City Of The Future
THE PACIFIC-UNION CLUB IN SAN Francisco is located in one of the last brownstone mansions that once graced fashionable Nob Hill, a survivor of the great earthquake and fire of 1906. The club's bloodlines actually reach back to the frontier days of the 1850s, and even today there is about the club a distinctively San Francisco quality of Victorian excess. The marbled rotunda, ceiling frescoes, and carved wood paneling all bespeak the self-conscious affluence of the moguls of transportation, trade, and finance who still gather here for breakfast, lunch, or a quiet chat in the upstairs library. And although the members place a high value on privacy and exclusivity, they have managed to keep the reins of the city firmly in their grip.
Indeed, despite its reputation as a thriving tourist center and a capital of a youthful counterculture, San Francisco has been a city distinctly corporate in its outlook and personality. In addition to the scores of great national corporations that long ago made San Francisco their West Coast headquarters, there were the thriving homegrown giants: Bank of America, Wells Fargo, Crocker National Bank, Bechtel Group, Transamerica, Chevron, and Pacific Bell. The skyscrapers built by these companies defined the city's skyline, and for generations the companies' prospects defined the future of San Francisco's economy.
"In the old days, a few of the top guys could get together at The Pacific-Union Club and decide who the next mayor or what the next major project would be," recalls John Jacobs, executive director of the city's chamber of commerce. "Everyone, including the chamber, was very big-business oriented."
The Pacific-Union Club today remains a symbol of San Francisco's glorious past, but not its future. Consolidations, relocations, and layoffs -- more than 46,000 in the past decade -- have decimated the ranks of the city's major corporations. The city's great railroad company has been acquired. The Port of San Francisco, through whose piers and warehouses once passed most of the West Coast trade, now is lucky to handle 15% of it. And the city that proudly proclaimed itself the financial capital of the West has been displaced by its arriviste archrival, Los Angeles, whose banks now control twice the assets of those in San Francisco.
Judged by conventional wisdom, San Francisco should be an economic basket case, in the midst of a long and profound economic decline. In fact, the city is booming. Based on its growth in employment, its knack for generating new companies, and its ability to nurture start-ups in fast-growing companies, San Francisco ranks a respectable 35th on our 1987 list of metropolitan economies -- and one of the top-performing big cities. But perhaps more important, San Francisco is on the leading edge of a rapid and dramatic transformation taking place in many major U.S. cities -- a transformation from the corporate era to an era that is dominated by the entrepreneurial aspirations of a new class of white-collar artisans.
Janice Schooler is a native of Houston, the daughter of a meat packer, a computer specialist who studied mathematics at the University of Texas at Austin. Attracted by the city's "anything-goes attitude," she moved to San Francisco in 1973 to take a job as a systems analyst at the Bank of America, the city's biggest bank, dominant corporation, and largest private employer.
As Schooler moved up the ranks at "B of A," she rented an apartment in the middle-class Richmond area near Golden Gate Park. She studied dance, skied the High Sierra, and enjoyed the excitement of the city. In 1981, she heard about an opening at Levi Strauss & Co., the clothing company, and decided to apply for it because of an increase in salary and the prospect of foreign travel.
By the early 1980s, however, economic events prompted Schooler to reassess her attitude about having staked her career on the success of the city's big corporations. At the Bank of America -- which founder Amadeo Giannini had built to preeminence during the early 1900s on the strength of lending to small and midsize companies -- a single-minded emphasis on loans to Third World countries, agribusiness, and massive real estate projects was beginning to turn sour. And at Levi Strauss, intense competition for its traditional blue-jean franchise caused a companywide shake-up, and -- not insignificantly for Schooler -- a cutback in employee travel. Before long, both corporations had begun a period of retrenchment that to date has seen staff reductions of 17% at Bank of America and 31% at Levi Strauss. Schooler decided that this was not a trend she wanted to be a part of.
