Phoenix Nurtures a Business Oasis

PHOENIX —  It started with some phone calls. Then recruiters paid a visit to Anaheim. The Phoenix suburb of Glendale wanted business partners Loren Barnes and Betty McCalla to relocate their Orange County company to Arizona.

As the courtship progressed, the state dangled tax incentives. City officials smoothed the process of obtaining licenses and permits. An economic development honcho even volunteered his Sunday afternoon to take McCalla house hunting around the sprawling Valley of the Sun.

In the end, S&S; Headers Inc. made the leap to greater Phoenix, which feted the manufacturer of vehicle exhaust systems at an October banquet to show appreciation for the new jobs. Never mind that the tiny company only employs 12 people.

“We’re just a small business, but they were gung-ho to get us here,” Barnes said. “It’s quite a change from California.”

Such defections aren’t as common as they used to be, now that Southern California’s economy has warmed up after years of recession. But when it comes to entrepreneurial hot zones, experts say Phoenix is positively smoking.

Once derided as a boom-and-bust economy stoked on inflated real estate and easy S&L; money, Phoenix has emerged from the last recession with new stability and an infrastructure that some believe is nurturing the next generation of blockbuster companies.

Like oil-stained Houston and the old Rust Belt cities of the Midwest, Phoenix has retooled itself heading into the next century. Clean industries like software, biomedicine and business services have supplanted the Five Cs--construction, cotton, cattle, copper and citrus--as the new pillars of the Arizona economy.

A revitalized downtown, a new stadium and its first major league baseball team, complete with a $34-million shortstop, only underscore Phoenix’s ascent into the big leagues.

“The lights got turned off” in the late 1980s, said former Phoenix real estate developer Jim Kiely. “When they came back on, this was a different place.”

A just-released study headed by David Birch--the Massachusetts researcher who coined the phrase “gazelles” to describe young, fast-growing, job-creating firms--says greater Phoenix now boasts the highest ratio of precocious upstarts, or “baby gazelles,” in its business mix of any major metropolitan area in the country. The city knocked off reigning champ Salt Lake City to grab this year’s top ranking in Birch’s annual Entrepreneurial Hot Spots index.

Some economists grouse that Birch’s methodology naturally favors youthful boomtowns over old-line stalwarts.

Los Angeles, for example, generates more new start-ups annually than Phoenix. But measuring that activity against the city’s larger, existing business base puts L.A. at a middling 32 on Birch’s ranking of the top 50 entrepreneurial hot spots.

Magnet for Energetic Firms

But Birch defends his research as a reliable glimpse of things to come. And he contends that Phoenix is doing something right when it comes to attracting and growing entrepreneurs.

“Baby gazelles are a leading indicator of what’s ahead for the economy,” said Birch, founder and president of Cambridge, Mass.-based Cognetics Inc. “Like tribes, they keep moving. The real question is why.”

Why indeed has Phoenix, once an occupied territory of the Resolution Trust Corp. and the butt of jokes about its blue-haired retiree set, become a magnet for energetic, up-and-coming young firms?

Climate, scenery and lifestyle are factors. Pro-business, anti-union, conservative politics is another. There’s the relatively cheap cost of living, a good airport and decent schools. Not to mention continued migration of America’s population to the West and South.

With 1.2 million residents, Phoenix is now the nation’s seventh-largest city, while the surrounding metro area is home to 2.8 million people. The region is growing by more than 77,000 people annually--the equivalent of the entire city of Whittier hopping in a U-Haul bound for Phoenix. Small wonder the region is creating jobs twice as fast as the rest of the nation as a whole.

But some trace the area’s vitality to a simple magazine headline--a two-word indictment that helped launch a bout of economic soul-searching when the bottom fell out of the Phoenix economy in the late 1980s.

Up until that time, Phoenix seemingly could do no wrong. Explosive growth began during World War II, when military airfields were built in Maricopa County. Defense companies followed. Later, Intel Corp., Motorola Inc., AlliedSignal Inc. and other major firms set up facilities to take advantage of the region’s low costs, wide-open spaces and proximity to the giant California market.

Retirees followed the sun. Workers chased the jobs. Developers tossed up homes, office buildings and retirement communities on spec to welcome them.

Smoke and Mirrors Behind ‘80s Miracle

Activity reached frenzied proportions by the 1980s. But federal Tax Code changes closed some loopholes on developers and S&Ls;, eventually exposing the smoke and mirrors behind this desert miracle.

A 1988 Barron’s magazine story titled “Phoenix Descending” ridiculed Boomtown USA as a precarious house of cards perched on a bubble of puffed up real estate and oversized egos. Overbuilt, over-leveraged and overly confident of its ability to grow out of its problems, Phoenix watched its imploding development sector bury the rest of its economy, with the magazine’s stinging rebuke ringing in its ears.

“Phoenix is proving to be as much a one-industry town as Houston or Denver,” the article read. “The industry isn’t oil, of course. It’s growth.”

Those proved fighting words to the scrappy denizens of Phoenix, said Rick Weddle, president and CEO of the Greater Phoenix Economic Council.

“It was a stinging jolt to the people of a very proud city,” Weddle said. “It pushed and prodded them to action.”

That action took the form of a statewide initiative known as Arizona Strategic Planning for Economic Development, or ASPED (later dubbed the Governor’s Strategic Partnership for Economic Development, or GSPED).

