Use tax credits to expand isle manufacturing

Hawaii is not famous for its factories. But it could be.

Manufacturing — the conversion of raw materials into finished goods for sale — makes up only 2 percent of Hawaii’s total gross state product. Business and political leaders, prodded by the Chamber of Commerce Hawaii, hope to increase that number through targeted tax credits and other investments that will ease Hawaii’s lopsided economic dependence on tourism and the military.

While it’s unlikely that Hawaii’s manufacturing industry will become a driving force in the economy, the next governor and Legislature should take heed. There are direct and collateral benefits to promoting manufacturing, such as growing the job base and marketing the unique Hawaii brand.

The hard realities of doing business in Hawaii conspire against manufacturing here. Everything costs more — suitable commercial properties, labor, health care, raw materials. And since manufacturing accounts for about 80 percent of Hawaii’s exports, our products compete in a fierce global market.

Nonetheless, manufacturing in Hawaii is worth some limited public investment. Manufacturing accounts for about 14,000 jobs in the islands. Along with most other industries in Hawaii, manufacturing jobs increased between 2010 and 2013, according to the state Department of Labor and Industrial Relations. 

While that growth was 3.8 percent, a mere trickle compared to, say, leisure and hospitality’s 10.5 percent, the improvement shows manufacturing can fill a small but reliable niche in the market. 

The most obvious niche are products unique to Hawaii. Food products such as the iconic Kona coffee, macadamia nuts and other processed and packaged goods, are part of the second largest manufacturing sector in Hawaii in terms of monetary value, behind petroleum and coal products. The "Made in Hawaii" label carries a cachet that allows businesses to sell their products at a higher price. 

The clothing manufacturer Jams World, which recently celebrated its 50th year in Hawaii, built its business on customers who value the "Made in Hawaii" label. But it hasn’t been easy, said Brant Ackerman, the company’s operations manager. Jams World bought its own building after rising commercial rents drove it from its home for 30 years in Kalihi. Jams World is fortunate; most local manufacturers can’t afford to buy and retrofit. 

To remain competitive, the company is investing in new equipment. 

But the company’s costs will continue to rise: The minimum wage is going up in stages, beginning in January, along with employee health care costs. The price of fabric is increasing. The workforce is aging, and it’s difficult to find younger workers who want to sew clothes.

Last session, the Legislature considered measures to help the manufacturing industry, including Senate Bill 3082, which would have provided tax credits for equipment purchases and employee training. It did not pass, but this issue should be revisited next session. Manufacturers have high overhead costs, and must continually upgrade to keep themselves efficient and competitive.

"Any credits would help," Ackerman said.

Policymakers also should take note of the collateral value of high-quality Hawaii products. A "Made in Hawaii" product sold overseas advertises the islands as well as itself. Hawaii farms and coffee plantations have become niche tourist draws. The popularity of such events at the annual Made in Hawaii Festival, which draws more than 1,000 buyers perusing products from nearly 400 exhibitors, offers hope that local products will continue to be a growth industry.

Of course, the continual challenge for local manufacturers is ensuring that "Made in Hawaii" label stands for a product of premium quality that justifies a premium price. With a little support, that shouldn’t be a problem.