LA Flawed

The burning and looting that followed the Rodney King verdict compounded the problems of a city already reeling from an exodus of manufacturers and lobs. But the riots may have sounded a wake-up call for a CEO community traditionally fragmented and apathetic about community issues.

July 1 1992 by Peter Lacey


When the Rodney King verdict sparked rioting in Los Angeles, the physical devastation was more than matched by damage to the reputation of a city already described by The Wall Street Journal as “the most insulted and least understood city in the country.” Like other major urban centers nationwide, Los Angeles had already been trying to stem an increasing exodus of companies and shore up an eroding tax base. The looting and shooting simply underlined the temptation among CEOs and other businessmen to get away from it all.

For some years now, Los Angeles executives have been receiving invitations to move their companies out of the troubled city. Colorado, Oklahoma, Idaho, New Mexico and other states regularly bombard LA-area executives with radio ads, personal solicitations and promises of much cheaper places to do business with less red tape.

Just how tempting such invitations can be became apparent last August, when Wilford D. Godbold Jr., president and CEO of aluminum luggage and container manufacturer Zero, announced plans to move two of his company’s divisions and 450 jobs from California to Utah. At the time, Godbold was also head of the Task Force on Saving California Jobs and a member of the LA Chamber of Commerce.

“I would very much like to stay,” The New York Times quoted Godbold as saying. “We are nearer the Pacific Basin, we like the environment, and the California economy has been more vibrant than the nation’s over the years. But if the rules become more and more harsh, that will be overshadowed.”

Godbold claimed the move would save Zero up to $5 million a year. Most CEOs in southern California have either faced similar situations or known companies that have. Things aren’t the same, and business leaders are feeling it.

“New business is not being attracted to the state,” says Les McCraw, chairman and CEO of Fluor, an international engineering and construction company based in Orange County. “And there is insufficient encouragement for businesses that are here to either stay or expand.”

Such long-standing problems have been compounded by the April riots, which killed 58 people and caused an estimated $1 billion in damage-more than five times the figure for riots in the city’s Watts district in 1965. Analysts say the disaster will siphon off more jobs and tax revenue from a city already reeling under the decline of both. Government spending and services, which, except for New York, are tops in the nation in size and scope, are threatened as middle-class earners flee and receivers of public assistance multiply. Tourism, in particular, which provides 360,000 jobs statewide and generates annual revenues of $7 billion, seems certain to decline in the short term. Foreign investment in real estate and industry may also be at risk.

In an effort to stop the bleeding, Mayor Tom Bradley appointed Peter V. Ueberroth-held in esteem by local leaders for having successfully coordinated the 1984 Olympic Games in Los Angeles-to head a commission charged with rebuilding designated inner-city neighborhoods. A tall task, considering some burned out in the riots of the 1960s were never rebuilt.

Another snare: The recent recession precipitated a real estate and banking crisis that is reverberating well beyond Los Angeles itself. These economic fault lines reach as far as New York and Tokyo. Add to this the city’s well-known crime, environment, bureaucracy, education and transportation problems and the prophets of doom become more believable.

“It’s a time of night in LA,” says a local economist. “The media describes it as a version of Hell.”

But despite the recent turmoil, the Los Angeles area is still a place of tremendous vitality. In 1990, the gross business product of the greater metropolitan area’s five counties totaled $342.2 billion: If ranked as a national economy, the area would be the world’s 11th largest. It is also the largest and most diversified city manufacturing zone in America, 40 percent larger than the next biggest, Chicago.

With Hollywood ensconced inside its borders, LA is also the original field of dreams, luring a steady stream of would-be stars to the footlights from across the U.S. But these days, many drawn to the city hail from places farther away than the Dust Bowl or the Dairy Belt. According to the 1990 census, minorities in Los Angeles County have become the majority: Hispanics, blacks and Orientals comprise 59.2 percent of the population, up more than 12 percent from 1980. Possibly half of the annual half million arrivals (legal and illegal) in southern California are now foreigners who hail from from Hong Kong, Laos, Seoul, Oaxaca, Chichicastenango and hundreds of other foreign places. The LA public school system now copes with youngsters who collectively speak 82 different languages. Some of the newcomers are providing a much-needed injection of entrepreneurial verve.

Even traditionally Anglo Orange County, just south of LA, has been transformed by the wave of immigration. Comments a frequent visitor to Irvine, the county’s leading town: “It’s gone from white bread city to a place with a mosque.”

Absorbing these settlers is an economy that has undergone an equally dramatic change in the last ten years: The high-paying aerospace and other defense-related industries-which long dominated Southland, as the Los Angeles area sometimes calls itself-are in sharp decline. But they still provide almost a quarter of the manufacturing jobs in Los Angeles County.

