State agency signs $1M lease for manufacturing space; past tax-credit program yielded little
Hawaii officials are courting engineers and startup founders in an effort to diversify an economy that has remained heavily dependent on a tourism industry whose inflation-adjusted dollars peaked more than two decades ago, The Wall Street Journal reported. The push comes as the state faces population losses, high housing costs and what economists say is an urgent need for higher-paying industries.
June visitor arrivals to Hawaii were down 9% from June 2019, the Journal reported, diminished by a roughly 50% drop in international tourism over the same period. Food and housing prices have climbed while incomes adjusted for the cost of living are among the lowest in the United States. Only California has a higher median home price.
“If we don’t fix the problem, we’re going to face many more years of anemic growth and people voting with their feet,” Carl Bonham, executive director of the University of Hawaii’s economic-research division, told the Journal.
The diversification challenge is rooted in the history of the islands’ economy. Hawaii depended first on sugar plantations and then the pineapple industry in the 19th and early 20th centuries. In 1936, Pan American Airways began flying passengers from San Francisco to Honolulu. After statehood in 1959, larger aircraft cut airfares and visitors grew sevenfold in a decade. During the 1980s, the Japanese economy swelled, drawing legions of new visitors. But by 2000, the volume of inflation-adjusted tourism dollars had peaked, and a state report issued last fall said Hawaii’s economy remained highly dependent on a weakened tourism industry through 2024.
The state’s tech ambitions rest on a small but growing cluster of startups and university research projects. In the foothills of the Koolau Mountains, University of Hawaii students at the Hawaii Space Flight Laboratory assemble flight hardware, run orbital simulations and design satellite-tracking stations. “Our names will be going around the moon,” Matthew Madayag, a student who found the lab from a flier posted in a campus elevator, told the Journal. Miguel Nunes, an aerospace engineer recruited from Portugal to join the project, said nearly all the students would likely move to the mainland unless things change, since the best jobs are at mainland-based companies such as SpaceX.
State officials have been in talks with Fenix Space, a California-based orbital launch company that has expressed interest in establishing a launch site on the island, according to the Journal. “We miss this opportunity, and in two years it’s going to be too late,” Nunes told the paper.
The agency leading the push is the Hawaii Technology Development Corporation. Its head, Trung Lam, grew up in Hawaii to Vietnamese immigrant parents who ran a Honolulu sandwich shop, returned to the islands after earning a mechanical engineering degree at the University of California, Davis, and helped found an organization to support local tech workers before applying to lead the corporation. Lam has met with venture capitalists, executives and lawmakers and focused the agency on ocean- and space-based industries that could take advantage of Hawaii’s geography.
The corporation is signing a lease worth more than $1 million for manufacturing space at the Kapaa Industrial Park on the outskirts of Kailua, the Journal reported. The state intends to sublet space to startups that might not commit to long-term leases on their own. In meetings of the corporation’s board, agency documents show, members questioned the state’s acting as a landlord and the risk of losing public funds.
The approach echoes a past state effort that did not succeed. In 2001, Hawaii began offering 100% tax credits to investors in technology businesses; an audit after the program ended a decade later found the state had afforded nearly $1 billion in credits with little to show for it, the Journal reported.
Among the startups navigating the new landscape is Normal Corp., which builds energy-efficient heating, ventilation and air-conditioning machinery and has grown to roughly 20 employees. The company was launched by Josh Leong, a 40-year-old former Google employee and alumnus of the Silicon Valley startup incubator Y Combinator, and Ashten Akemoto, a 23-year-old computer engineer who had been preparing to take a job in Japan. Leong persuaded Akemoto to stay in Hawaii at a Waikiki café, and the two recruited recent college graduates and experienced engineers. To set up manufacturing space on a lot zoned for retail, Leong and his wife opened Ando Café on the premises. “It was surprisingly easy to convince a bunch of 20-year-old tech guys to live on my couch and build robots with me in Hawaii,” Akemoto told the Journal.
Not all ventures have fared as well. Keizo Gates, 41, runs Kamanu Composites, an industrial canoe business he started with high school friends who grew up in Hawaii. Gates, who attended Rensselaer Polytechnic Institute, told the Journal that the business is in debt and he is not sure it will survive the year. “We wanted to prove that you can do something different,” he said, pacing through his facility in the Kapaa Industrial Park. “And I feel like we failed.”
Hawaii’s small ocean-tech industry — firms that repair cargo ships, make sensors to detect floods, breed commercial shellfish or make livestock supplements from seaweed — offers another possible route, the Journal reported. Patrick Sullivan, chief executive of Oceanit, an industrial research and engineering company based in Honolulu, has trained 800 interns over the years. Most leave for the mainland, he said. “People think we’re in the middle of the sea, so let’s focus on seawater,” Sullivan told the Journal, expressing skepticism that the state can establish an ocean-tech industry on its own. He added that the state should not try to predict which industries or businesses will succeed.
Steven Bond-Smith, an economist who has studied how Hawaii can create higher-paying jobs that retain local talent, told the Journal that rising opportunity costs drive young workers off the islands. “If your wage doesn’t keep up with the rest of the United States, then the opportunity cost of staying in Hawaii becomes higher and higher,” he said.
Hawaii lost a greater share of its population last year than any state except Vermont, the Journal reported. Young adults make up roughly a fifth of Hawaii’s population but account for more than 40% of residents who leave, and more than half of Hawaii-born college graduates now live on the mainland. State Senator Glenn Wakai told the Journal that the people leaving are the ones Hawaii needs to reinvent the economy. “As those people exit Hawaii, who’s going to be left?” he said.
Economists and entrepreneurs interviewed by the Journal said the state needs only a few successful enterprises to jump-start broader change. Zach Hernandez, who left Hawaii for college on the mainland and returned to run a talent-development startup on Oahu, told the Journal that a small number of high-paying jobs at a successful company can produce investors for further startups. “If you bring 30 or 50 jobs with a $100 billion company, you create 30 or 50 millionaires,” he said. Akemoto, who left Normal last week to launch his own robotics startup, was more pointed: “Hawaii needs one unicorn. We need one crazy success. You can change a place, you can change perception, you can change everything with one crazy success.”