Episode Show Notes
Episode 2 features Beacon Economics Research Manager Taner Osman. Taner discusses the current state of California manufacturing, particularly in terms of employment and competitiveness. In addition, Taner covers the diversity of California’s various regions and industries, supply chain challenges facing California SMMs, and key elements SMMs should consider including in their manufacturing strategies.
Taner Osman is Manager of Regional and Sub-Regional Analysis at Beacon Economics. Dr. Osman plays a leading role in many of the firm’s principal research projects, which currently include examining the potential effect of minimum wage law changes on California’s restaurant industry, and developing labor market analyses and industry profiles for a variety of regional economies. He is also a postdoctoral researcher at the Lewis Center for Regional Policy Studies and an instructor in the Department of Urban Planning at the University of California, Los Angeles. His research focuses on how local economic development and land use policies affect the performance of industries and regional economies. He also specializes in the impact of high-technology industries on local economies. Dr. Osman co-authored the book “The Rise and Fall of Urban Economies,” a comparative study of the Bay Area and Los Angeles economies published by Stanford University Press. He publishes scholarly work in the areas of economic development, regional economics, and land use planning. Dr. Osman holds a Ph.D. in Urban Planning from the University of California, Los Angeles with a specialization in regional and international development.
00:01:16 - Introductions
00:01:44 - Meanings of “employment” and “competitiveness” when used by economists
00:03:36 - Thoughts regarding employment and competitiveness
00:04:44 - Current state of manufacturing in the U.S., particularly in terms of employment and competitiveness
00:07:36 - Factors driving the increase in productivity nationwide
00:08:20 - How California fits into the national picture of increased productivity
00:09:52 - Industry sectors in which California has a competitive advantage
00:12:12 - Health of the manufacturing industry across various regions in California
00:17:05 - Drivers, trends, and factors of California having a concentration of high-tech industries
00:20:35 - Major challenges facing the manufacturing industry in the state
00:23:42 - Discussion of supply chain challenges for California businesses
00:26:13 - Thoughts regarding when supply chain issues will resolve
00:28:43 - How recent global events shaped the trajectory of manufacturing in the U.S.
00:29:59 - Where California fits into retrenchment
00:32:36 - What is important for policymakers to be aware of and to consider in their decisions regarding legislation that can assist manufacturing in the state
00:35:01 - Key elements to include in overall manufacturing strategy
00:35:44 - Outlook for the manufacturing industry in California
Gregg Profozich [00:00:02] In the world of manufacturing, change is the only constant. How are small and medium-sized manufacturers, SMMs, to keep up with new technologies, regulations, and other important shifts let alone leverage them to become leaders in their industries? Shifting Gears, a podcast from CMTC, highlights leaders from the modern world of manufacturing, from SMMs to consultants to industry experts. Each quarter we go deep into topics pertinent to both operating a manufacturing firm and the industry as a whole. Join us to hear about manufacturing sectors' latest trends, groundbreaking technologies, and expert insights to help SMMs in California set themselves apart in this exciting modern world of innovation and change. I'm Gregg Profozich, Director of Advanced Manufacturing Technologies at CMTC. I'd like to welcome you.
In this episode, I'm joined by Beacon Economics Research Manager Taner Osman. Taner discusses the current state of California manufacturing, particularly in terms of employment and competitiveness. In addition, Taner covers the diversity of California’s various regions and industries, supply chain challenges facing California SMMs, and key elements SMMs should consider including in their manufacturing strategies.
Welcome, Taner. It’s great to have you here today.
Taner Osman [00:01:16] Hi, Gregg. It's great to be here.
Gregg Profozich [00:01:17] Taner, can you please take a moment or two and tell us a little bit about yourself?
Taner Osman [00:01:21] Sure. I'm a research manager at Beacon Economics. We're an economic consulting firm. In particular, I focus on regional economies and industry analysis. My background is in economic development. I hold a Ph.D. in urban planning from the University of California, Los Angeles, where I specialized in regional and international development.
