Chasing the 777X assembly site

Washington State is ramping up its all-out effort to land the assembly site of the Boeing 777X.

Gov. Jay Inslee appointed a bi-partisan panel from the Legislature to come up with an incentive package to present to Boeing. He’s already proposed extending the Boeing 787 tax incentives adopted in 2003 another 16 years, to 2040, though these incentives were ruled illegal by the World Trade Organization.

Predictably, Airbus pounced on Inslee’s proposal, though mistakenly assuming Boeing asked for the incentives. According to The Everett Herald, the initiative is entirely Inslee’s. Said Airbus:

This is another example of Boeing’s refusal to accept to play by the rules by continuing to solicit and receive subsidies which are especially potent in distorting trade. The 787 tax credits were ruled illegal subsidies by the WTO in the final verdict of March 2012. After breaking the WTO rules on the 787, with a repeat of measures for the 777X Boeing continues to show total disrespect for WTO obligations and the compliance process. 

These are the quotes from the reports on
adverse effects:

–  The WTO Panel found that “the availability of … the B&O tax subsidies, enabled Boeing to lower its prices beyond the level that would otherwise have been economically justifiable” (7.1818) giving Boeing a “pervasive and consistent pricing advantage” (7.1819) that is “felt most acutely in particular sales campaigns of strategic importance” (7.1822) and results in illegal adverse effects to EU LCA interests (7.1823) 

– The WTO Appellate Body generally upheld that finding (para. 1273), emphasizing the importance of the subsidy given the price-sensitive nature of many sales, and Boeing’s market power in a duopoly context (para. 1260)

The analysis of the B&O tax rate reduction “subsidies” do not provide any great quotable statements by the Panel, which isn’t surprising given that the dollar value of those subsidies was quite low during the period of review, when the subsidy programs were just starting to take effect.  The numbers now are much larger!! 

The quote on the subsidy side is in 7.302 of the panel report:
“For the foregoing reasons, the Panel finds that the Washington B&O tax reduction; the B&O tax credits for preproduction development, for computer software and hardware and for property taxes; and the sales and use tax exemption for computer hardware, peripherals and software are specific subsidies to Boeing within the meaning of Articles 1 and 2 of the SCM Agreement. The Panel estimates that the amounts of the subsidies to Boeing’s LCA division are $13.8 million; $21.3 million; $20 million; $1.1 million; and $8.3 million respectively”

Inslee’s office said that the WTO ruling is under appeal and until that’s settled, the tax breaks are legal.

Washington has been often criticized, including by its own politicians, as having a worse tax structure than competing states. But Washington has the sixth best tax climate in the country, according to the Tax Foundation. A low number on the map is good.

South Carolina ranks 37 and Texas, another sometimes-talked about site, is #11.

But taxes aren’t the only criteria for attracting business, nor is it the only consideration by Boeing when studying where to locate the 777X assembly site. Business climate overall is important, and Washington’s compares poorly in some respects, according to a Boeing insider. Cooperative politicians and government agencies are important, and South Carolina’s are much better than Washington’s, this person says.

Additionally, Washington’s strict environmental rules are a major issue. Last year, the state Department of Ecology proposed stringent rules to protect salmon. Former Gov. Christine Gregoire killed the effort at the time, but it’s not over. Boeing lobbied against the rules due to the cost and challenges of compliance, and has said adoption could prompt moving assembly out of Washington. Inslee is trying to strike a balance.

Transportation is also an issue, and the Puget Sound area around Seattle, Renton and Everett is among the most congested in the nation. Inslee has proposed a tax package to fund transportation improvements, but the Republicans control the State Senate and the party, nationwide, oppose tax increases of any kind for any reason. Still, some Republican legislators say there is some hope a tax package can pass the next session, which begins in January.

STEM education–Science, Technology, Engineering and Math–is a constant need and in this area Washington has been successful in making progress despite huge budget cuts. Inslee has proposed more funding.

