The Rail Deal That Thrusts L.A. Into the 21st Century : Economics: The Sumitomo pact shows that overseas firms may prove good regional partners and may stimulate an industrial renaissance here.

Just nine months after canceling its rail-car order with Sumitomo Corp. in a fit of xenophobic fervor, the Los Angeles County Transportation Commission switched gears and accepted a stopgap 15-car bid from the Japanese manufacturer. The reversal spotlights some important, if embarrassing, lessons for regional economic policy-makers. By squelching the urge to engage in Japan-bashing, the new deal stresses the creation of new jobs and capabilities for transit construction in Southern California.

The deal-making that led to the agreement epitomizes what’s required to be successful in “the era of global regionalism.� Under the new arrangement, for example, Sumitomo has agreed to double domestic content, to greater than 60%, and more than double the share of disadvantaged business content, to 10%, bringing in an estimated $4 million more to minority and women-owned firms here.

Of course, some fervent xenophobes oppose the deal as violating the “Buy America� Charter amendment passed by voters last June. But onetime opponents of the Sumitomo deal, such as Councilman Joel Wachs, now seem to recognize that the “Buy America� standard should not automatically reward U.S. companies like Morrison-Knudsen, which sought to parley anti-Japanese sentiment into a rail-car contract.

Indeed, Morrison Knudsen was no more, and perhaps far less, capable than Sumitomo of providing the critical assistance necessary for stimulating locally based transit manufacturing. When bids were solicited for the 15-car order, a development largely brought about by Morrison-Knudsen lobbying, the Boise-based company flatly refused to bid, claiming lack of time and other excuses.

Significantly, the Sumitomo deal bolsters the credibility of the idea, most aggressively promoted by LACTC board member Nick Patsaouras, that there may be economic salvation in the county’s $184-billion, 30-year, transit-development plan. Public spending on such a capital-intensive project, especially when local manufacturers and construction firms are hurting, should aim to foster the development of these companies.

Viewed in this light, Sumitomo’s initial reluctance to spread around its technology and procurement locally was sufficient reason to reject its bid. But the weakness of the anti-Japanese chorus was to ignore the central issue--creating the best system with the maximum local economic benefits--and embrace the dubious proposition that Morrison-Knudsen, simply because it is an American company, would prove a better partner. Ironically, in virtually all its ventures, the company has heavily relied on foreign firms--even re-subcontracting a major contract back to Sumitomo-affiliated companies. Tellingly, when the time came for the 15-car bid, the LACTC learned that Morrison- Knudsen was unwilling to even negotiate on local content.

By contrast, Sumitomo was willing to meet the tight deadline and make at least some substantial, if still far from totally satisfactory, concessions. Indeed, firms like Sumitomo have enormous experience working with local suppliers in Japan, where public works long have been consciously used as a means to develop sustainable new industries, and have been willing to behave similarly abroad, if prodded politically.

Simply put, the LACTC deal with Sumitomo shows that overseas firms may prove good partners for Southern California. As a region deeply dependent on foreign trade, investment and exports, it seems simply insane for Southern California to adopt a policy that, in a mistaken attempt to snub Osaka, undercuts its own interests while rewarding states that, on other fronts, are eager to pillage its industrial base.

Yet, Los Angeles’ brief xenophobic interlude may have another, perhaps unanticipated benefit. The pressures to find local suppliers for the transit system revealed an enormous treasure trove of innovative, quality manufacturers, particularly among smaller companies. More than 200 such companies showed up at a recent forum sponsored by the LACTC. This kind of outreach--using the Green Line contract as a means to stimulate competitive ties among local producers--could serve as a model for future industrial development.

If intelligently cultivated by the winner of the 85-car bid scheduled for May, 1993, these networks of producers could serve as the basis for a new transportation industry in Southern California, one plugged into the global transit-manufacturing industry. This is how the Japanese broke into such markets as aerospace, where they lacked an indigenous industry, much like Southern California lacks a mass-transit manufacturing business.

The creation of such a new local industry may also prove critical for many companies with ambitions to expand. The experience of one local supplier, Philatron, is instructive. A highly successful manufacturer of cables for the automotive, truck and aerospace markets, the Santa Fe Springs-based company last year won a verbal agreement from Sumitomo to supply cables for its new rail cars. The offer evaporated in the heat of the Japan-bashing excesses of the spring.

Now with the Sumitomo order revived, company President Phil Ramos, who employs 45 at his factory, looks to the transit project as a key component of his long-term expansion plans. If local firms such as Philatron can gain new expertise and orders, including from outside the region, it could signal the beginnings of a industrial renaissance in the region.

Ultimately, if government agencies use the Sumitomo experience as a model for how to balance local concerns with openness to the global economy, we may, at long last, see the beginnings of an intelligent approach to regional development. By adapting to the realities of global regionalism, Los Angeles can show the way not only to its future, but for other U.S. regions seeking a path out of the current economic morass.