Gregg Profozich [00:01:44] Excellent. Well, thank you so much. I'm really glad you're here, and I'm excited to have our conversation today. I’m looking forward to hearing your perspectives and your insights. Let's get started. We're here to talk about a recent research study commissioned by CMTC and conducted by Beacon Economics. There have been a number of headlines that tell a negative story about manufacturing in California over the past few years—companies leaving the state, the high cost of land, housing, and overall living, government regulations, falling manufacturing employment numbers. You could read that all, and it might be easy to get the idea that manufacturing isn't doing well and won't be around very long in California. This research study seems to say otherwise in a number of key areas. Let's get into some of the details. The study covers two important aspects of the manufacturing sector: employment and competitiveness. To set the context, when an economist uses these terms, what do they mean, what's included?
Taner Osman [00:02:35] Well, when we talk about employment, we're typically referring to jobs. That is simply the number of people who are employed by manufacturing companies. Competitiveness ultimately refers to relative strength. When we consider the strength of different economies, we’re ultimately referring to areas in which one place has a larger share of its employment and resources devoted to one sector of an economy compared to another. When we consider the competitiveness of manufacturing in California, we're ultimately trying to understand those areas of the manufacturing industry in which California has a strength or a higher proportion of jobs and output compared to other places in the nation.
Gregg Profozich [00:03:19] Competitiveness is a relative term. You have to be comparing one thing to another.
Taner Osman [00:03:24] Absolutely, yes.
Gregg Profozich [00:03:26] A lot of our conversation today will be about California vis-à-vis the nation or vis-à-vis region within the state of California. Is that correct?
Taner Osman [00:03:26] That's correct, yes.
Gregg Profozich [00:03:34] Any trends from a high level we can talk about before we get into it? I'll have a question in a moment about the US state of manufacturing, California state of manufacturing. Anything else on competitiveness and employment in and of itself?
Taner Osman [00:03:48] With respect to competitiveness—again, these would be the areas in which California has strength relative to the rest of the nation—when we consider the trend—our study looks at a period going back to the early 1990s—where we see California gaining strength relative to the nation over time is with respect to what we've considered to be high tech manufacturing. Proportion or the share of jobs in California within the manufacturing sector, which are found in the high-tech components of the manufacturing industry, is greater than what we see nationally. But that strength, that relative outperformance, has been growing over time. Not only was California's manufacturing sector devoted to high-tech aspects in the early 1990s compared to the nation, the relative difference, or California's relative strength, has been growing compared to the rest of the nation over time.
Gregg Profozich [00:04:44] Wow. Interesting. Big picture. What is the current state of manufacturing in the US in overall terms, but particularly in terms of employment and competitiveness?
Taner Osman [00:04:55] I think there's a couple of things to consider. There's the short-term effects and the longer-term effects that we can observe. Obviously, COVID-19 did have an impact on the manufacturing sector nationally following the outbreak of the pandemic in the US in the early parts of 2020. The nation lost around about one and a half million manufacturing jobs. We're just about at the point where we've recovered most of those jobs. At that time—again, in the first and second quarter of 2020—the unemployment rate for manufacturing workers had increased to 13.2%. It's now fallen to 3.2%. We have seen a positive bounce back compared to where things stood a couple of years ago. Now, one of the interesting dynamics, which isn't specific to the manufacturing sector, but we are here to speak about the manufacturing sector today, is that nationally we see a lot of job openings that are unfilled in the sector. We have close to a million unfilled positions nationally. The precise number would be around about 850,000 job openings in the sector today. To put that number in historical perspective, prior to the pandemic, the average number of job openings in the manufacturing sector in a given year for a period of time, for maybe the 20-year period prior to the pandemic, we would have had around about half a million job openings in manufacturing on an annual basis or at any given point in time. That number has shot up to 850,000 today. In terms of the macro picture, that's some of the challenges that are facing the national economy today. We've seen a good bounce back from COVID, but we do see a lot of job openings in the sector, which is somewhat historical in their magnitude. In terms of where the manufacturing sector stands within the US economy, today, manufacturing jobs account for just under 9% of all jobs in the national economy and just under 12% of national GDP. Now, over the last 20 or 30 years, as has been widely reported, there has been loss of manufacturing jobs. But over this period, we've seen output in the manufacturing sector increase. While manufacturing jobs are down by around about a third over the last 20 years, output in the sector is up by around about 40%. What does this tell us? This tells us that within the manufacturing industry over this period of time, workers have become more productive. On a per-worker basis, each worker is producing more output than they would have been 20 years ago.
