Hard Times May Await as 2000 Boom Begins to Wane

How fast things change.

2000 was a year of record growth, booming export levels and some of the lowest unemployment rates in decades. Many Southern California business owners chalked up healthy sales and profits.

Now a rapidly slowing economy indicates tougher times are ahead. Here are some areas to watch:

Politics

Business lobbyists warn that barely defeated efforts to increase the cost of workers’ compensation insurance premiums will be remounted in 2001 and have a good chance of passing. They worry that the extra cost to California employers, the majority of which are small-business owners, will come at a time of slowing economic growth.

The National Federation of Independent Businesses and the California Chamber of Commerce are also gearing up to fight a proposed increase in unemployment insurance costs and expansion of the family leave law, which are being pushed by labor unions.

“What I call job-killer bills threaten the flexibility of small-business owners,” said Martyn Hopper, California director of the NFIB.

Economist Jack Kyser of the Los Angeles County Economic Development Corp. is more optimistic than the business groups that Gov. Gray Davis will hold the line on measures that would increase the burdens on business.

“The saving grace is Davis was comptroller in the early ‘90s and remembers how tough it was” during that recession, Kyser said.

But Kyser, the NFIB and the chamber were concerned that freshman state legislators may not be as business-friendly.

Also at the top of business groups’ political agenda is tapping the state budget surplus to get a tax relief bill next year. Legislation has also been proposed to provide relief from energy prices, ranging from refunds to re-regulation of the utility industry.

Financing

It will be harder to get financing next year as venture capitalists, banks and the stock markets tighten the once wide-open money spigot.

Banks are tightening their loan criteria in the face of an increase in bad loans. The market for initial public offerings will remain soft in the foreseeable future and valuations lower. That means companies may have to postpone or scrap plans to raise money. Down the line, more companies could run out of money and be forced to close their doors.

Firms looking for venture capital also face a new paradigm.

“Now we just need that comfort level that they understand they have to make revenue at some point in time,” said Frank Creer, a managing director and partner at Zone Ventures, the Southern California arm of Silicon Valley heavyweight Draper Fisher Jurvetson.

Creer expects money to be more available for Internet infrastructure providers, including security technology companies, as well as evolving technologies such as wireless or mobile computing. “Instead of branded companies that have to succeed based on consumer acceptance, we are now looking for companies that have nothing to do with consumers,” he said.

Many of the biggest names in venture capital have taken heavy hits to their investments in consumer, retail-oriented “dot-coms,” he said. Smaller venture capital firms could fare even worse. Some could even fold this year.

International Trade

After setting record levels this year, California exports are expected to slow in 2001, although they are likely to remain high compared to historic levels.

High-tech, biotech and environmental technology are likely to remain key drivers in export sales for the state. This year, they helped push export sales up 21.5% in the first nine months and will contribute to the record $120 billion expected for the full year.

“California is at the cutting edge of what people want and that’s new technology,” said Lon Hatamiya, secretary of the California Trade and Commerce Agency. He said he remains “quite optimistic” for small and medium-size exporters.

To help business owners finance their exports, the agency will open three financial development corporations in Southern California next year. In addition to the two already operating in Los Angeles County, the agency will open sites in the San Fernando Valley, Orange County and the Inland Empire.

The agency’s financial development corporations signed 631 export finance guarantees for small and medium-size businesses in the last fiscal year for a total of $80.8 million, Hatamiya said.

Entrepreneurs interested in doing business in Asia and the Pacific will get a boost under agency plans to open new overseas offices in India and the Philippines, he said.

The health of the Asian and Latin American economies, key trading partners for California, will have a direct impact on how much their countries buy from Southern California companies next year.

In particular, California business owners will be watching Mexico, the country with which it does the most trading. Mexico, which sends roughly 85% of its manufactured exports to the United States, has been benefiting from the booming U.S. economy. As the U.S. economy slows, Mexico’s ability to pay for imports from California will decline.

“The U.S. economy seems to be decelerating more rapidly than anticipated, casting a pall over the Mexican economy as well,” said Sung Won Sohn, chief economist of Wells Fargo & Co.

He expects Mexico’s real economic growth to drop from 6% this year to 4.9% next year.

Labor Market

A 50-cent-an-hour increase in the minimum wage will greet Southern California employers on the first day of the new year, while upward pressure on salaries in high-tech and other sectors suffering worker shortages will continue.

