Minority Firms Feeling the Pinch Too : Defense Cutbacks Leave the ‘Disadvantaged’ Scrambling to Find New Sources of Business

During the boom years, Southern California’s vast defense industry resembled a rich and seemingly bottomless gold mine for minority-owned machine shops, cleaning companies and parts suppliers.

African American-owned Erik A. Electronics of Monrovia, for example, a few years ago had grown to more than $4 million a year in sales by supplying electronic parts almost exclusively to defense contractors. “It (defense) has been good for me and my family,” said Al Harris, the company’s president.

Now, Harris and many of his peers are rushing distance themselves from the collapsing defense industry. Following the lead of other defense-dependent businesses, many minority entrepreneurs have slashed costs, introduced new products and wooed new customers, from road builders to T-shirt designers.

Diversification, however, has proven to be a difficult and time-consuming process. And success is not guaranteed. Many minority contractors, however, have little choice.

“We see a lot of minority firms and small businesses go out of business. The reason is that they don’t diversify,” said Ted Rogahn, senior manager for McDonnell Douglas’ small businesses program. “Some cannot survive unless they get their business restructured. We have been trying to get them to look into other areas . . . ground transportation, rail cars.”

The defense slump and Southern California’s other economic troubles have been deadly for minority contractors and suppliers of all kinds. In the past three years, the Southern California Regional Purchasing Councils, a group formed to promote the development of minority suppliers, saw its roster of more than 5,000 firms diminish by more than half.

“This (slump) is serious for minorities and small business,” said Hollis Smith, the purchasing council’s president.

Military work has been particularly important to minority contractors. Under government goals, 5% of Department of Defense contracts--or about $6 billion a year--are to be awarded to small, “disadvantaged” businesses, which include those owned by ethnic and racial minorities and women.

Defense contracts have been the backbone of Gardena-based Computer Circuit, which transforms blueprints of electronic circuits to film for use in manufacturing. But as the flow of defense dollars has dried up, Computer Circuit’s sales have been halved and 20 workers have been let go. The company’s major customer, Hughes Aircraft, is moving many of its operations out of state.

“You didn’t think of diversifying in the early ‘80s--money was coming in left and right,” said Computer Circuit owner Jose B. Ramirez. Now, instead of $10,000 and $20,000 government contracts, Ramirez is taking in $25 and $50 orders from T-shirt designers who want their computer-generated artwork transferred to film for use in silk screening.

“I once got offered a nice piece of change for the company,” said Ramirez, 65. “I should have sold it. Now I’m suffering.”

In addition to facing the same problems their white male counterparts do, minority contractors say they are up against a unique set burdens as they diversify. For many, it means having to fight continued perceptions of inferior quality and preferential government treatment.

“I get very angry that I have to spend so much time defending my quality,” said Linda Aceves-Dabbs, owner of Protospace, a South El Monte machine shop and metal coatings firm. “They (many competitors and customers) feel that you are getting something for free. In fact, I’m out there pounding the pavement like everyone else.”

The importance of defense dollars led one minority contractor to sue the government. The 9th Circuit Court of Appeals in San Francisco sided with Latina-owned GC Micro, a San Francisco Bay area computer supplier, and said the Department of Defense and major contractors must disclose the proportion of minority-owned firms involved in a program on a contract-by-contract basis.

GC President Belinda Guadarrama said the information would show that the government and its prime defense contractors are nowhere near to meeting the 5% goal for using disadvantaged businesses. Improved compliance with the rule would generate billions of dollars in additional revenues for the minority and female entrepreneurs, she said.

The Department of Defense, however, disputes Guadarrama’s claim. A Pentagon spokesman said that 5.3% of all contracts were awarded to disadvantaged small businesses during fiscal 1993--the first year in which the 5% goal was exceeded. The government has yet to decide whether to appeal the court’s ruling.

Despite continued interest in defense work, many minority contractors have moved quickly to find business elsewhere.

Jesse Singh, president and founder of PC Systems Design Corp., a Brea-based personal computer maker and distributor, said he has replaced orders from big defense contractors with others from small and medium-sized companies. The individual orders are smaller, Singh said, but there is less red tape and bureaucracy with smaller customers.

“It’s working out pretty good,” said Singh, whose firm relies on defense contracts for 25% of its sales. “A lot of these (smaller) companies are not fully automated, so we recommend solutions to them.”

After he saw revenue fall off for the first time in 1992, Harris of Erik A. Electronics began his own diversification project. He formed a team of employees to work the telephones, and made 2,000 to 3,000 sales calls weekly to a variety of companies and government agencies.

Harris was surprised to find that Caltrans, for example, purchases large supplies of the electronic parts--such as fuses and terminal boards--that his 15-year-old company distributes. The state highway agency became one of his customers.

After two years, Harris has reduced his company’s dependence on military contracts to 75% of revenue from 90%--and the proportion should continue falling. He expects overall sales to rise again next year by more than 10%, to about $4 million, as the diversification continues to pay off.

Still, weaning the company off defense dollars has been more difficult than the 51-year-old Harris had expected.

“I was hoping to be further into these (new) areas than we are today,” Harris said. “No matter what other industry you go into, they say ‘we don’t want new suppliers.’ ”

But as Southern California’s defense business continues to shrink, Harris says, he must explore other markets.

“The decision was made for me,” he said.