Gregg Profozich [00:07:32] It's a productivity increase story.
Taner Osman [00:07:34] Absolutely, yes.
Gregg Profozich [00:07:36] Do we have any data to say what that's from? Is it technology? Is it we're raising smarter kids? What is it that you think is driving that?
Taner Osman [00:07:47] It’s really driven by two primary factors. The first factor would be that the sector today is employing higher skilled workers compared to 20 years ago, but there's a technology aspect, as well. Most of the time, when we look at productivity increases—this isn't just specific to the manufacturing industry; this is an economy-wide observation—normally, productivity increase is coupled with advances in technology. Those two factors have really accounted for the productivity increase over the past 20 years.
Gregg Profozich [00:08:20] Where does California fit into the national picture?
Taner Osman [00:08:24] There's a couple of ways to think about this. Again, I'll speak about jobs and GDP. California's contribution to manufacturing jobs nationally is around about 11%. Eleven percent of all manufacturing jobs in the US are found here in California. That has been quite constant over the past 20 years. That share hasn't changed too much. With respect to manufacturing output—the value of all the goods which are produced nationally—California accounts for around about 15% of national manufacturing output. We have seen an increase over the past 20 years. If we were to go back to the year 2000, California accounted for around about 11% of manufacturing output. Today it stands at around about 15%. I think it would be tempting for some to say, “Well, California is a large state, so, of course, it produces more output with respect to manufacturing than is found in other states.” But if you were to look at the ranking of states and how much manufacturing output each state produces, the rankings aren't just correlated with sites. Yes, California is the largest state, so you might expect it to have more output, but if you look at some of the states which are at the top of the output rankings, whether that is in Ohio or Indiana, these are places which don't have particularly large populations. California is producing a lot of manufacturing output because it's large but also because it has a relative strength in the sector nationally.
Gregg Profozich [00:09:52] Overall how competitive is California both domestically and globally? In which industry sectors does California seem to have a real advantage?
Taner Osman [00:10:01] With respect to California's relative strength, we can group the subsectors of the manufacturing industry into different categories. The manufacturing sector is incredibly diverse. On the one hand, you have the manufacturer of aircraft; on the other hand, you have the manufacturer of agricultural products. It's an incredibly diverse sector of the economy. But what we can do is take these individual subsectors and group them into broader categories based on different factors. One way to do this is to look at the type of technology which are used in the production process. We can think of some manufacturing sectors as being high technology manufacturing sectors, whereas other manufacturing sectors might be low technology. Again, a lot of this comes back to the sophistication of the production techniques and the type of technology which is used in production. Nationally around about 18½% of manufacturing jobs is found in what we might consider to be high technology manufacturing. In California, that share is almost double; it's around about 37%. In that most sophisticated aspect of the industry, California has double the share of the workers that is found nationally. If you look at the lowest technology aspect of manufacturing, California has a smaller share of jobs than is the case nationally. California tends to be comprised of more sophisticated, high-value-added manufacturing components than is the case nationally. By the way, that difference has been growing over time. The difference that we see between the share of jobs in high-tech manufacturing between the US and California that gap between the two has been growing over the past 20 years, whereas California's sector has been becoming much more technologically sophisticated than has been the case nationally.
Gregg Profozich [00:11:47] Wow. There's been something of a natural organic progression towards higher-tech and, therefore, higher productivity, higher-skilled workers but better-educated workers. Is that what the data is saying?
