Boeing Boeing … Gone

The Boeing Co. is threatening to leave its home in Seattle, fed up with costly demands from its workforce and an unresponsive local government.

Executives are looking south to warmer climates, where cheaper land is available and workers seem more willing to provide the flexibility the managers say they need to compete in the cutthroat airplane business.

Thats the story today, at least. It was also the story during the 1920s, when Boeing got into a fight with the Seattle City Council over building new roads connecting downtown with the airport we now call Boeing Field, and threatened to move to southern California.

Like rain in winter, this is a regular feature of the Puget Sound emotional landscape, says author and political economist T.M. Sell. Were coming up on the 100th anniversary of Boeing first threatening to leave. Perhaps we can all get together and have a cake.

Even so, policy makers today are facing a new threat from the states largest manufacturer, the notion that its next new airplanelikely to be a replacement for its top-selling 737 serieswont be built in Renton, but in some business-friendly, right-to-work state in the southeast United States.

Everyone should take it very seriously, says Linda Lanham, the director of the Aerospace Futures Alliance, an industry group that lobbies the Legislature on behalf of Boeing and the rest of the aerospace industry. There are 78,000 reasons78,000 good-paying, family-wage jobs.

In addition, there are 10,000 more aerospace jobs in the region that are directly or indirectly tied to the presence of Boeing, not to mention the service economy that has grown up around Washingtons largest employer.

The issue came to a head last October, in the midst of the bitter 57-day strike by the International Association of Machinists (IAM), one of the longest in Boeings history. Some 87 percent of the factory workers in Boeings largest union had voted to reject the companys contract offer, partly because of pay and benefit issues, but largely because of disputes over Boeing moves to use non-union workers to perform tasks traditionally done by machinists.

At the same time, contract talks with the second-largest unionthe Society of Professional Engineering Employees in Aerospace (SPEEA), representing engineers and technicianswere getting off to a rocky start. Boeing had proposed to SPEEA contract terms very similar to those already rejected by the machinists, and SPEEA leadership was warning its membership to prepare for a walkout as well.

In Chicago, Boeing CEO Jim McNerney issued a memo to employees noting that despite the companys efforts to pay industry-leading wages, machinist union leadership had recommended strike votes in four of the last five rounds of contract talks. As a result, Boeing was getting a reputation for being an unreliable supplier, he said, a fact that was jeopardizing the entire United States aerospace industry.

In the midst of this tension came a report from well-respected and oft-quoted aerospace analyst Richard Aboulafia. In the October edition of his monthly newsletter for the Teal Groupwidely read in the industryAboulafia warned that aviation centers are almost impossible to create, but they can easily be destroyed.

Seattle, he continued, will be the next to go.

The reason, he said: labor strife. The machinist union undoubtedly has some legitimate grievances. Over the years, Boeing management has shown that it knows as much about labor relations as the producers of Predator III knew about science fiction.

But it appears management is moving to the next stage. After decades of butting heads with the machinists and other unions, Boeing management is fed up, Aboulafia said. Over the next 10 years, [Boeing Commercial Airplanes] will move to southern states with weaker unions and right-to-work laws that diminish union power. As the car companies realized, its easier to train flexible workers than it is to work with experienced but inflexible workers.

The Puget Sound aviation cluster wont be moved in one giant piece; rather, like every other ex-cluster, it will disaggregate, Aboulafia projected. The final assembly lines will move to right-to-work states. Outsourced major airframe sections will continue to be shifted to multiple locations, either abroad or to right-to-work states.

This remark was followed within days by what quickly became known as Boeings strike zone speech. Fred Kiga, Boeings vice president of governmental relations, delivered an address to an industry conference in Everett, warning that the constant fights with the unions were causing harm.

We cant afford to be known as the strike zone, he said, speaking at a conference thatironicallyhad been called to discuss Boeings need for trained workers in the future, a future that seemed very much in doubt after Kiga finished talking.

