Boeing CEO: Puget Sound too Expensive for Boeing
Interesting article in today's Seattle Times: Boeing CEO in no hurry to settle strike
Anybody else read it that way? If not, what do you think he is getting at here?
The really interesting part comes near the end:The Seattle Times wrote:Boeing chairman and chief executive Jim McNerney sent a memo to employees Monday that was also a firm message to the Machinists union: Though the ongoing strike is now into its fifth week and all commercial jet production is halted, Boeing won't scramble to settle on the union's terms.
McNerney warned that the International Association of Machinists' (IAM) "track record of repeated union work stoppages" is "earning us a reputation as an unreliable supplier to our customers."
The memo did not address the gap between the two sides on compensation issues, instead focusing on the union's insistence that Boeing reduce outsourcing of work and offer workers some guarantees of future jobs.
He also alluded to the disastrous long-term outcome that past labor settlements by the Detroit auto companies had on that industry, and raised the specter that competition emerging in the American south would use cheap labor to undercut commercial jet manufacturing in the Puget Sound region.
Maybe I'm off base here, but reading between the lines, McNerney seems to be saying that Boeing does not intend to keep the Puget Sound as its primary base of operations for much longer, but will instead be eying cheaper parts of the USA where they can pay less for the same work, and likely be faced with less work stoppages.The Seattle Times wrote:In his message to employees, McNerney talked about how "the duopoly between Boeing and Airbus in supplying the world's large commercial jets will come to an end — probably sooner rather than later — as other competitors enter our markets."
He listed the Chinese ambition to build large commercial jets, as well as similar efforts in Russia, Japan, Canada and Brazil.
He said also that Airbus is growing stronger as it dramatically restructures and cuts costs.
And in a detail aimed directly at the Puget Sound area workforce, he said the plan by Airbus parent EADS to build the Air Force tanker in Mobile, Ala. — stalled for now until the next president takes office — is a move "to establish a beachhead for producing commercial airplanes in the United States — and in a very low-cost location."
"The issue of competitiveness as it relates to this strike is a big deal," the memo said, with the last two words underlined.
Anybody else read it that way? If not, what do you think he is getting at here?
Comments
Not to say that Boeing does relish the idea of lowering cost by moving or outsourcing; but they would never says so "for real". This is just stepping up the pressure of public opinion and an attempt to weaken the resolve of the rank and file.
Face it, Seattle now has similar business costs to Chicago, LA, Boston, or D.C, and we're one step below NYC or San Fransisco for property/labor costs. When you do that, you can now only compete for jobs at the top of the food chain (Financials, Managerial, maybe Engineering). Unless this bust changes things, Seattle no longer makes sense as a place to manufacture anything. This is going to surprise a lot of people.
So, long term outlook in Seattle is probably not so great, but short term this is just the CEO telling the union they can shove it on their demands. What he left out is that Boeing helped create competition in Asia by giving away wing models, but he's right that you can't follow the example of Detroit if you want to remain competitive in a global marketplace.
It's no secret that corporations don't like unions. This is a horrible time for IAM to strike from Boeing's perspective, and the management team has been playing the PR game for 3 or 4 months now, hoping to capitulate IAM into taking the contract Boeing wants. And yes, that contract includes language that allows them to outsource more of the work and have those outsourced companies do their assembly in Renton/Everett.
As for moving manufacturing out of the Puget Sound, I don't really see it as viable, at least not without bankruptcy being involved or capitulating the unions. Moving corporate to Chicago is easy; office space in Chicago is the same as office space in Seattle, and most of the "knowledge" in running a business is easily replaceable in a big city. The facility in Everett would probably cost a $1-2B to duplicate; plus you need to find 30,000 people to do assembly, train them, etc. Even with generous incentives, Boeing would be lucky to have 20% transfer. The loss of knowledge would cripple the company for a decade at least, which would be long enough for EADS, Embraer, the Chinese companies, etc all take over the 737 market and figure out carbon fiber to wipe out the 787.
FWIW, with respect to outsourcing, most of the delays of the 787 are directly related to having companies who've never built an airplane trying to build an airplane. That, and a ludicrous time frame from the outset.
I could see Boeing slowly expanding those sites while slowly making Puget Sound smaller. If you move in 2 years, it is catastrophic. If you move in 20, the knowledge transfer is much more tenable.