Taner Osman [00:12:09] Absolutely. That is exactly what has been happening, yes.
Gregg Profozich [00:12:12] Let's get a little bit more granular now. California is a massive state with a diversity of industries. Let's talk a little bit about the various regions. What is the health of the manufacturing industry across the various regions in California? San Diego has a very different economy than Fresno, than the Bay Area, than Redding up in the far north. Let's talk about those regions and some of that diversity.
Taner Osman [00:12:34] California is an incredibly diverse state. We have, I think, 59 counties and hundreds of governments. We need an easier way to reference geographical differences. Much of the output in the California economy is dominated really by the San Francisco Bay Area and Southern California. That's not to say that there's not important contributions coming from these inland areas, but a very large proportion of the state's output comes from the north and southern California. If we were to just use this as a simple dichotomy, there are very clear differences between the manufacturing industry between north and south. In the previous answer, we were discussing differences in the manufacturing sector with respect to the extent to which it is high technology or relying on low technology production processes. In northern California, 50% of the jobs are found in what we consider to be the high technology aspects of the manufacturing sector. That's 50% compared to a statewide average of 37% compared to a national average of 18 1/2%. Northern California is very heavily specialized in these high technology components of the manufacturing industry. This has increased over time. Just since 2010, 46% of the jobs in northern California would have been found in high technology. That number has grown, again, to 50% to date. If we were to look at the low-tech manufacturing, that accounts for around about 26% of jobs in northern California. That is down from 30% in 2010 and a competitive statewide average of 31%. Northern California has a greater concentration of jobs in high-tech manufacturing compared to the state and the nation and has a lower proportion of low-tech jobs compared to the state and the rest of the nation. If we were to look at southern California, again, we do see a stark difference with the north. If we look at the share of jobs found in high-tech manufacturing in southern California, that number is around about 34%. The same number in northern California is 50%; in southern California that number is 34%. Interestingly, in southern California, that number is lower than the state average. Statewide around, about 37% of manufacturing jobs are found in high tech, 34% in southern California. When we refer to high technology industries, what are the subsectors that might be grouped as high technology? Some examples might be aircraft and spacecraft manufacturing, the pharmaceutical sector, also medical precision, and optical instruments. These sectors of the economy where the manufacturing process itself is sophisticated relies to a great extent on technology. These are also industries which are home to a lot of research development. At the other end of the spectrum, examples of low-tech technology industries would be industries such as food products, beverage and tobacco manufacturing, textiles, cut and sew apparel, leather and footwear manufacturing. Again, the key differentiation between these two different groups of industries would just be the level of sophistication, for lack of a better term. The type of technology which is relied upon to produce the goods across these two different sectors in that first group, we typically think of these subsectors as being higher value-added components of the economy, whereas the latter group typically we would think of as being lower value-added components of the economy.
Gregg Profozich [00:16:15] But a lot of times both of them have to play with each other within a supply chain. It's the lower-tech, the basic metal benders, the fastener manufacturers, et cetera that do feed-in and enable some of those higher-tech manufacturing assemblies of aircraft, spacecraft, biomedical products, et cetera.
Taner Osman [00:16:32] That is certainly the case. A couple of examples spring to mind. A lot of the components, for example, that go into the production of semiconductors are related to commodities which are extracted. Yes, if we think of the supply chain more broadly, it's not quite as simple as saying that one industry is comprised of entirely high-tech production processes, whereas one is comprised entirely of lower-tech processes, because, yes, at times there are supply chains which link different components together.
Gregg Profozich [00:17:05] Taner, you were going through the industries a moment ago. I think that makes a lot of sense and gives a lot of clarity. Thank you for that. Can we talk about maybe some of the reasons why California has taken the path it has in the last 20 or 30 years? Why has it become so much more high-tech? What are some of the drivers, trends, factors that have taken us that way?
