California's new economic magnet

Sacramento becomes a high-tech hub as firms flee Silicon Valley, creating an 'incubator economy.'

. - There is a part of Rick LaPado that still seems surprised to be sitting here. Even a decade ago, the thought of moving operations for a primary US defense contractor to this overlooked outpost of Bartlett pears and state bureaucrats would have brought a chuckle.

Today, however, Mr. LaPado sits in his air-conditioned office with a sense of satisfaction. The old Silicon Valley operation was too expensive, and moving across the country to be closer to the Pentagon seemed too traumatic. So here he is, in the remodeled hangar of an abandoned Air Force base, bolstering his company's bottom line in Sacramento.

LaPado, the general manager of Northrop Grumman's mission systems has caught on to something. A year after a recall campaign in which Arnold Schwarzenegger lamented the flight of California companies to better business climates, Sacramento is becoming a safety net for a state concerned about losing businesses across state lines - or the Pacific.

Lower home prices and acres of open land have lured all kinds of companies - from large distributors to small-time manufacturers. But in particular, this emerging empire of strip malls and red-tile roofs is casting itself as the Bay Area's new back lot, filling an intermediate niche for companies that have moved past Silicon Valley's spark of invention but aren't yet to the point of outsourcing operations abroad.

"It's emerging as a different economy than anywhere else in California, and that is the economy of the future," says Robert Fountain of the Sacramento Regional Research Institute. "It is the incubator between the lab and the market."

The characterization fits LaPado's division of Northrop Grumman perfectly. When company changes forced him to look for a new property for his Silicon Valley division, prices there were as much as 10 times what he was paying. "I couldn't afford anything," he scoffs.

The answer: Run a leaner operation in the Bay Area, keeping only the talent he "couldn't afford to lose," and expanding elsewhere. He found that in Sacramento - cheap, convenient, close. While engineers in the Bay Area are wedged into tight spaces, those in Sacramento sprawl throughout the old hangar to test the antennas and communications equipment Northrop Grumman sells to the military.

"Lab tests use up a lot of floor space without a lot of people," LaPado says.

The lab has brought more than 300 jobs to Sacramento, and it is a taste of the economic revolution here. Not 10 years ago, Sacramento was seen as a state backwater - the province of politicians at the state Capitol and farmers who plied the soil of the surrounding Central Valley.

LaPado confesses that a decade ago, it "never would have shown up on our radar screen, partly because of the distance and partly because it was considered the agricultural sticks."

But just as Los Angeles burst from its basin decades ago to form the Inland Empire, the Bay Area is now cascading into the Central Valley, and many companies are creating a new economic hub in its capital. The outward thrust has pushed the median home price in the once-modest Sacramento area to the brink of $300,000, and given the town its first sheen of sophistication.

More than a quarter of the businesses looking at Sacramento to move or expand come from the Bay Area - a twofold increase since 1999, according to the Sacramento Area Commerce and Trade Organization (SACTO). For many, Sacramento represents the last place in California where they can afford to do business. "As we engaged these companies, we found that we were in the mix with other states, and we were having to compete with heavy incentives and no income taxes," says Bob Burris of SACTO. "So Sacramento has positioned itself as the entry point to California. There are always people who will want to be in California."

With a cost of living significantly less than that of the Bay Area - where the median home price exceeds $500,000 - workers can do more with less.

DOVEBID buys used computer test and measurement equipment and resells it. Several years ago, it became obvious that warehousing and testing all this technology in a costly Bay Area facility made no sense. So in 2001, the company moved that side of its operations to an office park on the fringes of Sacramento's suburban sprawl. "I get twice the space for half the monthly cost," says company president Mike Magown.

Perhaps more surprising is how radically the perception of Sacramento has changed. To many who come here, it is no longer a banishment, an outer ring of Dante's Inferno. With a professional basketball team, a minor-league baseball team, and a growing cultural scene to serve the Bay Area newcomers, it is developing into more than just a rural shadow of the San Francisco scene. Says senior manager David Thompson: "I can tell you, everyone who came here is really glad we did."