We’re told Boeing Commercial Airplanes wants to assemble the 777X at the Everett plant, but of course the decision will be made by headquarters in Chicago. Jim McNerney, the CEO, is known to generally favor the non-union, lower cost Charleston (SC) plant over the higher cost Washington even though the Everett unionized workforce is far more skilled. McNerney’s dissatisfaction with labor unions led to selecting Charleston for the second 787 assembly line in 2009, a year after a disruptive strike. But labor relations with the IAM, which assembles airplanes for Boeing, have improved since and there is a contract in place that extends to 2016–just about the time assembly of the 777X would begin.

Many believe the business case for building the 777X at Charleston isn’t there, since the current 777 is assembled at Everett. But looking long-term, selecting Charleston may fit into McNerney’s strategic vision of diversifying out of Washington State.

The wild card in site selection is McNerney, says the Boeing insider.

Former Gov. Gregoire was not well regarded by Boeing Chicago, sources told us during her tenure, in part because she appeared at IAM a strike rally as she was running for reelection in what was expected to be a tight race (which she went on to win comfortably). Inslee, a Member of Congress before he ran for governor, had a much closer relationship with Boeing. He was one of the strongest supporters for the Boeing tanker proposal in Congress and has been a long-time Boeing booster. But support doesn’t necessarily carry the day with Boeing. Members of Congress in Kansas were likewise strong supporters of Boeing’s tanker bid. Boeing promised finishing work in Wichita if it won the tanker contract. Boeing did win, but later announced it would close down its Wichita facilities, angering its supporters.

Although one of our sources claims Charleston has already been selected by Chicago as the winning site, we’ve not been able to confirm this with anyone else.

Inslee’s efforts to create a package to throw at Boeing are laudable. But it seems to us he needs to make a pilgrimage to Chicago (if he hasn’t already).

21 Comments on “Chasing the 777X assembly site

  1. Looks like when BA stifled filing a CVD ( Countervailing Duties Petition ) in 2001-2002- it may now have come full circle and bit them in the Posterior.

  2. I am not sure how fair it is to characterize Republicans as opposed to tax increases across the board nationally, but then ignore which party, comparatively, has controlled both Washington and South Carolina for the past 15 years (and is generally opposed by organized labor).

    The 2008 IAM strike is long term clearly going to be seen as a pivotal moment in Boeing’s Washington manufacturing. It is interesting that salmon-driven environmental policies could have such an impact on Boeing.

    • I think Texas makes a lot of sense, there are a lot of mechanic types there, it is RTW and it allows for risk diversion. Having 787 in WA and SC means an earthquake or hurricane could only stop half the production of the 787. Having the 777 in Texas and WA, an event only stops half of that production. A FAL has capacity limits, having 2 separate lines each at 7 solves a lot of thing.

  3. Is the SC site really lower cost at this point? Don’t you need to divide value produced by cost to come up with that determination? I would be shocked if that calculation looks favorable for SC at this point. If the cost difference is that extreme that it works out even with Charleston’s lousy production rate so far, I guess it is pretty compelling, but I really doubt it does.

    If the SC cost savings are all just anticipated cost improvement that will be realized only when the Charleston plant “inevitably” starts producing just as well as Washington, then I think it would be incredibly reckless to endanger program execution by making another major move to SC before the plant shows it actually can deliver — especially on a 777 freshen up program that could benefit substantially from the existing 777 industrial base.

    • Normally- ” costs” relate to ” productivity” ( defined as sales/per employee ).breaking this out by SC versus everett would take a lot more information that is available or public.

      But consider that SC is a basic assembly plant which also builds a ‘ small’ section.

      With automated equipment, labor is probably only 10 percent of the ” local” costs

      The differences in labor rates IMO would have to be three or four to one to attain the same productivity as Everett. Add to that ( or subtract depending on view ) a typical learning curve for the SC versus everett, and on a pure labor- experience basis, it would be hard to justify SC for a ‘ new” program building different parts than currently in any reasonable cost versus sales versus time ( years ) to get to ‘ break even’ for a NEW airplane.

      But who can guess what the power point rangers will come up with- along withn a post -it note mindset ??

  4. Jim McNerney, the CEO, is known to generally favor the non-union, lower cost Charleston (SC) plant over the higher cost Washington even though the Everett unionized workforce is far more skilled.

