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Exodus worries: High taxes and lots of rules prompt some firms to leave state
San Francisco Chronicle
Carolyn Said
California is known for exporting computers and chemicals, wine and apparel -- and, of course, cheese. But now the state is gaining the unfortunate reputation for exporting something far more valuable: Jobs. Corporate leaders and some economists fear that California's health is in jeopardy because too many companies are pulling up stakes and moving a state or two away, or even overseas, to cut costs.
At Sirenza Microdevices, a staff of 75 executives, engineers and manufacturing workers in Sunnyvale spent the past decade designing and making circuits that cell phone companies use to amplify the signals in their base stations.
Now Sirenza is leaving Sunnyvale for greener pastures -- in Broomfield, Colo.
"We don't see that we're leaving anything," said Bob Van Buskirk, chief executive officer. "We don't need to be co-located in Silicon Valley with suppliers or vendors."
In fact, the company feels it is gaining something: Larger facilities at lower cost.
"We increased the total square footage we have and lowered the overall (real estate) cost by about a third, and we've radically upscaled the quality of the space," Van Buskirk said. Sirenza is paying "something south of $5 per square foot per year" in Colorado, in contrast to the $25 to $30 per square foot annually it paid in Silicon Valley.
Sirenza was not disaffected with California. It decided to move after acquiring a Colorado firm and considering comparable costs of places where all its employees could be together.
But many other businesses are fed up with the state. They say California has become inhospitable.
The reasons are easy to tick off: Burdensome taxes, a morass of complicated regulations, high energy costs and soaring rates for workers' compensation insurance. Then there's the budget stalemate and a gubernatorial recall, not to mention the familiar quality-of-life issues: housing costs, congestion, troubled schools.
"It's very difficult to do business in California because of the expensive costs and the inattention of policymakers to stimulate the economy," said Allan Zaremberg, president of the California Chamber of Commerce. "Business owners here are very much afraid and frustrated."
No entity tracks state business migration, so it's unknown just how many companies have hit the road in recent years. And data, such as employment trends, don't really support the idea that California so far has hemorrhaged jobs any faster than other states.
But civic leaders say events are reaching a crisis point.
One-fifth of business leaders surveyed by the California Business Roundtable and California Chamber of Commerce in April said they planned to expand or relocate outside the state to escape the pressures of California's costs and regulations.
The roundtable and chamber, along with a broad coalition of groups -- a roster of cities and trade associations representing electronics-makers, retailers, insurers, manufacturers, contractors, farmers and oil companies, among others -- consider the situation so acute that in May they started an organization called the Coalition for California Jobs. The group, also called Jobs 1st, is lobbying the state to rein in fees, taxes and regulations.
"The Legislature could go a long way by showing that they want to set an atmosphere that's more friendly to business," Zaremberg said. For example, he said, suspending the impending workers' compensation benefits increase would save employers $1 billion per year.
Richard Kovacevich, CEO of Wells Fargo, California's largest bank, said he's deeply concerned about the state.
"I worry about California because it has a reputation to be an antibusiness state. And I think we're losing huge amounts of job growth," he said in a recent interview with The Chronicle (see accompanying Q&A). "There are companies moving out of California simply because the environment of doing business in California is so negative compared to our neighboring states."
Those states are rolling out the welcome mat for disaffected California companies.
-- Texas has a $295 million war chest to provide incentives for firms that want to relocate to the Lone Star State.
-- Nevada is starting a marketing blitz this summer targeting California businesses.
-- Idaho hands out literature showing how much a California business can save by relocating there.
-- Colorado's governor and Denver's mayor are heading to Silicon Valley early next month to sell their state to tech execs.
Such business poachers say that, more than ever, California is a happy hunting ground.
"California is basically running (businesses) out," said Somer Hollingsworth, CEO of the Nevada Development Authority in Las Vegas. "That's the deal, and we're taking advantage of it."
Nevada will spend $700,000 on a "hard-core, hard-hitting" ad campaign to persuade Golden State executives to go silver.
"A (20-person manufacturing) company can put $500,000 to $700,000 back on their bottom line just through workers' comp and power (savings in Nevada)," Hollingsworth said. And that doesn't even get into the tax savings: Nevada has neither corporate nor personal income tax.
