Hawaii chases startup wave as tourism arrivals fall 9%

Hawaii's economy, still dependent on a tourism sector whose inflation-adjusted revenue peaked by 2000, is pivoting toward technology and manufacturing startups as June arrivals fell 9 percent from 2019 levels.

"If we don't fix the problem, we're going to face many more years of anemic growth and people voting with their feet," said Carl Bonham, executive director of the University of Hawaii's economic-research division.

The state lost a greater share of its population last year than any state except Vermont. Young adults make up roughly a fifth of Hawaii's population but account for more than 40 percent of residents who leave. More than half of Hawaii-born college graduates now live on the mainland, and only California has a higher median home price.

The Hawaii Technology Development Corporation is signing a lease worth more than $1 million for manufacturing space at Kapaa Industrial Park, with plans to sublet to startups. The state is also in talks with Fenix Space, a California orbital launch company, about establishing a launch site — a bet that aerospace, ocean-tech, and advanced manufacturing can create the higher-paying jobs tourism never did.

The push comes as Hawaii's tourism model shows structural decline. International arrivals are down roughly 50 percent from 2019, and food and housing prices have climbed while cost-of-living-adjusted incomes rank among the lowest in the U.S. The state has reinvented its economy before — from sugar plantations to pineapple to tourism after statehood in 1959, when Pan American Airways' newer aircraft cut airfares in half and visitor numbers grew sevenfold in a decade.

Startup bets take shape

Normal Corp, an engineering startup in Kailua, has grown to roughly 20 employees building energy-efficient heating, ventilation, and air-conditioning machinery. Co-founder Josh Leong, a 40-year-old former Google employee and Y Combinator alumnus, recruited recent college graduates and experienced engineers, including some from NASA. Ashten Akemoto, 23, was set to leave for a job in Japan when Leong persuaded him to stay and launch the company.

At the University of Hawaii, students at the Hawaii Space Flight Laboratory are building equipment bound for the moon. Miguel Nunes, an aerospace engineer recruited from Portugal, said nearly all these students will likely move to the mainland unless the state builds a local aerospace industry. "We miss this opportunity, and in two years it's going to be too late," he said.

State intervention carries risk

The state's track record is mixed. In 2001, Hawaii began offering 100 percent tax credits to technology investors; an audit after the program ended a decade later found the state had afforded nearly $1 billion in tax credits with little to show for it. Board members of the technology development corporation have questioned the state's acting as a landlord at Kapaa Industrial Park and the risk of losing public funds.

Keizo Gates, 41, who runs Kamanu Composites, an industrial canoe business using aerospace-grade machinery, said the company is in debt and may not survive the year. "We wanted to prove that you can do something different," he said. "And I feel like we failed."

Patrick Sullivan, chief executive of Oceanit, one of Hawaii's largest tech companies, has trained 800 interns over the years — most leave for the mainland. He cautioned against the state trying to pick winning industries. "People think we're in the middle of the sea, so let's focus on seawater," he said.

Economists such as Steven Bond-Smith at the University of Hawaii argue the state should build on geographic strengths — proximity to the equator for space launches and the Pacific Ocean for marine technology. "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. The bet is that a single breakout success can change the calculus. "Hawaii needs one unicorn. We need one crazy success," said Akemoto, who left Normal last week to launch his own robotics startup. "You can change a place, you can change perception, you can change everything with one crazy success."

This article is for informational purposes only and does not constitute investment advice.