    So if they go for Charleston, it’s a decision driven in part by cost and in part by ideology, because the CEO isn’t a fan of Unions. Great. Is this really the 21st century?
    Curiously, by the way, Volkswagen have a single major factory worldwide that has no workers council, that being the factory in Tennessee. Going by their current profits and market position (having long surpassed GM and now striving to take the number 1 spot from Toyota), VW seem to be on to something, and the workers councils have obviously not harmed the company. But they’re now being told by politicians that having a council is a bad idea. Very odd that a company has to explain to politics why more employee rights representation would be a good idea.
    For somebody from Germany like myself (living in Ireland), and even for a German company that’s got factories worldwide, that is really strange and somewhat indicative of a very strong anti-workers-rights ideology that – like all ideologies – has more to do with a certain principle of thought than reality.
    Which is to say that of course, an overly strong workers representation like the UK saw in the 70s and 80s is just as bad as an exaggerated focus purely on companies’ interests, pretending that companies’ and workers’ interests are one and the same. That equation isn’t true in either direction.

  5. We could debate VW as well. How many B and C class cars does VW import from Germany to the US again? Is there a reason they are built in Mexico/south of the border? What about GM and Toyota? Where are the Corolla/Yaris/Cruze/Sonics assembled? Hmm…

    Maybe aviation chasing lower cost manufacturing is on to something. Again, that 60 day, $100-million/day strike in 2008 shouldn’t be dismissed as “silly for management to consider” when studying future production/long-term labor needs.

    Right-to-work states, and perhaps the idea itself as an ideology, is not a new phenomenon. As explanation, they essentially are allowed in such states, such as SC, to opt out of the union and still work in the shop/plant.

    • We could debate VW as well. How many B and C class cars does VW import from Germany to the US again? Is there a reason they are built in Mexico/south of the border? What about GM and Toyota? Where are the Corolla/Yaris/Cruze/Sonics assembled? Hmm…

      Your point being? Many Boeing and Airbus sub-assemblies come from different states and countries, and some Airbus planes are even assembled in China.
      Every major car maker (and even every major multinational, including the one I work for) has plants in multiple locations, usually their major markets – Tennessee isn’t exactly home ground for VW, nor is Eisenach home ground for GM, or Burnaston for Toyota.
      Also, I never said VW didn’t take advantage of lower-cost production locations – Tennessee is a cheaper location for them than Wolfsburg, for instance (which also explains why e.g. BMW builds the X5 exclusively in the US and imports it to Europe then).
      My point was that VW has so far not closed existing plants in favour of a direct replacement in a lower-cost location, and much less based any such decision on having supposedly less hassle with workers rights representation.

      That’s the contrast I was trying to highlight with regard to McNerney’s (alleged) stance and reasoning behind potentially relocating 777(X) production to Charleston because of the lower associated cost and SC being a non-unionised location, throwing considerations like skill, employee loyalty, labour relations, etc. out the window.

      Regarding “Right to work” – I do understand that this is only supposed to mean than employees get a choice whether or not to be in a union and still be able to work in the plant. However, nobody here is talking about drones of employees wanting to move from Everett to Charleston because they finally want to get rid of their union membership. Scott has brought the subject up because the CEO of Boeing (allegedly) prefers Charleston partly because it suits his agenda better to not have a union that dares challenge management’s decisions.

      “Right to work” has in effect come to stand for “non-unionised”. See Scott’s original post for example, which contrasts unionised Everett with non-unionised Charleston.

      That is is why McNerney would care about it to begin with. His concern in that context is not the welfare and freedom of choice for employees, but RTW in SC meaning less hassle with a body that represents workers interests with more clout than individual employees could ever hope for.
      This means that RTW effectively just replaces the obligation to be a member of a union (which I disagree with) with the obligation to not be a member of a union (or a member of a powerless union) (which I disagree with in at least equal measure).

      To wit: Tennessee, where VW’s plant is located, is a RTW state. And yet, it’s particularly some RTW groups and the local senators that oppose even the introduction of a workers’ council and (by extension) some influence by unions.