"When I got here, saying you worked for Levi's or Bank of America got everyone excited," she recalls. "Now, it seems being in a big corporation doesn't mean anything. The place to be is out on your own."
Schooler started Micro Search in 1983 to help companies integrate personal computers into their operations and train employees in using them. And so far, things have worked out well. Last year, Micro Search had revenues of nearly $200,000, much of it from the military and such major corporations as Pacific Bell and Mitsubishi Electronics. She has only one part-time employee, and her overhead amounts to a modest $20,000 a year. What's left over already provides her with an income equal to what her former colleagues are pulling down at Levi Strauss -- with the prospect of six figures within the next three years.
Today, few of the business or civic leaders who make up the luncheon roster at The Pacific-Union Club pay much attention to the Janice Schoolers or their enterprises. Yet the size of their companies obscures their importance to the new urban economy and the prosperity of a city like San Francisco. "People have to realize that the thing keeping this city going is not what happens to the Bank of America," points out Bruce W. Lilienthal, a San Francisco real estate attorney and a leader of the small-business community. "It's the jobs that come from individuals using their imaginations and creativity with business savvy -- that's the future of this town."
In fact, San Francisco's small businesses are generating jobs faster than the larger firms are eliminating them. According to a study commissioned by The San Francisco Bay Guardian, small companies with fewer than 100 employees created virtually all the city's new jobs between 1981 and 1985. And more than three of every four of those new jobs came from companies with fewer than 20 employees. As a result of this entrepreneurial explosion, San Francisco's unemployment rate fell to 4.8% last year, well below the national and statewide averages.
Nearly all of this employment growth is registered in the broad service sector of the city's economy, which has long been disparaged by many economists and economic-development specialists as merely "taking in each other's laundry." Not so. Between 1979 and 1984, according to government statistics, employment in San Francisco's retail trade and personal-services sector grew by only 11%, most of which was provided by a booming restaurant trade (up 25%) catering largely to out-of-town tourists and business visitors. By contrast, during the same period, employment across the entire spectrum of business services was up 23%, including such lucrative and brain-intensive fields as advertising (up 23%), health care (21%), accounting (21%), and the law (50%).
These are service industries that are creating not only new companies and new jobs -- they are also creating wealth. According to recent projections by the U.S. Department of Commerce, San Francisco may boast the highest per capita income of all metropolitan areas in the nation by the year 2000. That is partly a reflection of the city's unique demographics, with its low birthrate and high proportion of unmarried, working adults. But it is also a reflection of just how effective San Francisco's service sector has become in selling specialized and sophisticated services -- not only to businesses within the city, but as far away as New York City and Tokyo.
Take, for instance, Peterson & Dodge, a small editorial-and-creative-services firm located on the outskirts of the city's financial district. The firm is a logical outgrowth of the current streamlining of corporate America. As increased competition and declining profits force large companies to cut back on their in-house service departments, more and more often they turn to such firms as Peterson & Dodge to produce their corporate newsletters, brochures, and annual reports.
"The economics of large organizations don't work for delivering the best-quality service, and they know it," explains Linda Peterson, who started the firm in 1979 after leaving Pacific Telephone's public-relations department. "From inside, they get acceptable service, but that's it. And who is willing to accept merely acceptable service?"
Last year, enough major corporations found sufficient logic in Peterson's pitch to help her 10-person firm grow to nearly $1 million in sales, a 25% increase over the previous year. And although still small by almost any standards, Peterson & Dodge's reputation has grown enough to attract such major national clients as AT&T, American Express, and Audi of America.
"Good 'craft' people don't flourish in large corporate settings," argues Peterson, who keeps her own craft skills fresh by spending up to a third of her time writing instead of managing. "Creative people don't handle depersonalization very well. A more intimate environment is what promotes creativity."
A more intimate environment may also be cheaper. Ask Tyler Comann.
Comann headed up the small merger-and-acquisition department at Crocker National Bank until Crocker was acquired by Wells Fargo & Co. last spring. Although Comann's tiny group was highly profitable, it was dismantled in the merger along with Crocker's many other, decidedly unprofitable, operations.