The combination of Aboulafias comments and Kigas speech sent a shockwave through the aerospace community, with many analysts and pundits weighing in on the question of whether Boeing was serious about pulling out.

There is a faction in Boeing thats had it with the IAM, Leeham Co. analyst Scott Hamilton wrote in one of the companys recent reports. This faction in Boeing looks at the strike threat every three years and wonders, Why not outsource the work?, and even asks, Why not relocate assembly lines?

As author Sell points out, Boeing has often considered relocating its major final assembly centers when it launched new airplane programs.

With the 747 in the 1960s, for example, Washington wasnt at all a strong contender early on. Boeing looked hard at sites in Ohio and Kansas and had even taken an option on land in the San Francisco Bay Area, before reluctantly concluding that it would be too hard to convince enough key personnel to relocate. That finding put Boeing into a search for Puget Sound sites, which led it eventually to Everett, where the company recently celebrated the 40th anniversary of the 747s first flight.

And in 2003, Boeing conducted a high-profile, nationwide site selection search for a new home for the 787. The company was believed to be leaning toward locations in North Carolina, Alabama and Texasall right-to-work states dangling attractive cash incentivesbefore then-Governor Gary Locke (now U.S. Commerce Secretary) convinced the Legislature to approve a tax break expected to save Boeing and its in-state suppliers some $3.2 billion over 20 years.

That tax break evened out the higher costs of doing business in Washington and let Boeing make the decision it wanted to make all alongbuilding the plane in Everett, says Walt Gillette, the executive in charge of developing what would become the 787.

About the only time Boeing has moved a major business unit away was in 2001, when it shifted headquarters to Chicago. But tellingly, only about half of the 500 executives and support staffers Boeing offered to move to Chicago took the jobs.

Thats a lot of talent out the door, Sell wrote last winter at Crosscut.com, an even more important consideration when youre talking about actually building the planes.

A lot of people still dont want to leave here, he adds. Every time Boeing has looked at going, the company has concluded that too many important employees were simply not going to march off to wherever.

A TRANSFORMED INDUSTRY
Americas manufacturing industry has been transformed over the past two decades by outsourcing. Corporations have been able to increase their profits by offloading low-skill work to places where wages are cheap.

In Boeings case, it makes no sense for the company to produce its own fasteners when it can buy nuts and bolts made by someone elsein Texas, perhaps, or in Chinafor less.

Advances in machine tool technology mean that its increasingly possible for more complex parts to be made by cheap semi-skilled workers in Mexico, China or even Vietnam, argues Tom Captain, a principal aerospace analyst for Deloitte LLP, which put out a report critical of Washingtons aerospace industry competitiveness last year. That assessments going to make outsourcing even more attractive to Boeing in the future.

All these factors reinforce the new manufacturing paradigm epitomized by General Electric Co., which seeks to drive efficiency by shifting actual production to the lowest-cost provider. Boeings thinking is heavily influenced by the GE model; former CEO Harry Stonecipher was a disciple of Jack Welch, who led GE to glory in the 80s and 90s with this method. So is current CEO Jim McNerney, who came up through the ranks at GE and was once considered Welchs likely heir.

But the problem with outsourcing is that it works much better on flow charts and spreadsheets than on the factory floor. And it ignores the fact that skilled labor is also an asset.

The problem with this model is that it is truly not very efficient, Sell says. Workers are not interchangeable parts; they have knowledge and skills that can create new products, solve problems and go to the wall for you when you need it.

While Boeing management argues that outsourcing lowers its costs, Sell is doubtful. The company … often spends a lot of money paying its workers to fix others mistakes.

Hamilton is also critical of McNerneys GE-style approach to outsourcing, saying he stubbornly clings to the broadest possible outsourcing when the 787 program clearly proved the model seriously flawed.

Sending the work overseas also provided suppliers with the skills they need to rise up to challenge both Boeing and Airbus in the commercial jet market, says Hamilton, noting that a key 787 supplier, Japans Mitsubishi Heavy Industries, is taking steps toward building a jet that could compete with Boeings 737 replacement.

