Reinventing Manufacturing

Throughout much of the 20th century, the US economy was buoyed by the manufacturing sector, which provided a source of middle-income jobs and drove new waves of innovation. Offshoring and recession have had major impacts on the sector, causing employment to shrink. However, technological advances and shifting global cost factors are now creating new opportunities for domestic manufacturing.

With more manufacturing jobs than any other state, California has a diverse manufacturing base. Its innovation ecosystem, which has led to links between manufacturers and technology companies, makes it particularly well positioned to take advantage of a resurgent interest in domestic manufacturing. This is especially true for products of an advanced technological nature and products that depend on custom design and repid response to markets.

Due to technological change, which has reduced the number of workers required for most production processes, this manufacturing renaissance is unlikely to generate jobs at the high levels it did in the past; however, it is central to a balanced economy and, if supported, can be an important source of economic competitiveness and high quality employment.

People often don’t realize that California has more manufacturing jobs than any other state in the US. As of March 2015, employment in manufacturing sectors totaled 1,271,672 in California, representing 9.3 percent of the state’s total employment.

California’s producers are diverse, are geographically distributed across the state, and include many small and medium-sized manufacturers. Many work hand-in-hand with technology companies, prototyping designs and producing specialized components and advanced end products.

California is also home to some of the world’s largest technology companies that offer the products and services for advancing any production process. The state’s research organizations are pushing the envelope in advancing materials science, process design, manufacturing tools and technology. California’s innovation ecosystem is rich in resources that are relevant for manufacturers.

Many of California’s manufacturers are closely integrated into the state’s innovation ecosystem. Better leveraging of California’s distinctive innovation assets for the benefit of its manufacturers can reach beyond the state’s borders, as many manufacturers are tied with affiliated producers in other states.

As a whole, average annual incomes of $80,000 were reported in manufacturing in 2014. With 2014 average annual incomes across the economy ranging from $20,000 in Accommodation & Food Services to $133,000 in Information, manufacturing jobs tend to fall at the upper end of the wage spectrum.

Source: Greg Matter, Jones Lang LaSalle
Note: The eight industrial land use regions do not directly correspond with the eight manufacturing regional clusters analyzed above because the industrial land use map is based upon proprietary data provided by Jones Lang LaSalle.

Better coordination of California’s research institutions with business activities could help advance the state’s manufacturing ecosystem by supporting economic assets already in place and leveraging existing innovation networks to drive the commercialization process.

What Exists Today

A recent federal initiative highlights the industrial commons approach. In 2014, Congress appropriated $300 million over 10 years to the National Network for Manufacturing Innovation (NNMI) Program to build a network of 15 institutes that would seek to bring together regional manufacturing stakeholders from industry, government, and academia with the goal of facilitating advanced manufacturing processes from basic research to implementation. With investments coming from the Department of Defense and the Department of Energy, seven NNMI Program institutes were established by the end of September 2015.

California has secured one NNMI site in San Jose, and the state is also a national leader in federally-sponsored R&D awards, which often take the form of research performed through academic institutions and companies. In fiscal year 2013, the federal government placed $16.3 billion in research obligations within California, ranking it first among states with approximately 13.1 percent of the total for R&D awards in all states. Only one other state—Maryland with $15.9 billion in awards—surpassed the $10 billion level.

Taking advantage of its strength in public research, California launched the Innovation Hub (iHub) program in 2010 in an effort to harness and enhance the state’s innovative networks. The iHubs seek to improve the state’s competitiveness by stimulating partnerships and job creation around specific research clusters. The iHubs leverage assets such as research parks, technology incubators, universities, and federal laboratories to provide an innovation platform for start-up companies, economic development organizations, and business groups. Today, 16 iHubs span the state, each with a distinctive model for coordinating research and business activities.

Strengthening for Tomorrow

Leverage capabilities across California iHubs, and within individual iHubs, through a dedicated statewide funding mechanism.

Currently, the iHub system operates without any state funding. Instead, iHub activities have been funded through external partnerships—that often then dictate the iHub’s strategies going forward. If the Governor’s Office of Business and Economic Development (GO-Biz) were to provide a pool of competitive funds based on targeted metrics and goals, iHubs could be more effective and account¬able in expanding the innovation infrastructure that underlies advanced manufacturing. Competitive funding also creates an opportunity for iHubs with overlapping capabilities or geographies to partner together to further their reach.

Invest in shared manufacturing spaces and provide avenues for small manufacturers and start-ups to engage with and commercialize new technologies and processes.