Taner Osman [00:17:25] If we were to use a very broad dichotomy, we can probably divide manufacturing sectors into those which are competitive on the basis of cost and those which are competitive on the basis of innovation. A lot of what has happened, not just in California but also in the national economy over the last 30 or 40 years, is that we've seen a lot of the manufacturing where the products which are price sensitive, a lot of those jobs in those sectors of the economy have disappeared from California and have disappeared nationally. There are probably two dimensions to this. One of these is due to automation, and the other is due to globalization, where producers have sought out, in some respects lower-cost parts of the world. California hasn't competed for those parts of the manufacturing sector for a good 20 years or so now because it is one of the highest-cost places not only of the US but of the world. Where California does have a strength is with respect to, as we've discussed, these higher technology aspects of the manufacturing sector of the economy. Why is that the case? Well, a lot of innovation occurs in California. Initially, when products are innovated, we typically see that manufacturing occurs pretty close to where the innovation of a particular product occurs. It's over time that we see that manufacturing disperse. If I was to give you a concrete example of what I mean here, we can think of Tesla. The innovation underlying Tesla vehicles occurred primarily in the San Francisco Bay Area, and initially, the manufacture of Tesla vehicles occurred in the Bay Area. Obviously, Tesla has a big plant in Fremont. A lot of these prototypes were developed close to where the innovation was occurring. A few years later, now we're starting to see some dispersion of the production of Tesla vehicles to other parts of the US and, of course, other parts of the world. That is where California’s strength in manufacturing lies. It’s that California is innovating, creating new products. Initially, we tend to see the manufacturer of these new products occur relatively close to home. Of course, another dimension of this is just that California has a higher-skilled labor force than is the case nationally. In a global context, those aspects of the industry which require or rely on high skilled workers are going to find a natural home in California.
Gregg Profozich [00:20:02] It's a natural outcome of the innovation portions of the economy in combination with other factors of economics, housing costs, et cetera. Those things have all come together. If I'm hearing you correctly, the California manufacturing economy has adapted and found those places where industries can thrive here, because they're doing higher value-added and they're higher-tech, and those that compete based on cost in many cases have drifted away. Is that a summary?
Taner Osman [00:20:32] Yeah, that's absolutely right.
Gregg Profozich [00:20:35] All right. Let's go into terms of looking forward to the future a little bit and current state to that end. What are the major challenges facing the manufacturing industry in the state?
Taner Osman [00:20:46] We can think of short-term impact, and we can think of more medium- to long-term impact. I think the current challenge facing the state—this is a challenge which is facing the nation, also—is the labor shortage. Earlier I referenced the number of job openings in the United States and how this is much higher than has been the long-term trend. This labor shortage is something which is particularly acute in California. One of the impacts of COVID-19 is that we saw a lot of people leaving the labor force, but California experienced that to a much greater extent than was the case nationally. California has some very specific issues with respect to the labor shortage. One of them does relate to cost. California has incredibly high house and land prices. As we see in the media every day, those house prices have increased quite a clip over the last couple of years. When you have a state which has high housing costs to begin with and increase those housing costs by 20%, 25%, of course, that is going to put a strain on workers in the state. It's not something which is specific to manufacturing. But things that the state can do to alleviate the housing shortage and house price crisis that we see is something which would be a net positive for the manufacturing sector. With respect to more manufacturing-specific challenges, I mentioned before that when it comes to the manufacturing industry that California is not competing on cost; it is competing on its ability to manufacture highly sophisticated products. One of the challenges that California will see is its ability to continue to be this innovation hub over the next 20 or 30 years. We could have said this about California at any point over the last 50 years. When will the innovation train end? California has had this remarkable capacity to keep on the front line of innovating new consumer products. As I mentioned before, that has a big positive for the manufacturing sector just because of initially that close relationship between where innovation occurs and where the manufacturer of those innovative products occurs. That is going to be a challenge that California faces. Can its employers, can its people continue to innovate, because that has been such a tailwind for the manufacturing sector. I think another challenge that California will face would be not just the shortage of laborers but it's the type of worker that California has to stay ahead with respect to ensuring that workers have the training they need to fill these jobs which are being created within the manufacturing sector of the economy.