      • ” Regarding “Right to work” – I do understand that this is only supposed to mean than employees get a choice whether or not to be in a union and still be able to work in the plant. …”

        Partially right- but mostly wrong. Understand your confusion which comes about by the misnomer of Right to Work. Since the 1940’s, union membership as a mandate in order to work at a company has been and still is illegal. Often called ‘ closed shop ” . What IS required is payment of dues or a fraction thereof to cover cost of bargaining IF you are in a group of workers ( non supervisor for example ) which have been determined to have similar work requiremements AND for which workers have voted to be a UNION. In a few states, such non members only pay a percentage of dues from the get go. In MOST states, the non-member- non voting dues are the same as regular union dues. MOst companies ( like Boeing ) will only deduct ONE such amount from a paycheck, regardless of membership or not.

        Non members are generally known as Agency fee payers- and usually must pay by cash or check on a periodic basis, once every three months, or once a month. The uniion MUST treat them the same as ANY member- regarding employment complaints, management employee-disputes, etc and thgey get the same benefits as any employee re pension- healthcare, etc.

        There are essentially three classes of Agency fee payers

        1) pay regular dues- out of paycheck like any member

        2) pay reduced dues based on seperate audit for only the UNION functions- non political non necessary to union function. AT SPEEA for example, that is about a 20 percent discount- paid at least quarterly by check or cash – they are called BECK OBJECTORS as a result of a SCOTUS case between a guy named BECK and a union.

        3) Religious Objectors- those who have a belief or religious objection to joining a union pay NO dues to the union. BUT they must periodically pay an equivalent amount to a NON religious charity ( as defined by IRS) and present a receipt to the union proving they have done so.

        Using SPEEA as an example- rounded numbers cuz I’m too lazy to look uo the most recent which are screwed up anyhow but know a lot of previous numbers

        About 20,000 dues paying regular members
        About 700 Agency Fee payers- regular dues
        About 600 Beck Objectors
        About 200 relIgiou7s objectors

        Dues are based on 85 percent of total bargaining unit AVERAGE hourly pay

        thus
        http://www.speea.org/Join_Our_Union!/SPEEA_Dues.html

        Dues for 2013 – $39.75

        Dues are recalculated each January with the new rate taking effect with the first pay period in February. The calculation is based on a percentage of the average hourly rate of employees in all the SPEEA bargaining units combined. Per the SPEEA Constitution, dues are set at 85% of the average hourly rate.

        So- EVEN in a right to work state – employees have a choice to form a union or not, get to vote on such a choice.

        Little known- but now out of date factoid.

        In the 1990s,-early 2000s, the greatest percentage of employees who were unionized who worked for Boeing were in a RTW state- the land of OZ known as Kansas !!

  6. Hi Scott,

    I’d like to address an oft-repeated misconception about the relative labor costs in Everett and Charleston. When you compare apples-to-apples, the difference isn’t much.

    Most 787 final assembly workers, at both sites, are classified as mechanic/assembler Bs. Starting pay for them in Everett is $15 an hour; Boeing says Charleston starting pay is $14.

    More than half the Machinists Union members in that category in Everett earn between $15 and $20 an hour; Boeing says the average wage for mechanics in Charleston is $17 an hour.

    Machinists Union members who are at the maximum for this pay grade earn $35 an hour. I’d say that accounts for about a quarter of the Everett 787 workforce. At the same time, between 20 and 30 percent of the people building 787s in Charleston are temp workers on contracts that pay them $35 to $40 an hour.

    To Matt B’s point, given the fact that Everett has delivered roughly 30 ‘Eight-Sevens since the fires this spring, and Charleston has delivered eight, one could easily make the argument that Boeing’s labor-cost-per-airplane is actually lower using union labor in Everett than it is using non-union labor in Charleston.

    And to refine Don’s line of thought: We at IAM 751 have said previously that our labor costs are less than 5 percent of the cost of each Boeing airplane. (The exact amount is proprietary.)

    • The labor cost per B-787 built between WA and SC are an apples to oranges comparison. The Charleston FAL will never equal the production rate of the Everett FAL because it was never meant to be. Everett has the primary FAL line and the surge line, Charleston has the second line. For now, production at Charleston is fixed at 3 X B-787 per month, Everett is at twice that rate. SC will catch up as Boeing goes to 12-14 per month as there is not much more B-787 capacity left in WA, as much of that will be in SC.

