There’s an industrial revolution underway. Unless we act, it will make the racial wealth gap even worse

Phoenix, Arizona - March 08 2023: Ongoing construction of Taiwan Semiconductor Manufacturing Company (TSMC) wafer Fab 21 in North Phoenix located at Loop 303 and I-17.
Construction of Taiwan Semiconductor Manufacturing Company (TSMC) in Phoenix, AZ. Photo credit: Around the World Photos / Shutterstock
Editor's note:

This piece was first published by Fortune.

The U.S. economy is now navigating not one but two industrial revolutions. The first was catalyzed by digital technology, wireless broadband, and now generative AI. The second is being fueled by massive public and private investments spanning infrastructure upgrades, the net-zero transition, and a domestic reshoring of advanced manufacturing from computer chips to electric vehicles and batteries.

Media and policymakers alike are focused on the location and investment decisions of large companies. However, the revolution is not just about big companies like Intel or Siemens–it’s also about thousands of small and medium-sized enterprises that supply goods and services to the government or major firms receiving government contracts or subsidies. This is the promise and challenge of what has been labeled the “new procurement economy.”

A familiar cast of large firms

While much has been said about the job opportunities America’s industrial shift presents, far too little attention is being paid to the once-in-a-lifetime opportunity to build a new generation of dynamic and successful small businesses with diverse ownership in sectors that will dominate the next economy.

Take the energy transition, which will implicate a vast number and range of small and medium-sized enterprises. Public and private utilities will be looking to local construction firms to complete grid and transmission line modernization projects and new solar and wind farms to support electrification. Vehicle and battery manufacturers are building and restructuring their supply chains to support the production of electric vehicles. A huge stock of commercial, residential, and public buildings will require energy efficiency retrofits. These shifts represent many billions of dollars in business opportunities in the years ahead.

The new industrial moment implicates construction, design, engineering, and technology firms of all sizes, along with software and other service businesses. Yet public infrastructure projects are dominated by a familiar cast of large firms. In 2022, the top 20 contracting firms in the transportation, power, and industrial construction sectors captured between 56% and 82% of market share by revenue, according to industry data. Beyond the issue of fairness, this overreliance on a small number of major suppliers poses longer-term risks, as the pandemic reminded us, including added costs and delays for vital projects nationwide.

Market forces and unprecedented federal spending have placed a renewed focus on using public and private investments to grow small businesses of all kinds, particularly Black and Hispanic-owned businesses. However, this important goal will not be achieved without addressing serious economic realities.

The COVID-19 pandemic decimated small businesses, and not just those in the retail or hospitality sectors. Due to supply chain disruptions, material and labor shortages, and the added costs of inflation, small and medium-sized construction and manufacturing firms are still recovering from pandemic-related stop-gap measures and financial losses.

Pandemic setbacks and closures also reminded us of stark racial disparities in business ownership. According to the Census Bureau, in 2020, Black and Hispanic-owned employer firms represented just 2% and 8% of all employer firms, respectively. Minority-owned firms are even more under-represented in the construction, manufacturing, and utility industries that are projected for huge growth. Black firms are particularly scarce, representing less than 1% of all employer firms across these three sectors.

The racial gaps in business wealth are already far larger than gaps in ownership of real estate or financial investments, wide and persistent as those are. White households have about a dozen times more real estate wealth than Black or Hispanic households, but more than three dozen times as much wealth in private business assets. Conversely, viewed in terms of opportunity, Black households with an entrepreneur have twelve times the wealth of those without one.

Getting this right is even more important in light of the recent Supreme Court decision on affirmative action in higher education and the subsequent ruling by a federal district court in July limiting a federal program meant to help minority-owned businesses in the competition for government contracts.

We have a big supplier pipeline challenge. The new procurement economy requires serious reforms, in addition to capital that’s fit to purpose. Federal investments flow to a fragmented set of public authorities and agencies, each with its own hard-to-navigate rules, definitions, and practices, which put substantial burdens on small enterprises. Collaboration is rare between public entities and the business chambers, financial institutions, and entrepreneurial support groups that help firms grow. Supplier diversity efforts have traditionally focused on legalistic compliance rather than business building or inclusive growth. Financial products do not address the well-documented disadvantages of minority and women business owners, such as thin capital reserves and lack of traditional collateral.

Addressing the supplier pipeline challenge

To meet this moment, we need to tackle the problem from multiple angles.

First, we need to transform public purchasing and contracting at all levels to ensure small, local, and diverse businesses are included to the maximum extent possible. Experts including the Government Performance Lab at Harvard University and the Equity in Infrastructure Project have been working to do just that. So have the National Urban League (a longtime voice on the importance of equitable contracting), the National Black Chamber of Commerce, and the United States Hispanic Chamber of Commerce. They need more support.

Second, large private companies should look into their procurement and expand local sourcing. Manufacturing corporations are investing hundreds of billions of dollars in projects that can transform entire regions–but they are also bringing global supplier relationships along and are not yet engaged in local economic development in the U.S.

Third, we need to build new public-private partnerships to support small and medium-sized enterprises across entire regions, dramatically reducing the fragmentation that exists across purchasers, capital providers, and established small business development programs (many of which do not provide sector or procurement-specific training or coaching at all).

From San Antonio and El Paso to Chicago and Philadelphia, groups such as the Nowak Metro Finance Lab at Drexel University, the Aspen Institute’s Latinos and Society program, and Next Street have been facilitating the creation of these kinds of partnerships in markets across the country and developing the digital backbones and other tools required to make them work as effective marketplaces for institutional buyers and suppliers.

Fourth, we need more analysis and financing to scope the opportunities for small firms and identify new forms of support, especially capital suitable for suppliers (both startups and growth companies). High interest rates and recent bank collapses have made lenders more averse to risk, contributing to a credit crunch–the opposite of what’s needed in a building boom. Flexible financial products fit for scalable small firms, such as supply chain financing or revenue-based financing provided by Founders First Capital Partners–which began in San Diego and now works in the Chicago and Dallas markets too–need more experimentation and broader adoption, not less. The federal government is helping, working to offer flexible capital for underserved businesses through programs such as the State Small Business Credit Initiative. Private corporations, banks, and philanthropies are also mobilizing capital through the Economic Opportunity Coalition.

The imperatives we face are clear. In addition to making buyer practices more inclusive and innovative, we need to invest more strategically in developing small and medium-sized suppliers, in a deeply equitable way and on a dramatically larger scale. This demands reform, funding, and collaboration, powered by a new mindset.

We are facing a looming supplier pipeline challenge–but tackling it would have huge economic and social payoffs. This new industrial moment offers an opportunity we have not seen since the wartime economic mobilization of the 1940s–and there’s no time to lose.