The South is Winning: Why the Puget Sound area will keep losing Boeing jobs

As the South pries away more pieces of Washington state’s aerospace industry, some experts have arrived at a striking conclusion: There’s little Washington state can do to stem the loss.

Washington’s edge, its century of aerospace experience, is increasingly dulled by the South’s growing skill in crafting advanced engines and carbon composite aircraft structures — often borrowing these techniques from the nearby auto plants that are pumping out $60,000 BMWs and other high-tech vehicles.

Even Boeing’s latest and largest new version of the Dreamliner — the 787-10 — looks likely to be built in South Carolina, the state where Boeing’s fastest-growing factory complex covers 240 acres in the Charleston-area “lowcountry,” as it’s called locally. That was the hint dropped during June’s Paris Air Show, where Washington state politicians endured what has become a familiar drip of announcements heralding the South’s dominance in aerospace.

While Washington leaders often downplay each new prize plucked by the South — a General Electric jet-engine plant to North Carolina, an Airbus factory for Alabama — the accelerating shift of the aviation industry to the South is not a series of isolated events, but a self-perpetuating trend that goes beyond just Boeing.

In fact, says respected analyst Richard Aboulafia, Washington’s aerospace industry could start waning much like two of the nation’s previous hotbeds of aviation: southern California and New York’s Long Island.

There, the factories fell idle, one by one, in the 1960s, ’70s and ’80s, as the industry, especially in the case of southern California, fled to lower-cost locales.

“The more you get hollowed out,” Aboulafia said, “the less compelling a case you make for your own competitiveness, and every battle becomes more and more hard-fought.”

Heading in the other direction is the South, where lower costs, job-hungry political leaders, and non-union workers won the region a stream of auto factories in the 1980s and ’90s that were planted by car makers headquartered in Japan, Germany and Detroit.

Although aerospace has been strengthening in the South, many Washington state leaders have contended that the Puget Sound region’s engineering chops would forestall a wholesale exodus.

Think again. Cutting-edge technologies in aerospace and automobiles have proven to be surprisingly alike, and the synergy between those industries has helped the South build a formidable network of engineers and engineering skills.“

That is an old view that it’s risky to move manufacturing to the South because there’s not enough of a talent base there,” said Greg Charleston, senior managing director in Atlanta of Conway MacKenzie, a relocation consultancy.

“Mercedes has been in Alabama for years now, BMW is in South Carolina, and there is a wealth of manufacturing and engineering assembly expertise down in the Southeast.”

Southern advantages

Globalization.

Cost is king at a time when aircraft are becoming increasingly commoditized, with Boeing and Airbus almost deadlocked in technology and a small squadron of would-be competitors only just behind.

For Boeing, controlling costs and the price of its aircraft is paramount, especially when the company no longer leads Airbus in new orders for single-aisle aircraft. Boeing is also fighting to recover from four years of problems with the 787 Dreamliner.

South Carolina offers anti-union laws and generous government subsidies that have tempted Boeing leaders, since 2009, into making that state home to its fastest-growing factory complex, in North Charleston.

The average aerospace engineer in South Carolina makes 86 percent of the $102,240 that his or her counterpart makes in Washington state, according to the Bureau of Labor Statistics.

And those fewer dollars go further in the Charleston metro area, where the median home value is $160,000, compared to $289,000 in the Seattle metro area.
South Carolina is not alone. Throughout the South, those same cost advantages have lured some of the world’s most demanding manufacturers, who have built factories in which Southern workers churn out Delta rockets, jet engines for Boeing and other aircraft companies, and fuselages for the just-launched, $288 million Airbus A350 900.

These states are working hard to land even more aerospace business, said Bobby Hitt, South Carolina’s commerce secretary.

They’re doing it, he said, by taking advantage of the region’s growing industrial and technical expertise.

“Do we aspire to more business from Boeing, and more Boeing suppliers here, as well as suppliers that might serve (factories) in Georgia and North Carolina, maybe even Alabama?” Hitt said, in an exclusive interview. “You bet we do. We’re going to do our homework for that and compete as hard as we can for it.”

Washington’s response

To be sure, Washington state officials, from Gov. Jay Inslee on down, vehemently deny that the exodus of aerospace to the South is inevitable.

“We should remain confident in our abilities to remain the premier place for aerospace in this world, and we should be undaunted by any of that competition,” Inslee told the Business Journal. “We have some latent advantages that remain today and are not surpassed.”

