Our Take on Boeing's South Carolina Deal

By Mike Randle

On October 28, 2009, Boeing became the latest famous corporate nameplate to announce a big deal in the American South. On that day, the world's second-largest aircraft manufacturer decided that Washington State would not be the home of a second 787 Dreamliner final assembly line and that North Charleston, S.C. would be. The announcement shook up officials in Washington state, many of which were convinced that Boeing's latest courtship with South Carolina was a ploy by the company to gain further concessions to build the new line at existing facilities in the Puget Sound region.

Boeing's North Charleston project is expected to create at least 3,800 jobs and represents an investment of at least $750 million. Those two thresholds would have to be met by 2016 in order for the company to cash in on an estimated $450 million incentive package from state and local governments in South Carolina. We believe both numbers are predictably conservative. For one, there are already 2,600 workers in North Charleston working at the former Vought plant that Boeing purchased this summer and the Global Aeronautica facility that is a 787 subcontractor to Boeing. That facility is a joint venture between Boeing and Alenia. Some have speculated that Boeing will have more than 6,000 employees working at the aircraft factory by 2016. More than one expert has put the figure at 6,400 by 2016.

Regarding the investment in the project; Boeing is building a structure of 584,000 square feet interlaced with tunnels and new roads and they are doing it in a hurry. Construction has already begun and is expected to be completed by June 2011. To give you an idea of how quickly Boeing is putting up the new facility, in comparison, Kia began construction on its automotive assembly plant in West Point, Ga. in the summer of 2006. The Korean automaker officially opened that assembly line for production in November, or more than three years after it broke ground. Boeing is attempting to build and open its assembly plant in half that time.

A brief Boeing timeline and important events

One of the South's most impressive economic development coups didn't just land on South Carolina's doorstep this year. Back in 2003, Boeing began a widely publicized search for its first 787 aircraft assembly line, which was then called the 7E7. That prize went to Boeing's existing facilities in Everett, Wash. However, North Charleston along with Mobile, Ala. and Kinston, N.C., made the company's short list for the first Dreamliner factory.

While South Carolina missed out on its first chance with Boeing in 2003, the state did land significant subcontractors for the 787 aircraft as a result of its efforts. Two of Boeing's largest 787 suppliers, Vought Aircraft Industries and Global Aeronautica, broke ground on a $560 million manufacturing complex at the Charleston International Airport in 2004. In 2006 Vought and Global Aeronautica began producing, assembling and shipping fuselage components in its 747-400 LCF (Large Cargo Freighter) to Everett, Wash. for final assembly of the Boeing 787.

Even though South Carolina earned pretty good consolation prizes in Vought and Global Aeronautica after failing to land the first 787 assembly line in 2003, economic development officials with the Palmetto State never gave up on landing a Boeing final assembly line, whatever the aircraft type. South Carolina officials aggressively marketed the state at aerospace shows in Dubai, Singapore, Farnborough and Paris. Those same officials would make special efforts to meet with Boeing executives at the shows.

At the time, Boeing wasn't a primary South Carolina customer, but they were a large customer to two companies -- Vought and Aeronautica -- in the state. That connection enabled South Carolina economic developers to ask Boeing executives directly how the two subcontractors were performing in the 787 assembly process and it gave them an opportunity to ask Boeing if there was anything they could do to help the two companies do a better job. The connection ended up being critical for both Boeing and South Carolina.

In the fall of 2008, the Machinists’ union went on strike for the fourth time in 20 years at Boeing's facilities in Washington State. The timing couldn't have been worse for Boeing as it was struggling with issues surrounding the fuselage assembly of the 787 model, which at the time was almost two years late in delivery.

Meanwhile, in December of 2008, Boeing officials announced another delay in the first flight of the 787 Dreamliner, moving the date to the second quarter of 2009. In June of 2009, the company announced another delay in the 787 test flight, saying that it needed to reinforce an area within the side-of-body section of the aircraft where the fuselage connects to the wing. Boeing officials also cited the work stoppage as an issue in the delay.

On July 7, 2009, Boeing announced that it had decided to purchase the Charleston operations of Vought Aircraft for $1 billion. The deal fueled speculation that Boeing could open a second 787 assembly line in South Carolina. The next day, U.S. Rep. Norm Dicks (D-Wash.), revealed that Boeing wanted a 10-year, no-strike deal from the Machinists' union.

In August, Boeing announced another delay in the first flight of the 787, moving it to the end of 2009, with delivery of the first plane expected to be in the fourth quarter of 2010. By that time, Boeing had lost about 70 orders for the 787, due to both the delay in the delivery of the plane and the recession. On December 15, when the 787 finally completed its maiden flight, Boeing had about 840 orders for the Dreamliner.