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....And yes, that contract includes language that allows them to outsource more of the work and have those outsourced companies do their assembly in Renton/Everett.
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I have no special knowledge of the situation, but judging from what I am hearing, outsourcing is a major sticking point, if not THE sticking point, hindering strike resolution. If true, these people are fighting for their jobs. How can you fault them?
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Their jobs are not in any kind of danger unless their salary demands get out of line. They are going after more union power by preventing Boeing from shifting to other areas where workers are less inclined to value union power.
Their jobs, as they are today, are in danger. There are people in the Everett plant (and to a lesser degree Renton) who do not work for Boeing, who make measurably less money than Boeing (IAM) employees, and are doing work that Boeing (IAM) employees have traditionally done. That's the writing on the wall.
Whatever comes after the 787, probably a 737 replacement, I suspect Boeing would like to be 100% subcontracted by foreign / right-to-work based companies with final assembly done by a skeleton crew of IAM guys who can fix all the mistakes.
At some point you need to build a facility that can fit multiple 747s, 777s, and 787s, with moving assembly lines and 10s of thousands of workers. Maybe you do it one plane at a time, but then you're looking at a 25-30 year phase time where you're operating multiple giant buildings. I'm sure you can pencil it out and justify it, but from my experience major relocations always yield a 2-3 product cycle penalty.
Also, I think Wichita, KS is the only other large facility and it's not very big (can only house 2 or 3 737s maybe?), and part of an air force base. Long Beach (old McDonnell Douglass plant) is good sized but that's not exactly cheaper. I might be missing something, but the bleed transfer is not that easy with a huge final product.
There's some other minor points, but yes, that's the main point that drove IAM voting the contract down. I've heard a few people say that they're trying to get back what they gave up in '02 and '05 to keep the company going in a major downtime. But I don't really know the extent of what was given up or if that has any weight.
My guess is that two major facets of manufacturing change in the future.
1) JIT/Lean - they are working on cutting down the length of time a given plane needs to be worked before it rolls out the doors. If you go from taking 100 days per plane to 10, you can roll out the same number of planes a day with 1/10th the total floor space.
E.g. one plane a day needs to be delivered, if your cycle time is 10 days, that means you need room for 10 planes to be worked on simultaneously; if each plan takes 100 days, then you need room for 100 planes to be in progress just to complete one a day.
2) Distributed manufacturing - this applies to how the parts are made, but it might end up applying to the planes themselves. Due to how the company is unionized, Witchita for instance does not go on strike the same time as Puget Sound. If you have four plants that are all part of different unions, you aren't relying on any one of them as much. It allows the company to play more hardball. If you apply principal one, you realize that each of those plants can be smaller than Everett and be just as productive to boot.
So, my guess is that's the direction the company wants to go, and that Puget Sound will become one of many manufacturing locations, with each location being of similar size.
#2 is basically what's going on with the 787, and I would imagine more so for future planes depending on contracts and how well the 787 works out. Final assembly is still in Everett, but most of the major chunks of the plane are made elsewhere. And based on the string of delays, it doesn't seem to be a very efficient process. In theory it'd be fairly easy to up and move 787 production anywhere you could have a sufficiently large building adjacent to a 6000' runway - sans the total loss of knowledge.
Neither state is a right-to-work state, so any company fleeing a union facility would be loathe to go there, even with significant incentives, as they'd likely end up with a different union down the road. And it would also very likely be the UAW, which is probably the 2nd worst union to work with (ILWU being a resounding #1).
Of course, I think the big 3 have shown the world that going along with whatever a union asks for will have repercussions down the road.
Interestingly enough, Honda and Nissan have successfully operated auto plants for decades in the US and avoided union incursions not through threat of firing but by simply compensating their workers fairly. Of course, that wouldn't work here because a "fair" wage in Seattle is quite higher than a "fair" wage in Ohio or Tennessee.
I think 777 production time is 15 days, give or take a bit, so 10-14 days for a 787 seems pretty reasonable. The 747 is likely longer, the 737 is 11 days.