Gregg Profozich [00:23:42] How about supply chain as related to major challenges for California?
Taner Osman [00:23:47] I think over the last couple of years, there have been a couple of events globally which have really enabled some reflection on the way that production and supply chains are configured across the world. Of course, COVID-19 was a big contributor in this regard. As we know, the manufacturer of any good relies on an intricate web of suppliers across the nation. But one thing that has happened over the last couple of years is that governments across the world have had different responses to dealing with the pandemic. What this has meant is that as different parts of the global economy have shut down as local measures have been put in place to stem the spread of the virus, this has had the effect of clogging up supply chains. This has had all sorts of impacts on the economy, not least of which is the increase in prices for producers, but also, it has slowed down the manufacture of certain commodities. Semiconductors is perhaps the best illustration of this. If you were to look at the number of automobiles that are going to be manufactured in the US this year, it's projected that we're going to produce around about two and a half million cars less than we would have, had supply chains been operating at full capacity. We don't really know how this impact on supply chains is going to shape the behavior of firms. There are many people out there who are calling the end of globalization, that this is going to lead to a period of retrenchment almost, whereby nations start to onshore manufacturing from some parts of the world to areas which are closer to home. But it's difficult to know what the precise impact will be. I think that what is the most likely outcome is that we're going to see a diversification in the geography of production across the world. Rather than organizations or companies being reliant on particular countries, they will start to diversify locations with respect to the production of core inputs to final products. California can certainly capture some of that reimagination of how supply chains exist. But there are a variety of other countries and parts of the US which could see a boost in manufacturing if we have less of a reliance on certain countries within the world. Of course, I'm referring specifically to China in particular.
Gregg Profozich [00:26:13] As you were speaking, I was thinking about the supply chain and different pockets, if you will, of different ways of dealing with the pandemic. There's a surge in this country, and they deal with it in a certain way. The same surge in different countries, they deal with it in a different way. But essentially, those variations in when people can go to work and how production can be staffed and moved really are all variabilities that then begin adding up. All the variances begin multiplying and create these disruptions that we're seeing. Any idea about when these kinds of things are going to start to level out, moderate, return to whatever the new normal looks like, or are we in the new normal?
Taner Osman [00:26:52] That's a good question. I don't think that we're in the new normal. I do think that we are in a period of recalibration. If we were to default back to things as they were before, for that to happen, we would have to have a world in which we don't see these sporadic pockets of the world being shut down in response to the spread of the virus. I think that it's unlikely that we will return to normal this year or in the next 18 months or so. It's very difficult for me to predict how different parts of the world will respond to the virus. What does that mean? That means that I think that within manufacturing companies across the board, there is rethinking which is occurring; there is adjustments that are occurring. One example would be in the textiles sector. What we saw over the last couple of years and even prior to COVID, there were, of course, trade tensions between nations, notably between the US and China. One of the responses to manufacturers at that time was to remove some of the textiles production from China to Vietnam and other parts of Asia. I think that in real-time, companies are making adjustments. We will enter a new normal in which companies don't have all their eggs in one basket, so to speak, that they have a much more diversified supply chain structure. Of course, its supply chain is pretty diverse as it is. But what I mean by diversification in this context is that you won't have the reliance on one hub that could clog up the entire supply chain. If there's a particular input upon which a particular product relies, it's not going to make too much sense for a company for that particular product to be exclusively produced in either one country or one city. You would see a greater diversification in that respect.
Gregg Profozich [00:28:43] In the news lately Ukraine, obviously, with the invasion by Russia. How have the global events shaped the trajectory of manufacturing here in the US?
