CompanyWeek Q&A: CMTC’s Jim Watson assesses the current state of California manufacturing

The narrative of California manufacturing can be a dizzying array of good news mixed with bad. Yet one reliable marker underscores the story: California’s manufacturing ecosystem is still the largest and most influential in the U.S.

At a time when interest in domestic production is higher than it’s been in decades, it’s enough to rally action to strengthen and enhance California’s invaluable economic asset. That first means ensuring that manufacturers operating here get what they need to prosper and grow.

We circled back with CMTC’s CEO Jim Watson as part of our Q&A series to assess the current state of California’s sector, gauge how we’re doing in keeping companies healthy, and to discuss what lies ahead.

CompanyWeek: Jim, remind us what’s at stake here. Where does California’s manufacturing ecosystem rank nationally in terms of size?

Jim Watson: California’s manufacturing community is the largest in the U.S., with more manufacturers and more manufacturing employees than any state in the union. In total, California has roughly 36,000 manufacturing establishments and 1.2 million manufacturing workers.

California is also the largest state contributor to U.S. manufacturing GDP, representing 14.5 percent, followed by Texas at 10.9 percent. Far behind are the contributions made by Ohio, Illinois, Indiana, North Carolina, Pennsylvania, and Michigan.

And, manufacturing’s contribution to California’s GDP continues to grow. In 2020, manufacturing reached $324 billion, with $134 billion in manufactured goods exported (representing an 85 percent share of total goods exported in 2020).

There’s a lot at stake for us. About 75 percent of California manufacturers are small, employing less than 20 employees. And, as illustrated during the Great Recession and the pandemic, these small manufacturers are the most vulnerable to economic downturns and catastrophic events. Losing California manufacturers — be it to another pandemic or migration to other states — will have significant consequences on our economy.

CW: Describe the industry makeup of California manufacturing.

JW: The manufacturing ecosystem here is quite diverse — especially when looking at the difference between Northern and Southern California.

In Northern California, manufacturing is concentrated in the high-technology industries related to computers, software, communications equipment, and pharmaceuticals. More than 62 percent of all manufacturing employment is in high technology or medium-high technology. In addition, Northern California has high profile food, wine, and agriculture sectors in the manufacturing community.

Southern California, on the other hand, is varied, with companies in fashion, food, metal fabrication, plastics, aerospace parts and instrumentation, computer and electronic components, and medical devices.

Several key industries in California have contributed to both wage and employment growth. Industries such as aircraft and spacecraft, pharmaceuticals, computer and electronic products, communications equipment, medical, and precision and optical instruments fall into that category.

CW: The national narrative tends to focus on the efforts of other states to entice companies to leave. What are companies telling you about the reasons they’re staying in California?

JW: Lifestyle, for one. Let’s face it: California’s a high-cost state for manufacturing. But people want to live here.

Of course there are other factors. California manufacturers rank very high in the nation for productivity, providing a buffer to some of the higher costs. California’s consumer market is one of the largest in the U.S.

For manufacturers, California’s large manufacturing base provides access to a broad range of suppliers for sourcing parts and components. If you leave, you’ll be leaving America’s most robust manufacturing supply chain. So, there’s also the advantage of selling California-made products to Californians.

Our educational system is second to none, comprised of 260 colleges/universities and 110 community colleges. We turn out talent from machine operators to engineers.

The two largest seaports in the Western Hemisphere (L.A. and Long Beach) provide access to products from the Pacific Rim and beyond.

All of these factors combine to provide ample reasons to stay in California.

CW: To your point about Northern CA’s manufacturing workforce, I also think that an increasingly tech-driven manufacturing sector aligns with the state’s technology and R&D ecosystem, which is second to none. Agree or disagree?

JW: Agree. California’s employment is more concentrated in the higher paying, high-and-medium technology industries, with 36.9 percent of manufacturing employment in high technology. These jobs drive innovation, new products, and technology deployment.

The average manufacturing job in California pays $112,000 a year, and each job supports another 2.5 non-manufacturing jobs. These non-manufacturing jobs that are created contribute to the state through consumer spending and taxes — and they only exist in California because the manufacturing jobs are here.

I think the positive alignment goes beyond that. Overall, manufacturing’s critical contributions to defense, commercial aviation, satellites, motor vehicles, pharmaceuticals, and computer/electronics keeps our state and nation safe and strong.

CW: So, what does the future hold for California manufacturing?

JW: California’s manufacturing community, like the nation, will be impacted by workforce, supply chain, and technology challenges.

Jobs EQ, which provides timely data on workforce, indicates that over the next year, the demand for manufacturing jobs will exceed 135,000. Supply chain shipping backlogs are not expected to ease until the summer. And, while technology demand is growing, the pace is not sufficient to keep California manufacturing competitive over the next five years.

These are big challenges. Small manufacturers make up most of California’s manufacturing establishments, and they have the fewest resources to meet these challenges. The size of the problems and number of manufacturers will require a broad collaborative of academia, industry, and technical assistance programs to provide solutions.

To accomplish this, it will take a statewide manufacturing strategy to drive focus and assistance to keep manufacturing and high-paying jobs in California.

Bart Taylor is publisher of CompanyWeek. Reach him at btaylor@companyweek.com. Jim Watson is CEO of CMTC. Reach him at jwatson@cmtc.com.