Chuck Alvey, CEO of the Economic Development Authority of Western Nevada, added: "We're hearing from companies in California that they're in distress. It's not (whether) they could make more money (in another state). It's that they've got to get out of California to survive."
Inquiries from California businesses are up 60 percent this year, he said.
In Idaho, Kevin Clegg of the Bonner County Economic Development Corp., said:
"We have an aggressive recruiting program that targets high-cost areas." Southern California and the Bay Area are at the top of the list.
Randy Shroll, marketing manager for the Idaho Department of Commerce, said he's talking to several small California manufacturers about moving there.
Idaho recently landed a high-profile El Cajon company, Buck Knives. The knife manufacturer, which has been in California since after World War II, said it will leave San Diego County for Post Falls next year -- and slash its labor costs. About a quarter of its 250 employees will keep their jobs.
States with a big budget to lure relocating firms have an edge.
Jim Renzas, president of Location Management Services, a Mission Viejo (Orange County) site location and incentives negotiation firm, is helping Orange Plastics of Compton (Los Angeles County) move its 120-person manufacturing operations to Abilene, Texas. Abilene sold the company a $6 million building for $4 million and gave it $2 million in cash to cover relocation costs, Renzas said. Orange Plastics signed a 10-year energy contract that give it a rate one-quarter to one-third of what it paid in California.
BY THE NUMBERS
However, many experts say there is no real exodus taking place. It's just the normal flow of business. While some companies are undoubtedly leaving the state, the loss of jobs in California has more to do with businesses scaling back their operations.
"Most of the jobs didn't go anyplace; they just vanished," said Stephen Levy, director of the Center for Continuing Study of the California Economy in Palo Alto.
To get a snapshot of whether California was losing companies and jobs to Texas, Levy analyzed job trends during the past three years in the two states.
He found that California's 20.7 percent drop in computer and electronics manufacturing positions since May 2000 was less than the 25.4 percent decrease in Texas. It also was below the national average of 21.8 percent.
He then looked at each state's center of high tech. In Silicon Valley, the manufacturing job loss was 29.3 percent -- but it was even steeper in Austin, 32.4 percent.
For total manufacturing jobs, California lost 14.2 percent of its jobs compared with a 13.8 percent drop in Texas and a 14.8 percent drop nationally.
Junfu Zhang, a research fellow at the Public Policy Institute of California,
did a study tracking the movements of Silicon Valley companies from 1990 to 2001 -- admittedly a period that encompasses the full boom and just some of the more-recent slump.
Most companies that relocated stayed in the state: 3,757 left Silicon Valley for elsewhere in California. He found that 364 establishments left for other states, while 209 moved into Silicon Valley from nearby states, resulting in a net loss of 155 establishments and 6,438 jobs.
Meanwhile, 29,247 new companies started up in the region, creating thousands of jobs, he said. Many of those companies were small; a quarter had fewer than five employees. Still, startups employed more than 20 percent of Silicon Valley's high-tech workforce.
"The impact on employment in Silicon Valley from firms moving out is really small," he said. "The new firms greatly outnumber those moving."
LOSING POTENTIAL GROWTH
In fact, with the world's fifth-largest economy and 12 percent of the U.S. population, California will remain attractive for any company that needs to be near its customers.
Rather than mass migration, the real threat may be subtler but more potent. Experts say California's business climate chokes off growth.
Major employers may be committed to keeping their headquarters in California. But when it's time to expand with a new call center, a bigger accounting division or a new assembly line, they look elsewhere -- either in cheaper states or out of the country.
Wells Fargo, for example, has added 35,000 employees in the five years since its merger with Norwest.
"The number of (job) additions in California is far less than the number of additions outside California," Kovacevich said. The bank recently held a hiring fair in Des Moines, Iowa, for 5,000 open positions. "We wouldn't even consider California for those jobs," he said.
A similar attitude is pervasive among businesses using his bank.
"Our customers tell me every day that if they had a job to add, the last place they will think of adding that job is California. Every day. Diverse customers, small, medium, large, tech, non-tech. It is sad. And they don't want it to be that way," Kovacevich said. "I'm talking about customers today headquartered in California, OK? And if they have a choice, they will not add a single job in this state. And someone's got to hear this."
Zhang's research shows that Silicon Valley's 40 largest firms (as measured by sales) employ just 32 percent of their workers in the Bay Area. Iconic companies such as Santa Clara's Intel do most of their hiring outside California.