Taner Osman [00:28:53] I think that we spoke about some of the supply chain dynamics in the last segment. But the other impacts in particular of the war in Russia, but also due to COVID, has been the impact on the cost of commodities. If we were to look at the price of oil, the price of various metals, we have seen a lot of inflation over the last 18 months to 2 years. That has been one of the primary challenges that has been presented to manufacturers. In addition to supply chain management, there's also been the problem of input prices increasing. Of course, that has all sorts of implications for manufacturers. In some instances, it's difficult for manufacturers to find commodities in other parts of the world. Some commodities upon which manufacturing relies are only produced in one or a few parts of the world. But in the short term, that is obviously going to put a strain on manufacturers’ margins. That can have all sorts of implications for company profitability and consumer prices.
Gregg Profozich [00:29:59] Global geopolitical events—COVID-19, the pandemic, the war in Ukraine, other things that are happening or will happen—what do they mean to California? Does it make sense to try to bring manufacturing back here? If I'm a small manufacturer, what do I do? Where does California fit in, and how do we participate in getting a share in this retrenchment you talked about, this move back to nationalism away from globalization?
Taner Osman [00:30:23] I think that the framework that we discussed at the outset is really going to be the basis for understanding what stuff might come to California and what aspects of the manufacturing industry is unlikely to come to California. I gave the example of textiles before. The reason that textiles are being produced in lower-cost parts of the world is because they are especially price-sensitive. It's a competitive industry, where margins are important to companies’ business models. It's highly unlikely that you're going to see textiles move back to the US generally or California specifically. I gave the example before that instead of a reliance on China, there's been more diversification in other parts of Asia. But there will be parts of the manufacturing industry which would be a fruitful opportunity for the state. For some of the more sophisticated products which are produced around the world, there is an opportunity for California there. While California produces semiconductors, there are semiconductors which are, of course, produced in parts of Asia. The same would be true of other sorts of technological hardware. To the extent that there are more sophisticated products which are being produced offshore, those aspects of the industry would be the most likely to come back to California. Again, I think that is where a real opportunity would exist in those parts of the manufacturing sector in which California already has a relative strength. That is where we would expect to see onshoring to occur.
Gregg Profozich [00:31:57] Playing towards the same trend that we've seen for probably the last 20 or 30 years, it's moving more towards the high tech. If we're going to get industries back, they're going to be ones that fit within the sweet spot of what's currently working in California. It's not going to be a retrenching back to basic processes and low-cost production.
Taner Osman [00:32:14] That's right. I don't think that the reinvention of supply chains is going to reverse those longer-term trends in California. It's much more likely that you would see Tesla increase production in California if, for example, a Chinese manufacturing plant is shut down than it is to see Nike move some of their production to California.
Gregg Profozich [00:32:36] We've been talking a lot about the industry, the research, the data. Let's shift a little bit to what some of the meaning of that data is, particularly for policymakers. Given what the research seems to indicate—the overall numbers, the trends, et cetera—what is important for policymakers to be aware of and to consider in their decisions, and legislation that can assist manufacturing in the state?
Taner Osman [00:32:57] I mentioned before that when it comes to manufacturing, California is not competing on cost. That is not the state's competitive advantage. But that is not the same as saying that cost isn't important. To the extent that the state—this is not something which is specific to manufacturing generally—can get a handle on the cost of housing, that is something which would be a tailwind for the manufacturing sector. Now, if California has become a more hospitable environment for the higher-tech aspects of the manufacturing sector, the state can put in place programs which help small and medium-sized businesses adapt to a changing technological environment. Adapting to new technologies is not something which is costless. It does require capital investment on the part of manufacturers. To the extent the state is able to put in place financing programs to help with that tech adoption, that is something which would be beneficial, particularly to small and medium-sized enterprises. I think, again, coming back to where California's competitive advantage lies, it is in the skills of its workers, and it is in particular in the more innovative sectors of the economy. I think that California does need to continue to support policies that invest in people, ensure that the workers in the state do have the skills that are required for these more sophisticated manufacturing sectors within the economy. I think something else the state can do is identify opportunities within supply chains I mentioned before. There are some parts of the manufacturing industry which are now occurring in other countries which could succeed in California, and there are some that can’t. I think there's a broader analysis on the part of the state of global supply chains to try and understand where opportunities lie for California. With respect to onshoring or reshoring, it would be something which could be beneficial to the industry widely.