Its time to rethink the whole issue of outsourcing, Hamilton writes. The commercial competitiveness of the U.S. aerospace industry is at stake. There must be some middle ground upon which Boeing and its unions can agree.

AFTER WASHINGTON
But if it did leave Puget Sound, where could Boeing go?

Boeings production process for the largely outsourced 787which has major components built in Italy, Japan and South Carolinahas been a failure and shouldnt be a guideline for the future, Hamilton argues.

The execution of this model has been so abysmal that we believe Boeing needs to rethink this approach for the next airplane, Hamilton says. Boeing said the 787 production model will be the basis of all future airplanes. While we agree with the basic premise, we have become convinced that Boeing went a step (or several steps) too far.

Moving to a right-to-work state wont allow Boeing to escape from unions. The same machinists who walked out against Boeing in Seattle last year helped organize a union at the new 787 plants in South Carolina. The airplane industry in Texas is heavily unionized, and so are the plants run by key Boeing suppliers like Vought Aircraft Industries.

If Boeing were to set up a second 787 assembly line in San Antonio, as some have speculated, it wouldnt be long before unionization efforts would happen, Hamilton writes. Payback is, as they say, a bitch, and the IAM would seek payback big time.

Given all thats happened with the 787, analyst Michel Merluzeau of G2 Solutions thinks its highly unlikely that Boeing will move away all at once.

The 787 model has shown that it takes a fair amount of highly skilled individuals to manufacture a plane, Merluzaeu argues. Lesson No. 1: An experienced workforce is an incredibly valuable asset. Lesson No. 2: To reassemble it [the workforce] somewhere else is a momentous, time consuming and expensive task.

As a result, Merluzeau believes that Boeing will act prudently in making decisions about how and where it will build new airplanes in the future. There will be a fair amount of outsourcing for sure, he wrote, but I would expect Boeing to bring back a significant amount of engineering and design in-house to ensure that programs do not experience the glitches encountered with 787.

New manufacturing technology, combined with outsourcing, means fewer workers will be needed to assemble an airliner, he adds. So yes, Boeings footprint in the Seattle area will shrink. But, he adds, It [the footprint] will transform rather than disappear.

SWEETENING THE POT
So what more would it take to get Boeing to stay in the Puget Sound area?

Boeing Commercial Airplanes chief Scott Carsonin a carefully measured speech last fall, given in Seattle days after the machinists strike endedlaid out four areas where the company would like to see the state make improvements. The list had a lot in common with the agenda promoted by President Obama when he took office:

• Continued improvements in education
• Increased spending on transportation infrastructure
• Sustainable future budgets, and
• Making government programsspecifically workers compensation and unemployment insurancemore efficient and less costly.

Location is a choice, Carson told members of the Puget Sound Prosperity Partnership, and when weighing locations, companies will consider land costs, business taxes and the quality of the local workforce. In Washingtons case, all three of them are highbut high land costs and taxes are not a good thing.

In late February, Gov. Chris Gregoire appointed Bill McSherry, a former executive with the Puget Sound Regional Council, to be her liaison to the aerospace industry. One of McSherrys main tasks was commissioning an analysis of how Washington stacks up against other states in terms of competitiveness, everything from unemployment insurance costs to workers compensation, labor, materials, taxes and exemptions. Gregoire said then she wanted the information to help convince Boeing to locate a second 787 assembly line here.

The Aerospace Futures Alliance pursued a lot of Carsons agenda in the most recent Legislative session. Expanded job training programs and the maintenance of aerospace manufacturing tax breaks were top priorities for 2009. So were reforms in workers compensation and unemployment.

Job training is a particularly big issue, Lanham says. This isnt just about Boeing. There are 650 other companies, mostly suppliers, that are affected by all this. Before the economic downturn, trying to find skilled workers for this industry was their highest priority.