Particularly in portions of the state where national laboratories do not exist, there are opportunities for the state to invest in high-tech facilities with state-of-the-art equipment that can support specific innovative regional clusters. An example of this approach is New York State’s commitment of $225 million to investments in the Buffalo/Niagara region that would build a cluster of green energy businesses. The money will go toward state-owned facilities that will house equipment and machinery that clean energy firms need to develop new products but cannot easily afford on their own. To catalyze participation among a wide range of manufacturers in similar programs, California can employ a strategy resembling the small business voucher program used in some national labs. Small manufacturers would submit business plans to a governing body that would select companies to participate in the shared facility. These manufacturers would then be given credits to be spent through utilization of equipment and other business assistance.

Create improved coordination across engineering research functions at University of California campuses.

Similar to the multi-state strategy employed by the NNMI designee headquartered in Tennessee—which includes participants from eight states—future California applications for federal grants could consider ways to better leverage competencies and areas of specialization across the UC sys¬tem. For example, UC Davis has a well-regarded machine tools program; UC Irvine’s core competencies include defense-related applications and medical devices; UCLA has a smart manufacturing research center; UC Berkeley is a leader in sustainable manufacturing; and UC Santa Barbara has core strengths in materials. Creating cross-campus partnerships in an application supported by businesses and other research and manufacturing organizations across the state would allow California to better leverage the assets concentrated in distinctive regions.

Advanced manufacturing requires advanced workforce skills. As the existing manufacturing workforce ages and nears retirement, recruitment poses a major challenge for producers of advanced products or those utilizing advanced processes. Initiatives are needed to match workforce training with the needs of manufacturing employers, through apprenticeship and career technical education programs and a statewide certification system geared to advanced manufacturing skills.

In a 2011 Deloitte survey of manufacturers, 74 percent of respondents indicated that workforce shortages or skill deficiencies in production roles were having an impact on their ability to expand operations or improve productivity. In some cases, the loss of manufacturing activities has eroded the technical skills base, pushing manufacturers to locate in other locales.

What Exists Today

Of the $4.3 billion spent annually by the federal government on technology-oriented education and training, only one-fifth goes toward programs supporting vocational and community college training programs. Given this level of national funding, California workforce programs for manufacturing have been centered on better utilization of the community college system to place students on career paths in manufacturing.

Under the California Community Colleges Economic and Workforce Development Program, industry-specific workforce services are coordinated by regional Deputy Sector Navigators who align community college and other workforce development resources with the needs of industry sectors. Advanced manufacturing is one of 10 priority areas under the program, with goals that include identifying and filling gaps in community college curricula with the help of industry partners and attracting more students to career paths in manufacturing and other technical areas.

The Career Technical Education Pathways Initiative aims to engage learning institutions at all levels in improving linkages, increasing readiness of secondary students for postsecondary education, and increasing student success and training in postsecondary education. Grants provided through the program help in the development of local and regional career technical education pathway systems. For example, the Bay Area Community College Consortium is developing new curricula with eight colleges and 28 manufacturing industry partners to strengthen the alignment of training programs with regional industry needs. It has also created work-based learning opportunities at six Bay Area companies.

Strengthening for Tomorrow

Initiate apprenticeship programs to build skills for new workers and to train those that are changing fields.

Corporate apprenticeship programs can be used to draw younger workers into the manufacturing field in California. By combining classroom training with on-the-job experience, the costs of training new employees for manufacturing skills can be split between the educational system and industry. Germany employs the best practice apprenticeship model under which two-thirds of the country’s manufacturing workers are trained through partnerships among companies, vocational schools, and trade guilds. Germany’s system is part of the reason the country’s youth unemployment rate is below 8 percent, less than half of the rate in the US. Switzerland offers another successful example of public-private cooperation to support manufacturing and other skills development through apprenticeships.

Domestically, the Department of Labor supports public-private partnerships that establish apprenticeship programs in advanced manufacturing. At the state level, South Carolina has been able to stimulate apprenticeships through a $1,000 tax credit per year per apprentice. A similar initiative in California can be tailored to small and medium manufacturing enterprises that cannot otherwise afford the in-house training programs that will be needed to bridge skill and generational gaps going forward.

Support state-funded technical education programs through sustained funding connected to metrics for effectiveness.

The 2015–2016 California state budget established the Career Technical Education Incentive Grant Program to spur partnerships between school districts, colleges, and businesses. The budget provides $400 million, $300 million, and $200 million in each of the next three years, respectively, for competitive grants. These grants would require a dollar-for-dollar match and proof of effectiveness across a range of outcomes such as graduation rates, course completion rates, and the number of students receiving industry credentials. Additionally, the 2015–2016 California state budget extended the Career Technical Pathways Initiative by one year, which will sustain a program that has been in existence since 2005 and can be instrumental in promoting advanced manufacturing career exploration for community college students. Attention should also be paid to the sustainability of these programs after state funding expires.