In September of this year, members of the International Association of Machinists voted to decertify the union at what had become Boeing Charleston, the former Vought facility. Less than 60 days later, Boeing picked Charleston for its second 787 line. It is revealed that by 2013, Boeing expects to deliver seven 787s a month in Everett, Wash. and three a month in Charleston.

Operating costs and labor issue factors

In the fall 2008 issue of SB&D, we published an editorial titled "Will Labor Issues Force the Aviation and Aerospace Industry to Fly the Coup?" In the story, we wrote, "With the Machinists' strike now over, Boeing's first task is to get its Renton and Everett, Wash. assembly plants up and running again. The second thing Boeing might do is consider taking some of its assembly work elsewhere."

Little did we know at the time that exactly one year later Boeing would make the tough decision to move assembly work to South Carolina. Boeing officials said the move was made because it best fit its production plans for the 787 Dreamliner. In contrast, the reasons behind the move, according to Washington Gov. Gregoire, were "about negotiations with labor."

In a public statement regarding the Boeing decision, Gov. Gregoire said, "I'm disappointed, I'm angry, I hurt for the workers and I think the company made the wrong decision. But, I wasn't at the table." Why Gov. Gregoire wasn't "at the table" for such an important development with the state's largest employer (even larger than Microsoft) is up for speculation. Nonetheless, it probably didn't help matters for Washington State when Gov. Gregoire visited the picket line during the Machinists’ strike against Boeing in the fall of 2008.

Among other things, Boeing was seeking a 10-year no-strike clause with the Machinists' union in the Puget Sound. The union offered the company a 10-year no-strike agreement, but with it came plenty of other things the company would not commit to. Boeing wasn't interested in the union’s proposal and walked away from the negotiations the day before announcing that South Carolina would get the second 787 assembly line.

Pointing fingers at the union is easy to do in situations like Boeing is in. But Boeing is like so many other companies that have made similar moves in recent years. Caterpillar, Toyota, Nissan, BMW, NCR, Volkswagen, Fidelity, Newell Rubbermaid and many others have moved their primary manufacturing operations, their headquarters or both from other U.S. regions to the South for two primary reasons: costs and clout.

In Boeing's case, there is one other factor to add; almost all of its aircraft production is done under one roof in Washington State. What would happen to Boeing and the world's aerospace industry at large if something happened to that 4.3 million-square-foot building in Everett? Natural disasters and even terrorism have to be factored into a company's future strategy these days, especially one like Boeing that has over 90 percent of its production located in one place.

Diversifying its production also gives Boeing more political clout, something Toyota is famous for doing in its site searches. With the new South Carolina factory comes the support of two more U.S. senators, a governor and other members of Congress. And then there's the operating costs factor.

In similar moves to the South, Nissan, Fidelity, NCR and others have not been shy about publicly citing lower operating costs as the reason behind their decisions. As far as we can tell, few Boeing officials cited lower operating costs as a leading factor in choosing South Carolina over Washington State for the second 787 line. But the temptation to do the math on lower operating costs for Boeing is just too great not to include in this deal.

For example, currently, the average pay on the Machinists' line at Boeing's facilities in the Puget Sound is about $28 an hour. The average hourly wage for line workers at its North Charleston plant is $14. No big deal, you say? Well, if Boeing does end up employing 6,400 workers in Charleston like many of the experts say they will, and the company saves just $10 an hour in wages, including benefits, that's a savings of $4 billion over a 20-year period. The $4 billion in labor cost savings represents more than seven times the cost of Boeing's initial investment in the South Carolina plant.

An economy transforming aerospace deal

In the last 20 years there have been many economy transforming projects built in the South. By using the word "transforming," we mean individual economic development job and investment generating projects that are so large they single-handedly boost prosperity in the entire state they are located in. Those that come to mind include many of the automotive plants in the Southern Automotive Corridor (go to www.SouthernAutoCorridor.com) like BMW (South Carolina), Mercedes-Benz (Alabama) and Nissan (Tennessee). Other projects in different industry sectors such as Texas Instruments (Texas), Dell (Texas), Disney (Florida) and Wal-Mart (Arkansas), just to name a few, are similarly transforming when it comes to a state's economy.

Yet, the new Boeing project in South Carolina is paramount in that it represents the complete assembly of large commercial aircraft. There are only a handful of places in the world where large commercial aircraft are fully assembled and North Charleston, S.C. will be one of them. Also, for Boeing to pick South Carolina over its huge, existing footprint in Washington State for an assembly line means that change in decades of aircraft manufacturing tradition in the U.S. is underway.

Boeing's new investment in South Carolina won't ever amount to the investments the company has made over the last 90 years in Washington State. There are currently over 70,000 people employed by Boeing in the state of Washington. Still, for Boeing to make the decision that it will perform final assembly of large commercial aircraft outside of its traditional manufacturing beachhead for the first time ever makes this economic development story one of the most memorable in years.