Comann, however, was reluctant to give up the investment-banking business. Although he operated under the Crocker aegis, much of his business -- advising small and midsize companies on mergers -- was generated largely from his own network of contacts. Even in a corporate setting, the profits from such services were enviable: in its last 12 months, Comann says, his Crocker unit generated $200,000 in profits on only $425,000 in revenue. Comann was convinced he could easily improve upon that margin outside of the expensive cost structure of a large and bureaucratic corporation.
In his one-man investment-banking "boutique," Comann now pays $800 for office space and services that were carried on the bank's budget at $5,000. He finds, too, that he can do without a full-time secretary -- a bureaucratic necessity at Crocker -- in favor of such independent contractors as word-processing firms. But most surprising, Comann has discovered that being independent actually has increased his credibility in the marketplace. "I can do the same thing I did before," Comann says, "but now I don't have my credibility destroyed every time the company announces its earnings. It's really a boost."
With his lower cost structure, an independent Comann can also compete now for smaller jobs. Recently, for instance, he helped manage a $2-million private placement for Concord Growth Corp., a commercial finance company in nearby Palo Alto. The fee of $110,000 would have barely covered the overhead for a major-league investment bank. For Comann, it was nearly all salary and profit for himself.
"If I complete a deal like that three times a year, I'm doing great," said Comann. In fact, he was recently working on four.
Tyler Comann and Linda Peterson are just two of the hundreds of corporate alumni who have opened up independent shops in and around San Francisco's financial district, providing such diverse services as strategic planning, human-resource management, and specialized computer services. These businesses represent the future of San Francisco and other major cities. But in many ways they hark back to an urban economy that is centuries old.
It was in the thirteenth century in western Europe that carpenters, weavers, and a host of other cottage industrialists first began bartering with farmers in the surrounding countryside for surplus agricultural goods. These artisans -- and later the great merchant traders in such cities as Venice and Antwerp -- forged the basis of an emerging capitalist economy.
This small-scale artisan economy also characterized early U.S. cities, and it was the class of merchants, tradespeople, and craftspeople who played prominent roles in the early development of such cities as Boston, Philadelphia, and New York. Even then these artisans were an independent-minded, entrepreneurial lot. "Labor," noted Benjamin Franklin, a Philadelphia printer, "will never be cheap here, where no man continues long to labor for others." It's not surprising that many of these same artisanentrepreneurs played a prominent role in fomenting the revolution that overthrew British rule.
Such small enterprises continued to dominate the urban economy until the onset of the industrial revolution in the late nineteenth century, when the small shops and workhouses began to give way to a new urban paradigm, characterized by large factories powered by water and operated by large numbers of skilled and unskilled workers. By the late 1920s, the victory of this industrial system seemed complete, and the once-cherished ideal of the skilled, independent artisan gave way to the promise of an industrial economy employing the average talents of everyman. "The mediocre workman, thanks to machine production, today has a cottage and a car," celebrated the prominent liberal journalist, Glenn Frank, in a prosperous 1927. "In a handicraft world, he would be living in a hovel and walking."
World War II saw the heyday of the industrial city, but within a generation after the war, the urban factory began to lose its primacy. The development of new transportation systems, as well as the search for cheaper and unorganized labor, promoted movement of factories farther away from the old urban cores, either to underdeveloped regions in the South and West or to suburban fields along the highway. Between 1948 and 1977, New York and Chicago each lost more than 300,000 manufacturing jobs, Detroit and Philadelphia more than 150,000 apiece.
Instead of serving as production centers, cities now focused on their role as nerve centers for the expanding bureaucracies of the nation's corporate and financial giants. Each day, thousands upon thousands of white-collar professionals -- clerical workers, middle managers, professionals, and top executives -- poured into the central districts of America's cities. Such cities as New York, Atlanta, and Chicago embraced the transition, and continued to prosper. Cities that failed to see it coming, including many of the smaller industrial cities of the Midwest, began to deteriorate.
