's sure what was wrong with the old ones.

"You can make a living," Hancock said. "But at some point, if you were starting from scratch, this would not be the preferred location."

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(c)2012 The Sacramento Bee (Sacramento, Calif.)

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