That's not necessarily surprising, Zhang said. As companies mature and grow,
they have different cost-benefit considerations -- cheaper labor and other costs to produce goods, for example.
Manufacturers are particularly susceptible. With energy-intensive operations and more exposure to workers' comp issues -- because assembly line workers are more likely to be injured on the job than desk jockeys -- they're feeling the brunt of California's two priciest inputs.
Another issue is whether California is failing to attract businesses from elsewhere.
"Corporations throughout North America and Europe look at California and say, 'We have to serve this market, but can we serve it from someplace other than California?' " said John Boyd, president of the Boyd Co., a corporate site selection consultant in Princeton, N.J.
CALIFORNIA NOT ON THE LIST
For example, Progressive Insurance of Cleveland, a leading auto insurer, set up shop in Phoenix to serve Western states, including California. "We did not include California in the search for that client for all the (standard) reasons -- higher cost of doing business, more regulated environment," Boyd said.
Many experts say the loss of manufacturing jobs is a problem for the entire United States, not just California.
"California is a microcosm of what's happening in the whole country," said Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley's Haas School of Business. "I think the entire country is losing its manufacturing, (and) also call centers, low-end (information technology), software design. The technology is such that you can do that work anywhere."
The outsourcing of jobs "shows up as growth we're not having," he said. "California has a tremendous challenge in the global economy, competing against India, Southeast Asia, China and other cheaper-cost locations in the United States."
Levy agreed. "The nation is facing a serious threat about the cheapness of international locations," he said. "Much more so than the idea that the states are playing football with each other. Texas and California should be allied to get the tech stuff, not fighting over the remainder while China and India make off with (most of it)."
Ironically, one factor that may keep unhappy companies in place is the slumping economy. Moving is capital-intensive.
Even when labor savings are the objective, "most companies won't relocate without taking at least 25 percent of their employees, because if you don't have a core, you'll go out of business.
"When the market comes back, you'll find more companies relocating," said Renzas, the relocation consultant. "Relocation is very expensive to do and also risky. What we're seeing now is companies treading water trying to stay in business until the market turns around and they have some excess cash to make a relocation happen."
San Francisco Chronicle
Carolyn Said
California is known for exporting computers and chemicals, wine and apparel -- and, of course, cheese. But now the state is gaining the unfortunate reputation for exporting something far more valuable: Jobs. Corporate leaders and some economists fear that California's health is in jeopardy because too many companies are pulling up stakes and moving a state or two away, or even overseas, to cut costs.
At Sirenza Microdevices, a staff of 75 executives, engineers and manufacturing workers in Sunnyvale spent the past decade designing and making circuits that cell phone companies use to amplify the signals in their base stations.
Now Sirenza is leaving Sunnyvale for greener pastures -- in Broomfield, Colo.
"We don't see that we're leaving anything," said Bob Van Buskirk, chief executive officer. "We don't need to be co-located in Silicon Valley with suppliers or vendors."
In fact, the company feels it is gaining something: Larger facilities at lower cost.
"We increased the total square footage we have and lowered the overall (real estate) cost by about a third, and we've radically upscaled the quality of the space," Van Buskirk said. Sirenza is paying "something south of $5 per square foot per year" in Colorado, in contrast to the $25 to $30 per square foot annually it paid in Silicon Valley.
Sirenza was not disaffected with California. It decided to move after acquiring a Colorado firm and considering comparable costs of places where all its employees could be together.
But many other businesses are fed up with the state. They say California has become inhospitable.
The reasons are easy to tick off: Burdensome taxes, a morass of complicated regulations, high energy costs and soaring rates for workers' compensation insurance. Then there's the budget stalemate and a gubernatorial recall, not to mention the familiar quality-of-life issues: housing costs, congestion, troubled schools.
"It's very difficult to do business in California because of the expensive costs and the inattention of policymakers to stimulate the economy," said Allan Zaremberg, president of the California Chamber of Commerce. "Business owners here are very much afraid and frustrated."
No entity tracks state business migration, so it's unknown just how many companies have hit the road in recent years. And data, such as employment trends, don't really support the idea that California so far has hemorrhaged jobs any faster than other states.
But civic leaders say events are reaching a crisis point.