“Though little heralded, manufacturing is the backbone of the Southland economy-one out of five Angelenos works on a production line,” noted Benjamin Mark Cole in the Los Angeles Business Journal. However, this is also a soft spot: Since 1987, LA County has lost over 120,000 manufacturing jobs from a 1980 peak of almost 912,000, mostly in the higher-paying durable goods industries.

Given Los Angeles‘ size and regional importance, relatively few giant corporations call the city home. In 1991, for instance, only nine Fortune 500 companies had their head offices in LA County, compared to 19 in Chicago and 39 in New York City. San Francisco-with about one-eighth of LA’s population-has five.

Despite the looming presence of such big employers as Lockheed, Rockwell, Northrop, McDonnell Douglas and General Motors, the great majority of Southland’s manufacturing workforce has always been employed by small- to medium-sized companies. Many of these have been adversely affected by the recession and by the decline of defense orders to those big contractors.

But Lockheed’s Chairman and CEO Daniel M. Tellep remains optimistic: “The downsizing of the aerospace industry presents a difficult challenge for the southern California economy. It will take some time for the region to rebound from the current economic situation, but it has the fundamental building blocks for a strong recovery.”

Another powerful player, Atlantic Richfield Chairman and CEO Lodwrick M. Cook, is combat ready. Speaking of the state and city government attitude toward business, he says:

“We are painfully aware that, over the years, our leaders have turned a blind eye to our loss of competitiveness. A `stick-it-to-business’ attitude has been the order of the day in many regulatory and legislative chambers. But we see clear signs of change. The recent report by the governor’s committee on competitiveness, headed by Peter Ueberroth, gives us hope. The alarm bells have sounded, people have heard them, and battle stations are being manned.”

Throughout the area, fewer manufacturing jobs have been lost in nondurable goods industries such as food processing, garments and printing. (The sector’s workforce has declined only 3 percent from a high of 316,000 in 1980 to 306,700 in 1990.) Generally, such jobs do not pay wages that can support the middle-class lifestyle that has long lured Americans to southern California, but even so, many Asian and Hispanic newcomers are happy to have them. These newcomers are also found in Southland’s far-more-numerous (and lower-paying) service industries: LA has long been a financial services center with important links to the Pacific Rim. Last year, job losses in the sector totaled just 4,800, or 0.1 percent.

Hampering efforts to patch the economy, observers say, is a lack of cohesive, effective leadership from the business community. “Our current corporate leadership is bland,” claims LA business writer Joel Kotkin. “They might as well be living in a space station for all they know about LA. They contribute to the right charities and they go through the motions, but they basically send their flunkies to do most of the civic work. There’s very little of a passionate business leadership at the center of the city.”

Adds an executive of a civic organization: “Who are the major business figures in LA? There is no good answer because everybody is very low-key. There’s really nobody out there. We have a major power vacuum. Nature may abhor a vacuum, but there’s no one rushing in to fill this one.”

For many years, LA did have effective, if not passionate, business leaders. Pre-eminent among them was the Chandler family, owners of the LA Times. But the Chandler era effectively ended with the Watts riots in 1965. “After Watts, a deal was struck,” claims a journalist who covers the city. “The white establishment said to the blacks: ‘We will give you the mayor’s office and the bureaucracy-don’t burn down the city.’ “

Simplistic and overstated, perhaps. Nonetheless, the influence of big business at City Hall has waned. And blacks, who comprise 12 percent of LA’s population, hold 30 percent of the positions in its bureaucracy. As for Mayor Bradley, while many critics allow that he was a positive force in his first two terms, the epithets applied to him as he finishes his fourth term, particularly by business leaders, range from “pathetic” to “brain-dead.” The City Council is equally reviled.

In large part, the new political landscape is the product of the shifting demographics. Citing the increasing power of immigrants from Asia and Central America, author David Rieff recently wrote in the LA Times, “The old coalition of Anglo and Afro-American citizens may soon be irrelevant.”

Observers concede that big business efficiently protects its interests at the state level, lobbying Sacramento through the California Business Roundtable. Comprising the principal officers of the 100 leading companies doing business in the state, the CBR includes such LA area CEOs as Fluor’s McCraw, Kaufman and Broad’s Bruce Karatz, Litton Industries’ Orion L. Hoch, Northrop’s Kent Kresa, Occidental Petroleum’s Ray R. Irani, Security Pacific’s Robert H. Smith, and Times-Mirror’s Robert F. Erburu.

At the local level, Bruce Karatz says the events of April sounded a wake-up call for local CEOs, convincing many that they need to participate in efforts to rebuild the city’s slumping economy.