Lanham lists six states boosting training programs in hopes of recruiting aerospace firms. We have some of the best skilled workers in the country, but other states are putting in aerospace training facilities: South Carolina, North Carolina, Kansas, Alabama, Marylandeven Michigan is trying to figure out how to bring in aerospace to offset the car industrybecause the skills are similar. Those are the things we need to be concerned about and keep up with.

The organization is advocating an overhaul of aerospace job training programs statewide, urging a new facility that would both offer workforce training and coordinate the various programs that exist at community colleges. We have good ones, but theyre fragmented all across the state, Lanham says.

And even while Boeing is years away from launching its next major airplane, the time is now to ensure that its built here, Lanham says. Sometimes you do too little, too late, and we dont want to be in that position.

When people focus on Washingtons shortcomings as a jet manufacturing center, they overlook one of its key strengths, Sell says. We know Boeing better than any outsider, so we should be better able to meet its needs. Its the same thing we did with the 787we asked them what do you need? We knew what Boeing needed much better than anybody else then, and thats what we need to do now.

It would be pretty foolish to think that not maintaining our industrial base is something we shouldnt worry about, Sell continues. We should, but once again, Boeing has every reason to stay here and not much reason to leave.

Is there a future for the aerospace industry in Washington state? asks Merluzeau. Of course there is, but it will take vision and commitment from all sides to slow down the current tide.

To meet the unprecedented demand for 787s, Boeing is talking about ramping up to unheard-of production rates10 planes a month, which is nearly 50 percent faster than it builds any other wide-body jet.

But even at 10 per month, an airline placing an order for a 787 today wouldnt actually receive the plane until sometime between 2017 and 2020. That delay hurts sales.

The obvious solution, industry analyst Scott Hamilton says, is opening a second 787 assembly line, probably around 2012. The less-obvious issue is where to put it.

There has been much scuttlebutt that Boeing would build a second 787 line in San Antonio, Texas. The company has a facility there, and has discussed speeding production by flying partially completed Dreamliners south so Texas workers could install passenger seats, paint the planes and generally prep them for delivery.

Texas, of course, is one of the right-to-work states that analyst Richard Aboulafia thinks will land more Boeing work. Andunlike places like South Carolina and AlabamaTexas already is home to a strong cluster of aerospace companies and experienced aerospace workers.

But starting a second assembly line there has its drawbacks, too. Boeing would have to duplicate its supply chains to deliver parts to factories half a continent away, and it would need to make a big up-front investment in Texas tooling, training and facilities.

As Hamilton notes, one of the contract provisions the machinists union won during the 2008 strike was the right to bid on any work Boeing would like to shift outside the Puget Sound region. If Boeing proposes creating a second 787 line in Texas, he says, the machinists will likely counter with a proposal to create the line somewhere in the Northwest.

Boeing created the prototypes of all the tools its global suppliers are using to build 787 components at its developmental center in Tukwila. Those prototypes are still there, and union leaders think the prototypes could become the basis for a second line that would be far more affordableand significantly less complicatedthan the Texas option.

Further out, Boeing is studying options for refurbishing or replacing two other jets, the single-aisle 737 and the 300-seat 777. When it finally decides to replace those planes, Aboulafia argues that Boeing will likely set up brand new assembly lines and supply chains that are far away from the Puget Sound area.

Boeings been in talks with key customerslike Southwest Airlinesabout an all-new 737 replacement that incorporates most of the technological advances of the 787s. The problem, according to Boeing, is that jet engine builders such as GE and Rolls-Royce are still five years away from the fuel-efficiency breakthroughs that would make an all-new plane feasible. Therefore, Boeing is now talking about replacing the 737 no earlier than 2015, and maybe as late as 2020.

For now, the company continues exploring ways to once again update the 737, which is presently assembled in Boeings Renton factory.

Some speculate that Boeing will move first to replace its popular 777 model, which is getting squeezed by a new Airbus jet, the A350XWB. Boeing executives downplay talk of an all-new plane but say theyre studying ways to upgrade the current 777 lineup by the time the A350 comes to market sometime between 2013 to 2015.