Adopt a statewide certification for advanced manufacturing skills across strategically selected schools.

California can develop a manufacturing certification model that allows students to sequence credentials over time to build comprehensive advanced manufacturing skills. These certifications should range from machining and tool and die making to maintenance technician and quality control skills. They should also be compatible with the National Association of Manufacturers’ skills certification system, so that the credential can be transferred to work in other states. Designating strategic community colleges as “manufacturing schools” could also sharpen the manufacturing focus across the state and give regional industry participants a more streamlined means to participate in curriculum development and to recruit future workers.

Pursue higher goals for incorporating STEM education and its associated career pathways into curricula for elementary and high schools.

Educational objectives in Science, Technology, Engineering, and Math (STEM) continue to be high priorities in school districts around the state. Programs that bring robotics, machining, and other applied technologies into K–12 classrooms can begin to fill the talent pipelines needed for advanced manufacturing in the state. By reaching students at an earlier age, these types of programs can provide awareness of the options available to students who may not wish to pursue a four-year degree, and these programs can increase the knowledge and appeal of manufacturing careers.

To create a stronger market for investment in the state’s manufacturing base, especially in small manufacturers, California could employ a tax credit for investments made in the sector. If the benefits of the Industrial Development Bonds program are marketed more aggressively through local economic development channels, more manufacturers will be encouraged to take advantage of low-cost capital when expanding or moving their operations. Since prototyping can be costly for entrepreneurs and new companies that lack access to expensive manufacturing tools, the creation of local facilities that provide access to manufacturing equipment can help small manufacturers conserve resources and move their products more quickly to market.

What Exists Today

To assist manufacturers expanding their operations within the state or looking to relocate, the State of California has created a package of incentives.

The California Competes Tax Credit is negotiated between GO-Biz and businesses wanting to come to California or grow within the state. Credit amounts depend on the number of jobs that will be created in California and the amount of investment by the business. Of the $151.1 million of tax credit available in fiscal year 2014–2015, 25 percent was reserved for small businesses with sales less than $2 million.

For each taxable year between 2014 and 2020, the New Employment Credit is available to a tax-paying business that hires a full-time employee. The work performed by the employee must occur within an economic development area designated by the state, based on employment and poverty levels. In order to qualify for the credit, the business must have a net increase in the total number of full-time employees in California.

Eligible manufacturers can finance capital projects through Tax-Exempt Industrial Development Bonds, which are issued by a local authority—such as an economic development authority or joint powers authority—and are approved by the California Industrial Development Financing Advisory Commission. With a lower cost to borrow stemming from the tax-exempt status, manufacturers can use the bond proceeds to finance the acquisition and rehabilitation, or construction of manufacturing facilities.

Like many other states, California provides a partial sales tax exemption for manufacturing equipment. The exemption, which is intended to retain and attract manufacturers, applies to purchases of capital equipment made from July 1, 2014 through June 30, 2022 and reduces California state sales tax by 4.1875 percent on up to $200 million of a manufacturer’s purchases. A company that takes advantage of the exemption could potentially save up to $8.375 million in sales taxes per year. Eligible purchases include basic manufacturing equipment as well as food processing and biotech R&D equipment.

Strengthening for Tomorrow

Institute a special tax credit for venture capital investments in small enterprises that manufacture products within the state.

California’s concentration of venture capital investment has contributed to its strength as an innovation hub for advanced technologies and services, especially in relationship to computing and healthcare. In 2014, California-based companies received 56 percent of the $48 billion of venture capital investment in the US. However, the types of enterprises that venture capital generally funds are an imperfect fit with manufacturing, as sectors such as advanced materials and biotechnology require larger capital outlays and longer times to exit than are usually funded through the venture capital model.

To create a stronger market for investment in the state’s manufacturing base, especially in small manufacturers, California could employ a tax credit for investments made in the sector. At least 21 states offer income and business tax credits for angel investments; these credits range from 15 percent of the investment in Colorado to 100 percent in Hawaii. Some states (Arizona, Ohio, and Maine) offer higher credits for investing in businesses that are located in targeted locales or that operate within a specific sector (nanotechnology in Wisconsin). A similar strategy in California can be tailored to investments in small manufacturers that produce at least a specified percentage of their products within the state.

Make manufacturers more aware of state-provided funding sources.

California has been able to lower overall costs for manufacturing capital expenditures by providing Industrial Development Bonds for project sponsors. However, only seven manufacturers used this financing mechanism between 2012 and 2014, with $32.5 million issued. Historically, loan reporting requirements and lengthy approval processes have tended to lower manufacturers’ interest in applying for bond issuances. If the benefits of the program are marketed more aggressively through local economic development channels, a greater number of manufacturers will be encouraged to take advantage of low-cost capital when expanding or moving their operations.

