The Seattle Times, November 1, 2009, Sunday

The Seattle Times

November 1, 2009, Sunday

The Seattle Times

S.C. decision transforms Boeing's relationship with Washington, labor unions

By Dominic Gates

Seattle Times staff reporter

Boeing's decision to build a new airplane-assembly plant in Charleston, S.C., will change the shape of the company and dramatically alter how both the state of Washington and the Machinists union approach Boeing.

Washington state must accept a future where it competes for every new Boeing airplane program, with low-wage South Carolina as a certain rival.

The Machinists must accept that if Boeing doesn't like their demands, it can direct future work to its nonunion Charleston plants.

A defining moment could come about 2015, when Boeing will choose where to build the successor plane to either the Renton-built 737 or the Everett-built 777.

"There was a lot of sniping from Washington to the effect that 'it may be cheaper in South Carolina, but we build it better,' " said John Krug, an executive at Development Advisors, a corporate site-selection firm based in North Carolina. "The company didn't buy that argument.

"Boeing has clearly illustrated what its preference is," Krug said. "They believe they can manufacture in South Carolina and they can do it cost effectively."

Another crucial point will come even sooner, in 2012 — soon after Charleston is due to roll out its first Dreamliners — when the International Association of Machinists (IAM) and the white-collar union at Boeing, the Society of Professional Engineering Employees in Aerospace (SPEEA), will negotiate their next contracts.

That's when the unions must face their new reality, said Scott Hamilton, an Issaquah-based aviation-industry analyst.

"Clearly, Boeing is going to be looking at the 2012 SPEEA and IAM contracts as a benchmark for deciding where the successor airplanes will be built," Hamilton said. "That will be crossing the Rubicon for labor and for Boeing."

The IAM leadership and many of its members are angry now at the abject failure of talks with management, in which they had hoped to save the second 787 assembly line for Everett by agreeing conditionally to lay down their most potent weapon, the ability to strike.

Yet Adam Pilarski, an industry expert with aviation-consulting firm Avitas, believes that weapon may now be almost unusable in 2012, given the need to compete with Charleston for new planes.

"If labor has a strike, then it's over," said Pilarski. "A strike would be terminal."

The second line slated for Charleston will be modest compared with Boeing's Everett operation.

But South Carolina's hope — and Washington's fear — is that Boeing Charleston will grow substantially.

Doug Woodward, a University of South Carolina economist who expects to begin an economic-impact study for Boeing soon, said that when BMW opened an auto-manufacturing facility in South Carolina 15 years ago, it started relatively small. After major expansions and a complete change of product line, it now employs more than 5,000 workers.

"It's evolved and grown," Woodward said. "It could be the same with Boeing. What we see now is quite different from what they may make 20 years from now."

Officials of the Charleston County Regional Development Alliance plan trips to Seattle soon to recruit suppliers to set up facilities near the new Boeing plant, said Leighton Lord, managing partner of Nexsen Pruet, a law firm Boeing hired to help negotiate its South Carolina incentive package.

That package is valued at about $450 million — made up of $170 million in upfront grants, plus tax breaks.

Risky strategy

Art Wheaton, who teaches labor and industrial relations to union officials and others at Cornell University, said Boeing's strategy is risky. He points to the product-quality problems Nissan had when it opened a factory in Canton, Miss., with an inexperienced work force.

"It hurt Nissan badly," Wheaton said.

Nevertheless, he said, Boeing's strategy is a familiar one from the steel and auto industries, and it's a threat to the IAM's power.

"The union has to prove that it's worth something of value," he said, by continually delivering better quality, productivity and reliability with lower employee turnover.

IAM District 751 President Tom Wroblewski angrily denounced Boeing's negotiating tactics after the talks failed, saying the discussions were only a "smoke screen" for the company's intention to move anyway.

Yet looking forward, he strove to be more positive.

"We still have 25,000 members here building airplanes. Their future depends on us maintaining their jobs here," Wroblewski said. "We need to maintain a relationship with the company. That's what we'll do."

Rich Michalski, the IAM's general vice president and chief negotiator in the failed talks, said the union won't trust the company again, but will move on.

"We're resilient people," Michalski said. "We're going to build the best airplanes. We're going to deliver the quality."