Compared with the experiences of many cities in the East and Midwest, San Francisco made a remarkably smooth transition from blue-collar to white-collar town. Always more a center for trading, transportation, and finance, San Francisco never depended on heavy industry, and what manufacturing there was centered on the garment trade, metalworking, and food processing. But with its spectacular scenery, splendid architecture, and its base of homegrown corporations, San Francisco soon had remarkable success in attracting the regional headquarters for the nation's largest corporations. The federal government used it as a regional center for its far-flung bureaucracy, and the Federal Reserve Bank of San Francisco helped make the city a financial center for the entire Pacific area. Even a quirk of state political geography helped boost the city's fortunes: although the capital of California is in Sacramento, the state's Supreme Court sits in San Francisco, where a prosperous legal community has grown up around it.
Yet despite its natural and man-made advantages, San Francisco proved no more resistant than most cities to the recent troubles befalling corporate America. Not only were the largest corporations streamlining their headquarters' operations, but many of them were moving their offices out of major cities, in search of land that was cheaper and closer to their largely suburban work forces. Since the early 1980s, in fact, suburbs from New York to Los Angeles have been gaining corporate office jobs at rates as high as two and three times the rates of the cities nearby. In San Francisco, even such corporate linchpins as Pacific Bell, Bank of America, and Fireman's Fund have shifted thousands of jobs to suburban locations.
Changes in world markets have also hastened the decline of the city's corporate core. Long an administrative center for the mining, timber, and transportation industries of the West, San Francisco has suffered from the recent declines in the prices of commodities. Among the companies adversely affected have been such pillars of the San Francisco economy as Chevron, Natomas, and Potlatch.
Then, too, San Francisco's big corporations have suffered their share of bad management. It was more desperation than convenience that last year drove Crocker National Bank into the arms of Wells Fargo after a brief liaison with Britain's Midland Bank. A few years earlier, Southern Pacific Co., the city's railroad and its first truly giant corporation, submitted to the entreaties of the Chicago-based Santa Fe Corp. Chicago is also the new headquarters town for Itel Corp., the San Francisco leasing company taken over in 1985 by Samuel Zell.
But perhaps nothing more powerfully symbolizes how far the San Francisco mighty have fallen than the audacious bid this year by Los Angeles's First Interstate Bancorp for the shares of BankAmerica Corp. -- coming, as it did, on the heels of a string of unprofitable quarters and a noisy and embarrassing management shake-up at what was once the world's largest bank. BankAmerica's directors refused serious consideration of the First Interstate offer, but it may be only a matter of time before a troubled loan portfolio and aggressive competition from Japanese and Los Angeles banks force the House of Giannini into a humiliating new arrangement.
"The folks in San Francisco seem to have lost their edge," notes Roger Smith, president and chief executive officer of Silicon Valley Bank in nearby Santa Clara. "It got to be very insulated -- an old-boy type of thing. People cared who you went to school with and what fancy clubs you had lunch at. Here in the Valley or down in L.A., folks don't have time for that kind of stuff."
Today, San Francisco's dream of emerging as the business capital on the burgeoning Pacific Rim is a distant memory. By almost any measurement, the elegant city on the Bay now stands in the shadow of the sprawling and sunny metropolis to the south. Sitting in his ornate downtown office in the heart of San Francisco's financial district, the chamber of commerce's John Jacobs is forced to concede the obvious about his city's secondary status: "Los Angeles is now the center."
John Jacobs's admission of declining fortunes is tempered with the sure knowledge of resurrection. For in San Francisco you have the phenomenon of a city losing its big-business base and its international pretentions -- and getting rich in the process. Just as the industrial era gave way to the corporate era, the corporate era is now giving way to the era of white-collar artisans: urban professionals and craftspeople who have built small service businesses around their personal skills. Sometimes these artisans are able to turn their enterprises into bona fide growth companies, but more often they choose to retain the intimacy and close control of a small firm. By and large, their emphasis is on assuring the personalized quality of their products and services, protecting their independence, and assuring a comfortable and compatible lifestyle. And like the artisans of centuries past, they are already remaking their city in their own image.