Support the creation of local facilities housing manufacturing equipment that can be used for product prototyping and as a way to help small manufacturers conserve resources and move their products more quickly to market.

One of the key reasons that new product ideas fail to receive investments that would enable them to be manufactured at scale is the lack of a prototype. Prototyping can be costly for new companies that lack access to manufacturing tools, though organizations in California are beginning to provide these tools to entrepreneurs. For example, Prospect Silicon Valley, a nonprofit technology commercialization catalyst supported by the City of San Jose, assists emerging companies via its demonstration center, a $12 million, 23,000 square foot facility with industrial and lab space. There, companies are able to demonstrate new technological innovations in a real world setting, helping them bring their products to the market faster.

Industrial land use policies can alleviate land availability issues, particularly as housing and other commercial uses encroach. Limiting windows for CEQA challenges and creating special manufacturing zones at the local level, such as Industrial Priority Corridors, can give manufacturers greater certainty when making long-term investments.

What Exists Today

The high cost of operating a business in California is often cited as a reason why manufacturers choose to locate facilities in other states. According to an August 2014 study by the California Foundation for Commerce & Education, California ranks 43rd of all US states in terms of general business costs, ranking in the bottom 10 in terms of the costs of taxes, litigation, energy, and labor. The study also found that the average costs of auto manufacturing and machine shops in California are respectively 27 percent and 14 percent higher than the average for other western states.

The Impact of Environmental Regulations on Manufacturers: The environmental reviews that CEQA requires can be challenged in court by any group opposing the project (often for reasons that are not environmental in nature), adding time, cost, and legal complications to new projects. For example, Japanese light-rail manufacturer Kinkisharyo International almost scuttled plans to build a new facility in the Southern California city of Palmdale in 2014 due to a CEQA challenge from labor groups. While the two sides eventually settled, the Kinkisharyo example highlights the unintended consequences that CEQA can have on manufacturing. Given the debilitating economic impacts that CEQA can have, reform measures continue to be a priority for many policymakers.

High Costs of Workers’ Compensation in California: Workers’ compensation premiums make up an average of 1.5 percent of manufacturers’ total employee compensation costs in the US. (These costs include wages, paid leave, retirement and savings, and other legally required benefits.) While a small overall cost, that percentage is much higher in California—at 3.5 percent of costs—as of January 2014. As neighboring states such as Arizona, Oregon, and Nevada have workers’ compensation premium rates well below the national median, the added costs of operating in California can deter some manufacturers from expanding their in-state workforces. However, this is less the case for high-value producers where capital costs far outweigh the costs for labor.

Limited Land Availability for Industrial Use in Urban Areas: In California’s two leading manufacturing regions, the San Francisco Bay Area and Los Angeles, manufacturing development is being constrained by a lack of land availability as well as by a scarcity of vacant manufacturing facilities that could be repurposed for alternative uses. Bay Area industrial vacancy rates are currently approaching the historic low levels set in the late 1990s during the dot-com boom. Larger manufacturers are beginning to look outside of the immediate Bay Area to markets in San Joaquin County where available options and rental rates are more favorable.

Strengthening for Tomorrow

Create a more targeted mechanism for CEQA challenges to environmental reviews.

Limiting windows for CEQA challenges would be a first step toward changing CEQA from the barrier that it often can be to the environmental tool it was intended to be. In the 40 years since CEQA was passed, Congress and the California Legislature have adopted more than 120 laws to protect environmental quality in many of the same areas required to be mitigated under CEQA. These include laws like the Clean Air Act, the Clean Water Act, and the Endangered Species Act at the federal level, as well as greenhouse gas emissions reduction standards (Assembly Bill 32) and a requirement to prioritize transportation projects in preferred growth areas (Senate Bill 375) at the state level. CEQA reform should take into account the environmental standards that these laws seek to meet while introducing increased accountability, transparency, consistency, and timeliness to CEQA processes.

Identify areas of manufacturing concentration and desig¬nate those areas for prioritization in land use planning.

By the creation of special designations, such as Industrial Priority Corridors, cities across California can preserve urban industrial bases, and manufacturers can have greater certainty in making long-term real estate investments. Additionally, cities should consider balancing the competing needs of residential and commercial uses while prioritizing infrastructure investments in these areas. For example, zoning that promotes and requires greater density and mixed, compatible uses (e.g., commercial and industrial space alongside residential) can spur the creation of creative corridors for the advanced manufacturing economy. As advanced manufacturers move toward smaller-scale custom manufacturing with new technologies, the preconception of manufacturers needing large parcels of land to house buildings with smokestacks and high noise levels no longer holds. Instead, policies should be explored to allow manufacturing activities to coexist with other uses in populated areas.