AAeerroossppaaccee SSttaatteess’’ IInncceennttiivveess ttoo AAttttrraacctt tthhee IInndduussttrryy AAnn UUppddaattee By Rosa Maria Moller, Ph.D. Prepared at the Request of Senator Roy Ashburn ISBN 1-58703-236-8 Photo credit: California Research Bureau ACKNOWLEDGEMENTS The author would like to express her appreciation to the following persons who also committed valuable time and/or gave valuable advice for the development of this paper: the Director of the California Research Bureau, Dean Misczynski and the Assistant Director, Chris Marxen. I also would like to thank Kimberly Johnston-Dodds, Policy Researcher, for facilitating important materials used in this report and Steven DeBry, Senior Librarian, who provided important information on the history of aerospace in California. Thank you also to Pat Kinnard, Wanda Green, Katie Sarber, and Megan Quirk for their assistance in the publication of this report. Space Shuttle Enterprise Photo Credit: National Air and Space Museum California Research Bureau, California State Library i EXECUTIVE SUMMARY This paper originated from a request by Senator Roy Ashburn to update the California Research Bureau’s report: “Other States’ Incentives to Attract or Encourage Aerospace Manufacturing”, published in June 1999. Broadly defined, the aerospace industry includes the manufacturing sectors of: aircraft and related parts; guided missiles, space vehicles and related parts; and, search, detection, and navigation instruments. Significance of the Aerospace Industry The aerospace industry attracts the attention of policy makers because it contributes significantly to the economy of the state. The industry provides a number of well-paid jobs and is a spring board of innovation for other sectors. Historically, California has had a significant share of the U.S. American aerospace industry. Although this share has been declining, California still has the largest share of U.S. aerospace employment. California has been losing aerospace jobs to other states. In the 1990s, the state lost about 166,300 aerospace jobs. By 1999, California employment in the aerospace industry was less than half of what it was in 1986. In 1986 California had almost one third of U.S. aerospace jobs, in 1990 it was 29 percent, reducing to 22 percent by 1998. In 2006 this share was 19 percent, but still above the California’s share of U.S. average manufacturing employment (11 percent). Between 1998 and 2006, the aerospace industry in the rest of the country lost 12 percent of its workforce, but California lost more than twice this amount. Most of the losses took place in aircraft and components manufacturing. During this period, Washington State’s share of U.S. aerospace employment also decreased, while the number of U.S. aerospace workers increased for Texas, Arizona, Georgia, Ohio, and Illinois. This paper includes a section on the history of California aviation and aerospace to emphasize the historical importance of this industry in California. The origin of the aircraft industry in the state dates from 1909, when Glenn Martin started his company which became an early hub of a network of giants of America’s aviation. A variety of factors contributed to the expansion of aerospace in the state, including favorable weather, a significant number of technological breakthroughs that took place in the state, and increased federal purchases of aircraft, particularly during the Second World War. Most of the conditions that attracted the industry to California are still in place. The state has a rich infrastructure of educational institutions and research centers. The presence of the aerospace industry in the state is still strong. Although complete airliners are no longer built in Southern California, there is a large subcontracting business. California has a strong electronics industry and a significant ii California Research Bureau, California State Library proportion of aerospace electronic components and parts are produced in the state and the state has a leading role in space activities and programs with a variety of projects for unmanned vehicles developing in Southern California. Policies to Enhance Industry Competitiveness California can enhance the competitiveness of its aerospace industry by creating a more favorable business climate for the industry. Many states are trying to achieve this goal through a variety of policy incentives and other efforts offered to the industry. Policies can be part of an integrated economic planning effort or just be independent efforts to increase capital and funding for different types of businesses or regions. Examples of integrated efforts are Enterprise Florida and the California Space Authority effort. These organizations have developed strategic plans for space related activities within their state. More independent efforts include enterprise zones, defense conversion, market development, export financing, strategic technology, and other policies targeted to promote selected activities. Many programs share knowledge and information to promote growth. Other types of programs encourage the development of new technologies and help to provide financing for start ups in the industry. States provide a variety of tax incentives to decrease costs of targeted industries and to influence factors that determine site plant location and expansions. The appendix of this paper has a summary of the various tax incentives that are offered by the 25 states with the highest share of U.S. aerospace employment. Tax incentives can be offered to specific industries or targeted to single projects. For example, California designed a variety of incentives to retain the Joint Strike Fighter program, including a hiring wage credit and a property credit for businesses involved in the program. These incentives expired in 2006. Important factors that determine site plant location include labor costs, property costs, taxation policies, availability of skilled labor, access to research facilities, political support, access to capital, and quality of life (assessed by a variety of factors including infrastructure, weather, transportation facilities for employees, affordable housing, cultural events and amenities, a healthy environment, attractiveness of the community landscape, the quality of the educational system). To improve business conditions, the states typically offer tax incentives for investment, job creation, research and development expenses, property tax breaks, discounted rates for electricity, grants for worker training, sales tax breaks, infrastructure support, and others. California Research Bureau, California State Library iii Policy Options This paper suggests some policy options gathered from various sources including conversations with representatives of organizations that work with the industry. To stimulate investment and research in California, a reinstatement of a manufacturing investment tax incentive and increases in research and development tax credits are among these options. Other suggested policies mentioned in this paper are the creation and support of development programs that enhance the skills of California’s workforce and the development of a strategy to recruit suppliers through partnerships with existing aerospace companies. One of the industry’s major challenges is that companies will have to replenish their workforce as their current workers age and other high-tech sectors are recruiting the most talented. This happens in a context where the U.S. lags behind both Europe and Asia in producing college graduates with advanced degrees in science, math, technology, and engineering disciplines. iv California Research Bureau, California State Library TABLE OF CONTENTS ACKNOWLEDGMENTS ........................................................................................................................................... I EXECUTIVE SUMMARY...........................................................................................................................................II TABLE OF CONTENTS ........................................................................................................................................... V INTRODUCTION ..................................................................................................................................................... 1 HISTORICAL BACKGROUND OF THE AEROSPACE INDUSTRY IN CALIFORNIA ................................................... 1 Origins of the Industry................................................................................................................................. 1 The Expansion in the 1920s ...................................................................................................................... 3 The Decade of the 1930s........................................................................................................................... 5 The Second World War Period.................................................................................................................... 9 The Post World War II Period....................................................................................................................13 Industrial Activity After the War ...........................................................................................................13 Structural Changes in the U.S. Aerospace Industry After the Second World War ............................13 Important Developments in the California Aerospace Industry After WW II .....................................14