Part research project, part town hall meeting and pep rally, the early ‘90s effort brought together business heads, academics, civic leaders and politicians from all over the state to examine Arizona’s then-struggling economy.

Identifying Industries for Arizona’s Future

What emerged was a consensus that eight (later expanded to 10) industry “clusters,” from software and biomedicine to optics and transportation, represented Arizona’s future. Government officials, financiers, educators and business people were encouraged to help build and strengthen those sectors.

That might seem a tad socialist coming from the state that produced Barry Goldwater. But the idea of concentrating an area’s economic firepower rather than shooting at anything that moves--a philosophy pioneered by influential Harvard University scholar Michael Porter in his book “The Competitive Advantage of Nations”--is now widely accepted in economic-development circles.

“Arizona was a bit ahead of the curve,” said Doug Henton, a Northern California economic development expert who helped forge a similar alliance in the Bay Area. “Sometimes it takes a crisis to get everyone working together in new ways.”

Clustering has boosted Arizona’s software industry to more than 1,400 firms, up from just a few hundred a decade ago, said Joanne Carthey, founder and chief executive of NetPro Computing Inc., a Scottsdale-based software maker.

“We’re on the high-tech map now,” said Carthey, who also is president of the Arizona Software Assn. “Our mission . . . is to become as known and accepted as Silicon Valley.”

Some doubt those lofty ambitions but credit ASPED and GSPED with rallying the troops at a time when the region was stumbling badly.

“My take on the clusters is that they helped Arizona emerge from an identity crisis,” said Tom Emerson, founder of Xantel Corp., a Phoenix-based maker of telephone systems software. “People realized that our future lay in high-tech and Information Age industries rather than real estate, mining and old smokestack businesses.”

In assessing why entrepreneurs start and grow businesses in one location over another, researcher Birch has defined two broad categories of factors.

First there are “hard,” or measurable, elements such as universities, airports and a trained labor pool. “Soft” determinants are those fuzzy intangibles that make entrepreneurs and small businesses feel wanted and important.

Many places, including Phoenix, possess the former. It is the latter that have helped separate the city from the rest of the pack, say business owners and entrepreneurs in the region.

Take the city’s circle of business movers and shakers, for example. Many entrepreneurs describe the atmosphere as a “meritocracy,” where good ideas count for more than your family name or who you know. The Phoenix 40, an old-guard network of developers and bankers, simply vanished after the real estate debacle of the 1980s.

Restless Energy, Independence

“In one fell swoop they were gone,” said Alan Hald, co-founder of Tempe-based computer products giant MicroAge Inc. and chairman of the ASPED project. “This isn’t a closed-room city. I was raised in New York, and fat chance you could get anything done there. Phoenix is really quite open.”

Xantel’s Emerson, who also left the East Coast for Phoenix, said he was struck by the restless energy and go-to-hell independence of the place.

One of his earliest memories was a sign posted in a local supermarket asking gun-toting patrons to please check their weapons with the management.

“That cowboy mentality has carried over to the business climate,” Emerson said. “There isn’t a lot of zoning or restrictions or hassles. That laissez-faire, let-’em-be kind of attitude is really an integral part of the culture.”

Of course, that freewheeling climate also allowed swashbucklers like savings and loan executive Charles H. Keating Jr. to flourish. Not to mention the environmental havoc it has unleashed in Maricopa County, where unmitigated sprawl, poor air quality and traffic snarls have sparked concerns that Phoenix is becoming another Los Angeles. And while employers love its anti-union, right-to-work Zeitgeist, sunny Phoenix isn’t exactly a worker’s paradise for those mired in its abundant, low-paying service jobs.

Whether the region can preserve the quality of life that has drawn so many eager entrepreneurs remains to be seen. But for now, business owners like Barnes of S&S; Headers are reveling in their newfound freedom.

“No more California Air Resources Board,” said Barnes triumphantly. “Here, I didn’t even have to get a permit for our paint booth.”

Phoenix officials acknowledge that their poaching of Golden State companies has slowed as California’s economy has improved. But Arizona’s looser regulations, lower costs and rabid pro-business climate remain extremely potent sales tools.

And then there’s Joe Dean.

Arizona’s state-appointed small-business advocate runs his Phoenix office on the precept that government should serve the taxpayers, not the other way around.

One of his tasks is overseeing the Arizona Business Connection, a one-stop shop where prospective business owners can find out everything they need to know about starting a business there. The service is swift, efficient and a godsend for prospective business owners used to chasing around dozens of government agencies to find answers about taxes, permits and the rest.

In other words, it is California’s worst nightmare.

“One-stop shopping? It doesn’t exist in California,” said Betty Jo Toccoli, president of the California Small Business Assn. “It’s just the type of thing that motivates fed-up business owners to look elsewhere.”

Just ask Linda Lang. A former construction company owner in Colorado, Lang purchased an old helicopter engine repair facility in 1993 and launched Mesa-based Arizona Rotocraft Inc.

First-year sales amounted to a mere $200,000. But much to her surprise, government officials and other businesses in the area were eager to help her grow. Calls to state and local development agencies yielded training grants, trade show subsidies and other assistance. She met a veteran entrepreneur at a networking event who volunteered to become her mentor.

Lang now employs 20 people at her facility and expects 1997 sales to top $5 million.

“I don’t know if it’s in the water or what,” Lang said. “All I know is that I’m never leaving.”