Come 2012, Charleston may have rolled out a few Dreamliners, but Everett should be in full production. Because a strike then would be crippling, the IAM will be potentially powerful again but also possibly restrained by the desire to win the next airplane.

How does Michalski see the contract negotiations going? "We'll talk to them in three years," he said.

In the meantime, politicians and economic-development officials in Washington must regroup and work out a strategy to compete against South Carolina and other potential rivals.

Snohomish County Executive Aaron Reardon said the choice of Charleston this past week should not have come as a surprise.

He listed a series of pointers to Boeing's shift out of Washington, beginning with the merger with McDonnell Douglas in 1997, the headquarters move to Chicago in 2001, and the competition for the first 787 line in 2003.

"It's not the Boeing Company we all knew, homegrown in Washington state," Reardon said.

"I view them as a very aggressive, very competitive, publicly traded corporation who are focused on meeting their stockholders' needs above all else."

Nonetheless, Reardon said, Boeing jobs "are the backbone of the middle class in my county."

To protect those jobs in the years ahead, the state's elected officials should move to reduce business costs, work to improve labor-management relations and promote work-force training, he said.

"It comes down to investments," Reardon said. "What investments are we as a state ready to make?"

Regarding incentives, he said Washington should structure them as it did in 2003 to win the initial 787 assembly line — tax breaks on new investments, as well as funds for education and training.

John Monroe, a former Boeing executive consulting for the Snohomish County Economic Development Council, said Washington needs to be aggressive.

He recommends the state extend its wide-ranging tax breaks for commercial-airplane manufacturing to cover production of unmanned aerial vehicles, space systems and military and defense products — all of which would benefit Boeing.

"Washington is no longer the incumbent; we are the challenger," Monroe said.

Steve Mullin, president of the Washington Roundtable, an organization of local business CEOs, agrees.

"We would be well advised to consider ourselves the underdog and plan accordingly," Mullin said.

Analyst Pilarski said one key factor in determining where Boeing builds its next airplane will be how the company's Charleston experiment performs between now and 2015.

"If things are splendid in Charleston, with no unions, no absenteeism, low turnover and super productivity, then there's no chance for Washington," he said. "But don't write the obituary yet."

Not nearly gone

Most of Boeing's commercial-airplane operations will still be here for years to come, whatever the company decides about assembling its next airplane.

And because Boeing's design engineers are in Washington, this is the place where the program will be headquartered.

Boeing had about 15,000 engineering and technical staff in the Puget Sound region at the end of 2007, according to the latest available state data.

That cadre of intellectual capital couldn't be relocated or re-created elsewhere on short notice.

So while portions of the design work on the next airplane may be outsourced, it must largely be designed here.

And even if Boeing had a complete pullout strategy for its manufacturing, it would be very slow.

The 777 and 737 programs will run well into the 2020s and beyond.

If Boeing wins the contract for the Air Force tanker, the plane will be built in Everett, bringing tens of billions of dollars of work.

Alex Pietsch, director of Renton's Department of Community and Economic Development, has had to plan for the prospect of Boeing leaving for years.

Early in this decade, Boeing dramatically shrank its footprint at the 737 assembly plant on the south end of Lake Washington.

Renton rezoned the land in 2003 and drew up plans for condominiums, hotels and retail stores.

"If and when Boeing were to vacate the property, the city is ready to create a new future," Pietsch said.

Yet Boeing's presence in Renton keeps getting extended: The date for delivering a jet replacing the 737 has been pushed out until after 2020, the company will build a 737-based anti-submarine plane in Renton even beyond that, and Pietsch said Boeing is negotiating to extend its lease at the Renton airport for more than two decades.

Even as Washington warily watches Boeing's growth in Charleston, the vast majority of the company's commercial-airplane infrastructure remains in Washington, says Ed McCallum, senior partner in the South Carolina site-selection firm McCallum Sweeney, which advised Boeing on its 2003 search for the first 787 assembly line.

"You've got a chance to keep the rest of it," McCallum said. The Charleston selection, he said, is "a wake-up call."

Dominic Gates: 206-464-2963 or dgates@seattletimes.com

Seattle Times researcher Gene Balk contributed to this report.