One-fifth of business leaders surveyed by the California Business Roundtable and California Chamber of Commerce in April said they planned to expand or relocate outside the state to escape the pressures of California's costs and regulations.
The roundtable and chamber, along with a broad coalition of groups -- a roster of cities and trade associations representing electronics-makers, retailers, insurers, manufacturers, contractors, farmers and oil companies, among others -- consider the situation so acute that in May they started an organization called the Coalition for California Jobs. The group, also called Jobs 1st, is lobbying the state to rein in fees, taxes and regulations.
"The Legislature could go a long way by showing that they want to set an atmosphere that's more friendly to business," Zaremberg said. For example, he said, suspending the impending workers' compensation benefits increase would save employers $1 billion per year.
Richard Kovacevich, CEO of Wells Fargo, California's largest bank, said he's deeply concerned about the state.
"I worry about California because it has a reputation to be an antibusiness state. And I think we're losing huge amounts of job growth," he said in a recent interview with The Chronicle (see accompanying Q&A). "There are companies moving out of California simply because the environment of doing business in California is so negative compared to our neighboring states."
Those states are rolling out the welcome mat for disaffected California companies.
-- Texas has a $295 million war chest to provide incentives for firms that want to relocate to the Lone Star State.
-- Nevada is starting a marketing blitz this summer targeting California businesses.
-- Idaho hands out literature showing how much a California business can save by relocating there.
-- Colorado's governor and Denver's mayor are heading to Silicon Valley early next month to sell their state to tech execs.
Such business poachers say that, more than ever, California is a happy hunting ground.
"California is basically running (businesses) out," said Somer Hollingsworth, CEO of the Nevada Development Authority in Las Vegas. "That's the deal, and we're taking advantage of it."
Nevada will spend $700,000 on a "hard-core, hard-hitting" ad campaign to persuade Golden State executives to go silver.
"A (20-person manufacturing) company can put $500,000 to $700,000 back on their bottom line just through workers' comp and power (savings in Nevada)," Hollingsworth said. And that doesn't even get into the tax savings: Nevada has neither corporate nor personal income tax.
Chuck Alvey, CEO of the Economic Development Authority of Western Nevada, added: "We're hearing from companies in California that they're in distress. It's not (whether) they could make more money (in another state). It's that they've got to get out of California to survive."
Inquiries from California businesses are up 60 percent this year, he said.
In Idaho, Kevin Clegg of the Bonner County Economic Development Corp., said:
"We have an aggressive recruiting program that targets high-cost areas." Southern California and the Bay Area are at the top of the list.
Randy Shroll, marketing manager for the Idaho Department of Commerce, said he's talking to several small California manufacturers about moving there.
Idaho recently landed a high-profile El Cajon company, Buck Knives. The knife manufacturer, which has been in California since after World War II, said it will leave San Diego County for Post Falls next year -- and slash its labor costs. About a quarter of its 250 employees will keep their jobs.
States with a big budget to lure relocating firms have an edge.
Jim Renzas, president of Location Management Services, a Mission Viejo (Orange County) site location and incentives negotiation firm, is helping Orange Plastics of Compton (Los Angeles County) move its 120-person manufacturing operations to Abilene, Texas. Abilene sold the company a $6 million building for $4 million and gave it $2 million in cash to cover relocation costs, Renzas said. Orange Plastics signed a 10-year energy contract that give it a rate one-quarter to one-third of what it paid in California.
BY THE NUMBERS
However, many experts say there is no real exodus taking place. It's just the normal flow of business. While some companies are undoubtedly leaving the state, the loss of jobs in California has more to do with businesses scaling back their operations.
"Most of the jobs didn't go anyplace; they just vanished," said Stephen Levy, director of the Center for Continuing Study of the California Economy in Palo Alto.
To get a snapshot of whether California was losing companies and jobs to Texas, Levy analyzed job trends during the past three years in the two states.
He found that California's 20.7 percent drop in computer and electronics manufacturing positions since May 2000 was less than the 25.4 percent decrease in Texas. It also was below the national average of 21.8 percent.
He then looked at each state's center of high tech. In Silicon Valley, the manufacturing job loss was 29.3 percent -- but it was even steeper in Austin, 32.4 percent.
For total manufacturing jobs, California lost 14.2 percent of its jobs compared with a 13.8 percent drop in Texas and a 14.8 percent drop nationally.