The main difference being that IAM has fully embraced reducing the production time on all 4 current models. Faster production = delivering more planes = more profit for all involved. That's very different, from the perspective of the guys on the floor (and their union), than subcontracting a bunch of work and having those guys working in the shop. The number of jobs stays roughly the same, but the wages for the subcontractors are almost always lower, and that share of the profits go to other companies rather than being reinvested in Boeing.
Very small nit-pic here. Subcontractors tend to have higher wages, but not receive other benefits. Their total compensation is lower, but their wages are higher.
For individual contractors hired by Boeing, that's going to be true.
For full time employees hired by a subcontractor company, it's not. The wages are lower and the benefits comparable or inferior.
Yes, that's usually true. And I don't see any reason in the shorter term why these jobs will trend towards higher pay or better benefits. I think we've got maybe another 10 years of figuring out how to increase wages in the face of globalization. I'm sure in the long term, everyone will be better off, but in the short term downward wage pressures and outsourcing will increase.
Sadly, IAM and its membership is in a no-win situation. Even if they "win" this battle, the long war is not favorable. China's emerging airplane companies, Embraer, Bombardier, etc are all creeping towards the 737/A320 market which are the stable revenue generators for Boeing and EADS. Can a unionized American company or a European consortium based in socialist countries compete against China or Brazil's marketplace and lax corporate/safety rules? I don't see how they could. Some day, IAM and SPEEA will probably be forced to accept lower wages so Boeing can compete with the new players, or else see Boeing go under altogether.
* Whatever definition you may assign to that
Knowing the cost of a single plane crash, as CEO do you buy the cheaper plane or the known entity? I don't know, but it's not an easy question. Further, how many customers would you lose if people decided that like Chinese baby formula they think Chinese airplanes are unsafe.
I'm not suggesting that growing markets will never break into the market, only that it's a difficult/expensive market to break into. Look at autos. It took Japan about 20 years to really breach the American market, and the risk of a less well made car is lower than that of an airplane. It could take another 30 years for Chinese aircraft to become common.
Meanwhile, I think the wage difference between here and China or Brazil will greatly narrow in the next 20 years. Perhaps, by the time emerging markets are truly competitive, we will be wage competitive again...
Or, everything will be built by robots and all societies will be socialized by necessity.
You almost got that right.
You know how rats and squirrels get food from the cast-offs of humans? That will be the new relationship between humans and robots. Except that there will be so much stuff that we won't need a government to organize protection of private property.
And if by some freak chance you are able to provide something of value to the city-size robots then you will live like a billionare of today's time.
The old Larsen AFB.
One problem though. See all those little blue things on the north side of the building? Those are Genie lifts. Genie (my former employer) has been manufacturing at the Moses Lake facility since the mid-90s. So it's not exactly available for Boeing.
I was out there a couple winters ago and a 777 kept circling on an approach path... the guy I was talking to said that was fairly common.
If they do move, there's no way that spells good news for the Seattle-area housing market or general area economy.
Particularly in areas that aren't centralized. Unlike most other large employers in the area, who's jobs are mainly in downtown or Bellevue/Redmond, Boeing has offices or plants in many locations.
I was born in Moses lake. I lived in a neighborhood a couple miles south of the airport in the late 50's to mid 60's. Before the Vietnam wor got really hot, big silver and white B52's would take off and land over my house. As the war heated up, we saw a lot of B-52's with green camoflage with black undersurfaces. As a fifth and sixth grader, it was a really COOL thing. I remember driving by the airfield and all you could see of the planes was rows of those massive tails.
Sorry, I ramble...
On the other hand Boeing has the largest commercial/industrial facility in the whole United States. A lot of the suppliers have followed Boeing's policy of being in the radius of 4 miles of the facility and have moved to Everett. How hard would all of this infrastructure be to replace? And a system that is fully greased and tuned to work? Virtually impossible.
That huge facility was also 15% of what the Everett facility is. Majority of it was engineers. Who BTW I know of quite a few who are now $20k higher a year in pay and working at Everett for $80k a year. Not bad apples.
Renton facility was always a drag on Boeing as the Eastside values as well as constant issues with DOT, and a myriad of other issues made it more effective to move a lot of the administrative to Chicago. The actual industrial work went to subs or got moved to Everett.
If you have anything to back up moving Everett facility which is once again the largest industrial complex in the United States please state some of the facts, oh BTW and there is an airport attached to this one the size of SeaTac.