Ironically, many of these white-collar artisans came to San Francisco during the flower-child days of the '60s and '70s, much as they did to New York City's Greenwich Village and Los Angeles's Venice section. Alienated by what they saw as the bland conformity of suburban America, they sought the economic independence and cultural diversity that only an urban area could offer. Many lived out their rebellion for a few years and then moved on, either to a different place or a different lifestyle. But some of the most talented and aggressive found a way to channel their values into their own brand of business. And in San Francisco, their presence is felt everywhere.
When Laurel Burch first came to San Francisco from the suburban San Fernando Valley in 1965, for instance, she was a teenage mother separated from her husband, and a high-school dropout with less-than-spectacular economic prospects.
"I felt a mystique about San Francisco even before I got there," recalls Burch. "It was an open environment that allowed you to become what you wanted to be, whatever that was."
In Burch's case, the path was slow and somewhat tortuous. Starting out without any substantial means of support, she began making gifts for her friends of simple jewelry that she would design and craft by hand. As people started stopping her on the street to admire her handiwork, it occurred to her that there might be a market for her jewelry, and working out of her apartment, she gradually transformed her hobby into a business.
Today, CEO Burch employs about a hundred people in San Francisco, in addition to contracting out much of her manufacturing to shops elsewhere in the United States and the Far East. Her designs are sold in department stores as mainstream as New York City's Macy's and Philadelphia's John Wanamaker. Sales this year reached $11 million, more than double that of the previous two years.
By the standards of San Francisco's artisan community, Burch's is almost a giant business. More common are the small enterprises of 10 or fewer employees that look to fill small and specialized market niches -- and which often cluster together in smaller buildings on the fringes of a downtown area.
"Small firms need other small firms, and specialists need specialists," explains John D. Kasarda, chairman of the sociology department at the University of North Carolina at Chapel Hill and a noted urban researcher. "You find a great deal of interaction among these kinds of units."
According to Kasarda, San Francisco has been at the forefront of the transformation of cities to an artisan economy, but such cities as New York, Atlanta, Boston, and even Chicago are not far behind. "The transition to this new economy is happening fastest in those cities most closely tied to the national and international economies," he explains. "Those cities that can adapt to these new realities will prosper. Those that are slow to adapt to the new advanced service role of cities will have a tough time."
Jane Glickman is part of San Francisco's remarkably rapid adaptation. A former designer across the Bay at The Oakland Museum, Glickman went into business for herself in 1984, convinced that there were enough visitor centers and small museums that need occasional help in designing exhibits and displays. It turns out that she was right. Working for clients as diverse as the National Park Service at Point Reyes National Seashore, just north of the city, to a county museum in the Sierra Nevada foothills, Glickman's billings last year were close to $100,000.
Like many artisans, Glickman doesn't seek to build a large company. If she needs something outside her expertise, she contracts with other artisans, many of them located right in her own building, a growing complex in a once-desolate warehouse district, which has become something of a design center. There, Glickman has access to everything from designers to typesetters, from copywriters to illustrators. It is an arrangement in which Glickman and others have found the conveniences of a large operation without any of its disadvantages.
"There's really an atmosphere of excitement here, of sharing ideas and business," says Glickman, whom other tenants fondly call the "mayor" of their little business community. "Here you can have your independence and not give up anything you could get in a large design office." She says the relaxed, somewhat offbeat ambience of the building, plus its location near the center of the city, give the businesses a certain cachet with customers, especially those from the more monotone world of suburbia.