    • The other error in analyzing labor rates in this manner is that it misses the larger point; SC is really intended to decentralize away from the $600-million 2008 strike.

      That was very costly, to all parties involved, and probably to sales as well.

      Back to Anfromme’s point/discussion, I’m quite aware of the TN status as RTW, and the local politics between the UAW, VW, and state officials is interesting, but much more complex/nuanced than depicted here. It’s easy to go a bit too far attempting to discuss this here I believe, but the short story is that there has been a HUGE push by the UAW to get into German/Japanese American plants, and Chatanooga in particular. I think really the German union has a big say in what products will head state side (http://www.redstate.com/2013/09/11/were-a-majority-of-vws-american-workers-coerced-and-threatened-into-signing-uaw-cards/), but don’t really care, frankly.

      I personally simply hope the Boeing CEO does a good job managing production risk/costs. As above stated, Washington has proven costly in many ways. Diversification has and does make sense for BA, but it has to happen in a manner that doesn’t negatively impact products as it has (in total) with the 787 so far.

      There are ups and downs to RTW vs. “union” states, and that about half of the American states have gone each way is a good indication of this point. It’s not surprising BA is essentially working to straddle the fence today on it.

      • About the 600M ‘cost”. The common misperception is that the strike significantly cost the company MORE than the non payment of labor during that same time period.

        Most forget that Boeing has a strike clause in most contracts with customers which covers missed delivery dates as a result of strikes and or natural disasters.

        And that the 7 Late 7 program used a lot of the delay time to partially catch up on the engineering and paperwork mess, plus vendor delays.

        Just what the “cost’ was to Boeing is proprietary, but IMO it is quite probable that the NET cost to BA was significantly less then the 600M.

        The strike was caused by ONE main reason – way too many Jack Welch and MDC types in the executive offices. And IMO a chance to catch up on the 7 late 7 disaster.

    • Thanks Bryan- its great to get some facts from a credible source. I might add a bit to the labor cost picture re contract labor.

      from memory- BA typically claims(claimed) that the benefits cost in addition to base pay is on the order of 30- 35 percent. Meaning for a Base pay of say $40, an additional 12/hr is cost of benefits.. and the argument then becomes about why union costs are ” significantly ” higher. But for some strange reason, BA rarely – if ever- breaks down just what that ” 30 percent ” figure really is.

      For example – FICA adds about 6 1/2 percent- union or not
      medicare another 2% ?? union or not.

      Pension – somewhere between 6 to 8 percent – historically – but ALL employees get some sort of pension ( until recently )- generally union protected ( by contract ) pension benefits have been a bit better than non union (VERY dependent on year- decade- used for comparison ) About 1999- major changes for the non union types were made in benefits and pension.

      Then there is the healthcare game- at the moment- union helthcare benefits for the next few years WILL be and ARE better than OBUMA CARE. The non -union people may well be in for a big big surprise next year !!

      IMO- when one finishes an true complete comparison ( this year ) between SC and Everett ( or Northwest ), the net difference may well be something around 10 percent- to 15 percent in ‘cost ‘ of labor. Most of which is tax deductible.

      And as to pensions- a dirty little secret. Pension accounting is bizzare and if done at home one would be a prime candidate for club fed.

      If, according to the rules a company provided pension has surplus$$ , that surplus can be put into the audit as OPERATING EARNINGS. in fact, no $$ really change hands or pots. Those same $$ put into the plan are . . tax deductible or tax exempt.

      Has Boeing ( and others ) done this ? YES- a close reading of annual reports in the 2003 to 2006 time frame will reveal the amounts of $$ so designated.

      Of course improved operating earnings make for better bonuses for some, and certainly help stock prices.

      The above is NOT speculation on my part, but documented fact. And the BA board of directors went bonkers and complained to SEC when in one of my shareholder proposals, I claimed that BA ‘ pumped up ” earnings with pension dollars. Said it demeaned the company and was used in a pejoritive fashion.

      The SEC made me remove it so as to allow my proposal to be published.

      This of course clouds the picture as to the REAL cost of pension benefits !

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