Junfu Zhang, a research fellow at the Public Policy Institute of California,
did a study tracking the movements of Silicon Valley companies from 1990 to 2001 -- admittedly a period that encompasses the full boom and just some of the more-recent slump.
Most companies that relocated stayed in the state: 3,757 left Silicon Valley for elsewhere in California. He found that 364 establishments left for other states, while 209 moved into Silicon Valley from nearby states, resulting in a net loss of 155 establishments and 6,438 jobs.
Meanwhile, 29,247 new companies started up in the region, creating thousands of jobs, he said. Many of those companies were small; a quarter had fewer than five employees. Still, startups employed more than 20 percent of Silicon Valley's high-tech workforce.
"The impact on employment in Silicon Valley from firms moving out is really small," he said. "The new firms greatly outnumber those moving."
LOSING POTENTIAL GROWTH
In fact, with the world's fifth-largest economy and 12 percent of the U.S. population, California will remain attractive for any company that needs to be near its customers.
Rather than mass migration, the real threat may be subtler but more potent. Experts say California's business climate chokes off growth.
Major employers may be committed to keeping their headquarters in California. But when it's time to expand with a new call center, a bigger accounting division or a new assembly line, they look elsewhere -- either in cheaper states or out of the country.
Wells Fargo, for example, has added 35,000 employees in the five years since its merger with Norwest.
"The number of (job) additions in California is far less than the number of additions outside California," Kovacevich said. The bank recently held a hiring fair in Des Moines, Iowa, for 5,000 open positions. "We wouldn't even consider California for those jobs," he said.
A similar attitude is pervasive among businesses using his bank.
"Our customers tell me every day that if they had a job to add, the last place they will think of adding that job is California. Every day. Diverse customers, small, medium, large, tech, non-tech. It is sad. And they don't want it to be that way," Kovacevich said. "I'm talking about customers today headquartered in California, OK? And if they have a choice, they will not add a single job in this state. And someone's got to hear this."
Zhang's research shows that Silicon Valley's 40 largest firms (as measured by sales) employ just 32 percent of their workers in the Bay Area. Iconic companies such as Santa Clara's Intel do most of their hiring outside California.
That's not necessarily surprising, Zhang said. As companies mature and grow,
they have different cost-benefit considerations -- cheaper labor and other costs to produce goods, for example.
Manufacturers are particularly susceptible. With energy-intensive operations and more exposure to workers' comp issues -- because assembly line workers are more likely to be injured on the job than desk jockeys -- they're feeling the brunt of California's two priciest inputs.
Another issue is whether California is failing to attract businesses from elsewhere.
"Corporations throughout North America and Europe look at California and say, 'We have to serve this market, but can we serve it from someplace other than California?' " said John Boyd, president of the Boyd Co., a corporate site selection consultant in Princeton, N.J.
CALIFORNIA NOT ON THE LIST
For example, Progressive Insurance of Cleveland, a leading auto insurer, set up shop in Phoenix to serve Western states, including California. "We did not include California in the search for that client for all the (standard) reasons -- higher cost of doing business, more regulated environment," Boyd said.
Many experts say the loss of manufacturing jobs is a problem for the entire United States, not just California.
"California is a microcosm of what's happening in the whole country," said Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley's Haas School of Business. "I think the entire country is losing its manufacturing, (and) also call centers, low-end (information technology), software design. The technology is such that you can do that work anywhere."
The outsourcing of jobs "shows up as growth we're not having," he said. "California has a tremendous challenge in the global economy, competing against India, Southeast Asia, China and other cheaper-cost locations in the United States."
Levy agreed. "The nation is facing a serious threat about the cheapness of international locations," he said. "Much more so than the idea that the states are playing football with each other. Texas and California should be allied to get the tech stuff, not fighting over the remainder while China and India make off with (most of it)."
Ironically, one factor that may keep unhappy companies in place is the slumping economy. Moving is capital-intensive.
Even when labor savings are the objective, "most companies won't relocate without taking at least 25 percent of their employees, because if you don't have a core, you'll go out of business.
"When the market comes back, you'll find more companies relocating," said Renzas, the relocation consultant. "Relocation is very expensive to do and also risky. What we're seeing now is companies treading water trying to stay in business until the market turns around and they have some excess cash to make a relocation happen."