Among those advantages, Inslee said, are the world’s “best work force” and the state’s “tremendous intellectual infrastructure, which allows a symbiotic relationship for aerospace companies here.”

Indeed, aerospace employment in Washington has expanded vigorously in the last two years, up 13,000 to 94,000 in 2012. And Boeing is running its 777, 787 and 737 lines at record rates, with plans to increase 737 production to 42 jets monthly, from the current 38.

But this surge in activity, to meet Boeing’s huge backlog, may mask the long-range decline.

Even the most stalwart Washington boosters took notice this spring when Boeing made a spate of announcements that it would shed 1,700 engineering, 2,000 assembly and 1,500 information technology jobs in Washington — relocating many of them to Missouri and South Carolina. Perhaps even more attention-getting was the company’s plan to build a key engine casing for the upcoming 737 Max in the Charleston region, and to build a 220,000-square-foot factory there to do the work.

Wall Street is cheering on the Southern shift. It was no accident that Boeing chose to host its May annual investors’ conference at the Dreamliner factory in North Charleston. For many attendees it was their first visit to the shiny new campus. They were suitably impressed, and many advised clients to invest in Boeing stock.

“We believe that the potential labor savings from increased volume out of South Carolina is substantial,” wrote Ken Hebert of Imperial Capital. He added that while North Charleston’s 787 assembly line may be slower than Everett’s, “the overall cost per hour is 30 percent to 40 percent lower than what the company pays in Everett for 787 production.”

Tipping point

Boeing untied its apron strings from the Puget Sound area in 2001, when it moved its headquarters from Seattle to Chicago, which then-CEO Phil Condit said was better suited to a diversified company with operations in many states.

But many date the genesis of Boeing’s Southern shift to 2008, when a strike by Machinists District Lodge 751 lasted eight weeks and cost what Boeing said was $1.8 billion, as well as infuriating customers waiting for their 737s and 777s.

The next year, Boeing announced it would assemble commercial jets outside the Seattle area for the first time, at a $750 million 787 plant near the Charleston, S.C., airport.

That campus features the largest unobstructed factory interior of any Boeing manufacturing facility; capacity to fabricate and cure the Dreamliner’s carbon-composite rear fuselages; ample land to expand; and ardent support from regional leaders.

The notion that the strike prompted the Charleston decision was the subject of a public fight between the union and the company through the National Labor Relations Board. The union dropped its complaint as a condition of its 2011 contract with Boeing.

In Mobile, Ala., just 578 miles southwest of Charleston’s Dreamliner plant, the question of cost is becoming real to Boeing in another way. In April, rival Airbus began building a $600 million factory there, its first in the United States.

By 2015, Airbus will be assembling A320neo jetliners in Mobile, directly challenging Boeing’s 737 Max from U.S. soil. The plant takes advantage of the dollar-euro exchange rate and the South’s low costs. The Airbus plane, since its launch, has maintained a substantial lead in orders that Boeing has not been able to close.

Perhaps more disturbing for Washington state advocates, the engines that are at the heart of Boeing’s newest models are increasingly being built in the South.

In April, GE Aviation opened a composites factory in Ellisville, Miss., and a “super alloy” factory in Auburn, Ala. Both plants will build parts for final engine assembly in Durham, N.C., just 300 miles north of Charleston. Meanwhile, GE in June announced yet another plant, in Asheville, N.C., that will fabricate engine parts from a new generation of materials called “ceramic matrix composites,” stretching the technology envelope further.

Boeing is using versions of these extremely efficient GEnx engines on many of its new aircraft, including the 787 and the planned 777X.

Staying competitive

The shift of Boeing and aerospace away from Washington has developed in spite of vigorous local efforts to reverse it.

Former Washington Gov. Chris Gregoire for her two terms tried to win advanced aerospace manufacturing factories for Washington, but her administration’s best win was a BMW/SGL joint venture in Moses Lake.

While significant, that factory is limited to producing carbon fiber for car bodies, not actual automotive parts for BMW, and Washington secured that plum chiefly due to Grant County’s green and abundant hydro power.