Walking the streets of San Francisco these days, the rising influence -- and affluence -- of the artisan is almost palpable. Just as the corporate era produced its skyscrapers of steel and glass, the artisan era in San Francisco finds its physical manifestation in the rehabilitation of scores of old brick structures from the city's industrial past. The modern adaptations, with their treefilled atriums and high-ceilinged work spaces, are comfortable and strikingly ingenious. And the hum of activity inside contrasts sharply with the quiet of the downtown towers, where the vacancy rate for prime office space hovers at 18.1%, according to local brokers.
The shift has fallen hardest on big-name architects and developers, once the princes of the realm who made fortune upon fortune in the San Francisco of the late 1970s. Today they wait impatiently for the next big downtown project, which is unlikely to be anytime soon. But construction has by no means come to a standstill in San Francisco -- in fact, construction employment in the city has held steady as work proceeds on scores of small-scale projects better suited to the workstyle and budgets of the new artisan economy.
"There's lot of work in this city -- just not for the big guys," says Marc Hinshaw, whose 12-person architectural shop grossed $250,000 last year. Hinshaw works out of a former bocce club on Green Street that his firm renovated after a fire; today it houses eight separate artisan businesses in architecture-related fields -- from drafting to landscaping to interior design. "There's a whole universe of older buildings and small lots that need work," Hinshaw says. "San Francisco has a great future if you know where to find it."
To the members who lunched regularly at The Pacific-Union Club last year, it must have seemed a positively blasphemous idea. The proposal by a coalition of community groups would have made it difficult, if not downright impossible, to add another high-rise tower to San Francisco's skyline. Gazing down upon their city from atop Nob Hill, the executives and bankers, developers and publishers probably could not have imagined an idea more threatening to the city's future -- or their ability to control it.
The proposed ordinance had been offered several times before, and each time had been successfully opposed by the city's most prominent politicians, who, like many of The Pacific-Union Club's members, were somewhat perplexed by, if not unaware of, the profound changes taking place in the economy of the city. Like the business leaders on Nob Hill, political leaders have clung desperately to the idea of San Francisco's future as an industrial and corporate capital. Mayor Dianne Feinstein, for example, flew to Japan last year in a somewhat quixotic attempt to persuade Japanese corporations to establish factories in San Francisco -- this a town where large-scale industrial projects have been demonstrably uneconomical for at least several decades. And Roger Boas, former chief administrative officer of San Francisco and himself a would-be mayor, has recently proposed a major program to lure yet more giant corporations to San Francisco's shores.
"The leadership in this town has a profound identity crisis," notes Bruce Brugmann, editor and publisher of The San Francisco Bay Guardian and a leader in the fight to curb high-rise development. "For years, all the growth has come in the small places and the neighborhoods, but the leadership seems determined to develop a high-rise monoculture suited to giant corporations that are dying. They seem to have no sense where the vitality of this town is coming from."
Jane Jacobs, the famed philosopher of cities, has a view similar to Brugmann's. Of Mayor Feinstein's Japanese initiative she told us recently, "She would be much better off spending her energy on figuring out what the obstacles are that face people starting businesses in San Francisco. They have different needs -- new zoning, different tax regulations -- from big companies." She continued, "It's always been the case that people get enamored and have so much belief in what's big, not what's small. It's like believing in oak trees, not in acorns."
But if the lesson of the acorn is still somewhat lost on the political and business leaders of San Francisco, it has not been ignored by the voters. In November, despite the well-financed opposition of the downtown moguls, they narrowly approved the anti-high-rise ordinance. And as the city looks to its mayoral election this fall, candidates seem to be falling over each other to profess their concerns about growth and their allegiance to the entrepreneurial constituency. The primacy of San Francisco's new artisan economy seems to have presaged a fundamental change in its political economy as well.
"The big guys are all concerned about the vacant buildings downtown and what's happening at places like Bank of America," says Micro Search's Janice Schooler, "but in the long run it will all seem secondary. The trend of this town is all entrepreneurial. People like me will control this city because we are the breadwinners now. We are the voice of the city."
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