While the great dot-com meltdown has put some rationality back in the labor market, employers will still see pressure to increase salaries in 2001, predicted Kyser. The expectation of a slightly higher inflation rate in Southern California next year, driven by higher energy costs, is one reason. The tight labor market is another.

Even with the ripple effect of the closures of many high-profile Internet retailers in recent months, the unemployment rate will remain low by historic levels. UCLA forecasters have projected a rate of 5.4% next year, compared with 4.9% this year. The labor market is so tight, even employers in some low-wage industries such as retail will have little choice but to pay up to keep workers.

“There’s not a lot of room for employers to save on salaries next year,” Kyser said.

Technology

Business owners will face increasingly complicated technology choices.

“It will be choppy waters for business owners but with the challenges are also potential rewards,” said Clay Ryder, vice president and chief analyst at Zona Research in Redwoods.

He expects Internet, voice and data networks to continue to converge, posing more choices for businesses and more opportunities for those who can develop ways to better communicate with their customers.

But it won’t be smooth sailing. A relatively simple customer-service idea such as a call center, integrated with a company’s billing and purchasing system and combined with a Web interface and an 800 number, will be an expensive and complicated decision for most companies, he said.

Burying your head in the sand in hopes that the technology storm will blow over is not the answer, Ryder said. “What goes away will be your business.”

To help its business clients, Andersen Consulting has a chief scientist who monitors key emerging technologies. Glover Ferguson is keeping his eye on two new technologies he expects will have a growing influence on business next year: mobile computing and radio frequency identifiers, or RFID.

“We are going to see the permutations of these devices explode,” Ferguson said.

Business owners and consumers will be inundated with devices and services available for their personal data assistant devices and cell phones, he said, as the United States catches up to its more wireless-oriented global neighbors.

Radio frequency identifiers are an example of throwaway processing and memory that will open the doors to new inventions, he said. An RFID is a tiny processor with a little bit of memory and a relatively large antenna. It looks like a piece of cellophane with a piece of copper inside.

Label maker Avery-Dennison has layered RFID behind labels for companies that want to track the whereabouts of packages, say inside a warehouse, without bar codes and manual scanners.

British Airways has experimented with using RFID-enabled baggage tags to eliminate mistakes made in visually reading the tags. The tag allows someone at a remote location to ask it what it is, where it is and where it is going.

“The whole idea is to make the supply chain more efficient by making it more intelligent,” Ryder said.

He’s also tracking development of a mobile technology called Bluetooth. It knows when a person is in its vicinity and could, for example, send messages to a traveler walking through an airport that a flight is delayed or that a favorite coffee haunt is just around the corner.

Intellectual Property

Budget cuts at the U.S. Patent and Trademark Office, which come at a time when patent applications are growing at an estimated annual rate of 12%, will make it harder for entrepreneurs and business owners to obtain patent and trademark protection next year.

The lack of funds could mean 20,000 patents are not issued in 2001, according to some estimates. That means the intellectual property protection that companies need in order to attract investors, generate new sales and ward off competitors will be unavailable for some.

At one time, the impact would have been minor. But in recent years, protecting and managing intellectual property assets has grown in importance and complexity.

“IP management in general will be incredibly difficult,” said Andy Gibbs, chief executive of PatentCafe.com Inc. and a member of the U.S. patent office’s patent advisory committee.

He expects more large corporations to implement broad IP strategies, management and control tools.

Next year will also see a sharp increase in biotech and life science technology patent applications, such as those tied to the human genome project. Meanwhile, the boom in business method patents will likely ease because of the fallout among dot-coms.

A lack of funds could also increase the time it takes to process trademark requests, Gibbs said. That comes just as the new top level domains such as .firm, .shop and .kids are set to be released. Gibbs estimates the new TLDs could triple the number of domain names issued each week.

Many of those names will be issued to what he calls cybersquatters who gather valuable domain names such as McDonald’s in the hopes of selling the name to the company that owns the trademark.

“We will see an increase in disputes relating to brick-and-mortar companies taking back their brand on the Net,” Gibbs said.

Intellectual property has become increasingly important to business for two reasons, according to UCLA law professor John Wiley Jr. Patent law has changed in the last decade to cover more areas, such as business methods.

Previously, U.S. courts were extremely hostile to patent rights, he said. Also, traditional businesses such as the trucking industry have discovered they can lower costs in unexpected ways through the use of new technology.

“IP has become more important because business has made it so,” Wiley said.

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Cyndia Zwahlen can be reached via e-mail at cyndia.zwahlen@latimes.com.