Gregg Profozich [00:35:01] What are your thoughts on an overall manufacturing strategy? If somebody wanted to put together a manufacturing strategy, what are some of the key elements, based on the research you've seen, it would have to include?
Taner Osman [00:35:14] I think that ultimately, it just does come down to workforce development and ensuring that financing is there for tech adoption. I think they're the two. If I was to just pick the two areas that the state could concentrate or focus its efforts, it would be in those two areas.
Gregg Profozich [00:35:31] That seems to dovetail with everything we've talked about so far. We have a competitive advantage because we have higher-skilled workers and we adopt technology. More adoption of technology equals more productivity, and you need to hire skilled workers to run this.
Taner Osman [00:35:42] Absolutely, yes.
Gregg Profozich [00:35:44] All right. Last question here. Crystal ball time. Based on the trends and trajectories that you saw in the research, what is the outlook for the manufacturing industry in California?
Taner Osman [00:35:55] I would say it's positive for some of the reasons that I touched upon already. Ultimately, there has been a lot of media talk over the last couple of years, over the last five years, for a sustained period of time now about California losing its edge with respect to innovation. Are we seeing technology centers emerge in the US in places like Austin, in places like Seattle which is going to take away some of California's competitive advantage? Most of the data that we look at revealed that that isn't the case. If you were to look at where venture capital is being invested, it is still overwhelmingly in California. To go back to what I said before, that is important, because as innovation occurs here, production will occur here, as well. For as long as California is at the forefront of producing consumer products which are purchased worldwide, that is going to be a positive for the manufacturing sector. Like I said, you could go back to the 1970s when California was the most sophisticated designer and innovator of semiconductors, and you could find newspaper articles at that time questioning, looking at the growth of other parts of the world—at that time it would have been Japan and the semiconductors they were producing— and people almost administering the last rights for California. California has been remarkably resilient, and there's no reason to think that it won't be remarkably resilient with respect to innovation over the next decade or so. But ultimately, we don't know what we don't know. If you were to go back 15 years or so, the BlackBerry was the most widely used smartphone. BlackBerries became almost obsolete. If you were to see some technical rupture which replaced, for example, the iPhone as the primary smartphone that people use, perhaps you would see some of California's competitive edge diminish if there's some technical rupture that happens in some other part of the world. But again, that's something which is very difficult for us to envision or foresee. All we can really do is look at history as a guide. The history of the last 50 or 60 years has been one of California as an innovative leading technology economy. For as long as that remains the case, I think this is going to be positive for the manufacturing sector of the economy.
Gregg Profozich [00:38:26] Wow. Taner, that was a lot of great information. Thank you so much for sharing. I appreciate having you here today and really appreciate you sharing your perspectives, your insights, and your expertise with me and with our listeners.
Taner Osman [00:38:38] It was great to be here, Gregg. Thank you very much.
Gregg Profozich [00:38:39] To our listeners, once again, thank you for joining me for this conversation with Taner Osman in discussing employment and competitiveness in California. Have a great day. Stay safe and healthy.
Thank you for listening to Shifting Gears, a podcast from CMTC. If you enjoyed this episode, please share it with others and post it on your social media platforms. You can subscribe to our podcasts on Apple Podcasts, Spotify, or your preferred podcast directory. For more information on our topic, please visit www.cmtc.com/shiftinggears. CMTC is a private nonprofit organization that provides technical assistance, workforce development, and consulting services to small and medium-sized manufacturers throughout the state of California. CMTC's mission is to serve as a trusted adviser providing solutions that increase the productivity and competitiveness of California's manufacturers. CMTC operates under a cooperative agreement for the state of California with the Hollings Manufacturing Extension Partnership Program, MEP, at the National Institute of Standards and Technology within the Department of Commerce. For more information about CMTC, please visit www.cmtc.com. For more information. For more information about the MEP National Network or to find your local MEP center, visit www.nist.gov/mep.