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Fair Warning About the Competition

May 19, 1991

Even through last week's moderately unhealthful smog, Southern Californians could get a clear glimpse of some handwriting on the wall.

The message was that more than a decade of relentless growth in population and inflation, along with a smug assumption that California is irresistible, have eroded this state's ability to compete in a game California all but invented: aerospace and high technology.

It was a relatively short message, covering just 17 pages of a report by McKinsey & Co., Inc., an international management consulting firm. The report was commissioned by the Los Angeles Area Chamber of Commerce. This state can no longer afford to be smug, the report warned, and it's a warning that's commanding the attention of business executives and Gov. Pete Wilson.

Not all of the statistics were new. California's share of prime defense contracts dropped from 23% in 1984 to 18.5% in 1990. That still left Texas a poor second, but it also meant that between 115,000 and 300,000 jobs went somewhere else.

The bottom line was more dismal than earlier forecasts. A declining defense budget, McKinsey said, can leave California with a smaller but still robust core of research and manufacturing--if the state competes aggressively, uses its political strength wisely and does what is necessary to make California attractive to high technology companies.

In contrast to this "renewal scenario," there is a scarily plausible script for collapse, with aerospace and defense companies moving out with their suppliers trailing along.

Defense-related companies told McKinsey that high costs of labor, health care and housing were the most important reasons for looking out of the state for expansion.

Not far behind was a sense that neither state legislators nor federal members of Congress go to bat for defense companies the way they do in Texas, Georgia and other states competing with California for contracts.

A compelling point in McKinsey's conclusion was that there is not much time, if any, to start repairing the situation, for which all sectors of California "share the responsibility . . . and will inevitably share the resulting burden."

It says also that industry leaders, elected officials and labor will have to do better at making common cause on competing for work and jobs. Bad roads and other infrastructure problems that force companies to look elsewhere must be fixed. That means this state needs some uncommon ingenuity--in Sacramento and in corporate boardrooms--to make housing more affordable, transportation more efficient, and students better equipped to the do the work of the future. It won't be cheap, or easy. But the McKinsey report reminds us of the unpayable price of doing nothing.

We think that is fair warning.

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