“Business leadership is crucial at a time like this, when the politicians are overwhelmed with the problems of reconstruction. The recent void of Los Angeles business people you could count on to give time and funding will have to be filled, and I see this happening in the wake of the King riot. There has been a tremendous response.”

Among Los Angeles CEOs, perhaps best-known to the public are such entertainment moguls as MCA’s Lew Wasserman, Disney’s Michael Eisner, and Creative Artists’ Michael Ovitz. But Hollywood, its critics say, generally ignores the problems of greater Los Angeles.

“Most of Hollywood‘s leaders focus on the industry, not the city,” says an executive there. “If they have outside interests, they are usually local charities and national politics.”

Though LA’s entertainment industry directly employs only about 100,000 workers, it indirectly supports at least 100,000 more and surely produces the city’s most famous products. The recent big studio investments of Sony and Matsushita underline the world’s appetite for Hollywood fantasy, a local product that can’t easily be reproduced in Tokyo.

One Hollywood-connected CEO who is also involved in the business of greater LA is Bram Goldsmith, chairman of City National Bank in Beverly Hills. Though City National, with $4.5 billion in assets, manages the fortunes of many in the movie colony, it also finances the expansion of many of the small- and medium-sized companies that constitute the city’s economic backbone.

Goldsmith believes these thousands of light manufacturers will take up the slack caused by the aerospace decline. That many of these concerns are owned by Chinese, Indian, Thai, Vietnamese, Pakistani, Korean and Hispanic immigrants only highlights the city’s new ethnic fabric.

The new entrepreneurs from Asia and Latin America don’t usually depend on government contracts. They are likely to be intimately familiar with the export markets of their native countries. They employ and communicate with low-wage workers with similar ethnic backgrounds.

Referring to the Hispanic entrepreneurs’ attitude toward the city as a place to do business, Jack A. Kyser, chief economist for the Economic Development Corp. of Los Angeles, says, “For them, LA is heaven.”

Some CEOs also cite as a reason for optimism the willingness of these newcomers to work for less than top dollar. “As long as there’s a labor force that will accept lower wages, industry will stay here,” says David Kirschner, the head of Ted Turner’s Hanna-Barbera movie studio.

But others, like business writer Kotkin, want a new order. “The people who are the city’s solution aren’t being asked to solve its problems,” he says.

In February, Kotkin and others organized a conference called “The Next LA Economy.” The participants were somewhat different from those who usually attend such gatherings-a third were Hispanic or nonwhite, chief executives of the new breed. The conference’s speakers emphasized that the economic future of Los Angeles lies not with big companies-which one of them called “relics of the past”-but with immigrants and smaller, entrepreneurial companies.

“Basically, we’re saying that the old order has failed and we’re bringing new people in,” Kotkin says.

Hyperbole aside, the writer and his colleagues are calling attention to LA’s changing environment. What seems obvious to observers is that the script of urban America‘s future is being drafted partly in southern California‘s leading city.

Los Angeles,” says Jim Flanigan, a business reporter for the Los Angeles Times, “is the new place in the world, the new form of urban life.”


 THE TRIMMINGS OF TINSELTOWN

Going to Los Angeles? Which Los Angeles? If your business is in the downtown area (and there is a downtown LA), it will probably be in one of the new skyscrapers to the west of Fifth Street and Pershing Square. Overlooking the square is the remodeled Roosevelt Hotel, an LA classic restored to slightly empty opulence, but a classic, nonetheless. If you want the feel of the town circa its golden age, this is the place movie stars danced and power brokers plotted.

If you’re not being taken to lunch at the California or Jonathan clubs, try a popular restaurant in the downtown area: Engine Company No. 28 offers American cuisine in an elegant remodeling of a 1912 firehouse (644 S. Figueroa at Wilshire, 624-6996).

For Hollywood and West LA, the choices are famous. There’s always the Hotel Bel Air, with its verdant setting on 11 acres in President Reagan’s exclusive new neighborhood. This is Los Angeles as it used to be.

While Ronald Reagan dines lavishly with Hollywood‘s elite, another embodiment of the spirit of the 1980s contemplates Spam on toast at a remote prison farm. As he does so, perhaps Michael Milken recalls those fabulous “Predators’ Balls” he hosted for his investors at The Beverly Hills Hilton. Though Milken is no longer serving up beluga caviar by the ton in its ballroom, the BHH is still a vital presence and is far more elegant and attractive than its downtown cousin. This is LA as it is.

Just across the grass-grown railroad tracks alongside the BHH, a branch of Hong Kong‘s Peninsula Hotel recently opened-it looks even more lavish than the original and may now be the most expensive hotel in LA.