When Gov. Jay Inslee introduced “the Washington Aerospace Industry Strategy” in early May, in a ceremony on the roof of the Future of Flight museum in Everett, he struggled, when pressed, to articulate what was significantly different between his plan and Gregoire’s. While Inslee and his aerospace office director Alex Pietsch had pulled together many elements of their predecessors’ work into a coherent plan, there wasn’t much that was new.

If there was a failing, it may not be Inslee’s or Gregoire’s. Rather, there may not be much that Washington state can do, given political reality, to reverse what appears to be a fundamental realignment in manufacturing to the South.

“Where is the Washington aerospace strategy that looks at this?” asked Scott Hamilton, an industry analyst and president of Leeham & Co. in Sammamish. “It’s not in the 30-page (Inslee plan) that just came out. It was a very disappointing document.”

In 2011, Washington celebrated Boeing’s decision to build its upcoming 737 Max model in Renton. But a study that Seattle attorney Tayloe Washburn commissioned, as part of the state’s Pegasus campaign to win the 737 Max, came to a sobering conclusion for Washington. The study said that South Carolina, Texas and Alabama all could offer cheaper labor than Washington, and that Washington’s key strengths are its legacy as a center of aircraft manufacturing, and its highly trained, but aging, work force.

The primary recommendation of the study was that the state should do everything possible to educate and develop the state’s skilled aerospace work force. In response, Inslee has made bolstering aerospace education central to his plan for landing assembly of Boeing’s upcoming re-engined 777X, and for retaining aerospace overall in the state.

But recent actions taken by Boeing suggest that state efforts to train aerospace workers in Washington may be canceled out by Boeing’s own moves to relocate its engineering to the less-expensive South.

In April, the company announced it would lay off 700 aerospace engineers, part of a 1,700-person reduction in the engineering work force in the Puget Sound region.

In mid-May, Boeing announced it was moving 600 information technology workers to Charleston, part of a 1,500-person reduction of IT workers in the Puget Sound region. Later that month, Boeing announced a new engineering center in Charleston, which will compete against Seattle engineers for projects.

The reductions suggest that Boeing isn’t exactly struggling with a shortage of technically qualified workers in Washington. They also suggest that the company is confident it will find qualified workers wherever it needs them, most notably in South Carolina, undercutting the notion that people there are less prepared to do highly technical work.

Moreover, Boeing is no newcomer to the South. Just last year it celebrated its 50th year in Alabama, at the Huntsville headquarters of Boeing Strategic Missile and Defense Systems. Boeing employs 2,567 people in Alabama, many of them engineers developing outer-space launch and missile systems.
Automotive expertise

Those skills have been nurtured by the automotive shift to the same region, where U.S. and foreign car makers operate 17 of America’s 45 auto plants.
South Carolina, for instance, is home to the largest BMW manufacturing complex outside Germany, with 4 million square feet of assembly facilities capable of making 240,000 vehicles yearly. That $60,000 BMW X6 you’ve been eying? It’s made in South Carolina.

The “Palmetto State” also is home to a Daimler factory producing Sprinter vans, a factory churning out Honda all-terrain vehicles, and 250 automotive supply companies.

All this is largely because the South — with its lower wages, cheaper land, non-union workers and state incentives — has single-mindedly pursued manufacturing as the best way to recover from the collapse of its textile industry in the ’70s and ’80s.

“What we’ve seen over a long period of time, the industrial base was in the North, and the South was a bit hungrier to attract jobs,” said Scott Thompson, U.S. aerospace and defense leader at PricewaterhouseCoopers. “Not only did they have the labor base, but they had more favorable incentives for business.”

In other words, if Washington state is staring at the specter of losing its aerospace industry, people in the South have already experienced their own version of that. During the 1970s and 1980s, the region’s enormous textile industry virtually vanished, as garment manufacturers turned to Asia for less-expensive supplies.

“We were fairly one-horse-focused in our past,” said Hitt, South Carolina’s commerce chief. “We went through a pretty difficult time of losing several hundred thousand jobs.”

And from that descent, Hitt said, Southern leaders saw a way forward: cars.

“We doubled down on that, and said, ‘Let’s go find industry that would be successful, and elevate our middle class, and take the people we have who are skilled at making things, and find more things for them to make,’” he said. “We retooled, we changed our approach to our technical education, we became more flexible.”

The question now is: How should Washington respond?

[email protected] | 206.876.5427
Steve Wilhelm covers manufacturing, aerospace and trade for the Puget Sound Business Journal.