Questioning the effect of the WTO

We’re not the only ones questioning the effect of the recent WTO ruling against Airbus and its illegal subsidies.

A respected business writer from The Seattle Times has weighed in with this opinion piece.

We’ve long been cynical of the WTO and the Airbus/Boeing complaints as little more than political talking points. We’ve noted before the ineffectual rulings that Canada and Brazil illegally subsidized the Bombardier CRJ and Embraer EMB-jets, and nobody imposed sanctions.

Boeing was found many times to have improperly benefited from tax breaks via the Foreign Sales Corp. (FSC, pronounced “fisk) legislation. The European Union went back to the WTO six or seven times for enforcement once the FSC was found to be illegal (with application to 767, by the way), and nothing happened.

We’ve noted time and again that no sanctions are likely to ever be applied to Airbus and Boeing airplanes. If any sanctions at all are applied, they will be to unrelated products in unrelated industries, such as French wines and Washington State products–industries and products that have nothing to do with aerospace. Aerospace is too important to both sides to tamper with. Should the US sanction Airbus on, say, the tanker or commercial sales to, for example, United Airlines, then the EU will retaliate in kind for Boeing sales to European defense and airliner products.

The whole thing is a ridiculous sham.

This toothless organization is nothing but a waste of time, money and effort.

Separately, this news article reports EADS cut the price of the tanker by 10%. This isn’t the least bit surprising; the withdrawal of Northrop Grumman from the competition eliminated NG’s estimated 10%-15% mark-up.

Boeing also cut the price of its bid compared with two years ago, which also is not surprising. As we reported here, the shift to a Lean production line and Jim Albaugh’s more price-aggressive approach meant that Boeing would lower the price.

Say whatever you will about EADS, ain’t competition grand?

18 Comments on “Questioning the effect of the WTO

  1. I’ve always been sceptical of the claim NG was taking 10-15% off the top on profits of the total aircraft. Given that NG was only responsible for 13% of the KC-30 (according to EADS) by dollar value, which would mean NG was earning greater than a 100% profit margin for it’s meager 13% contribution to the project if they were taking a 15% margin. A 15% profit margin would have essentially left no money for the major partner (EADS) given that NG would be taking every penny allowed by law at that kind of margin. 15% of the 13% is far more realistic, so while EADS is far better off without NG, claiming an automatic 10% reduction by getting rid of Northrop is just plain lazy! Come on I know the defense procurement process is corrupt in many ways, but assuming NG was making more than a 100 percent margin on their very meager work is not plausible, not even NG is that greedy.

    • Look at any industry of your choosing and ask about their markup for resale
      even without them adding anything.
      If one looks around 5..10% just convers the amount of bakshis you have to infuse ( Wonder what Boeing and Airbus each spent on “wine and dine” alone ;-).

      About the mentioned commentary:
      Looks like the obvious next step to shoot at the referee is coming up.
      ( and a bit of preparation of the public for the next sore grape to come up.
      I still bandy around the notion that the allout a380 bashing-war was
      preparation for Dreamliner problems hitting the fan )

      On the other hand the post WWII situation produced a market that heavily
      advantaged the US by way of unimpaired infrastructure, a reversal in
      deptor relations and market scale.

      Nearly a water empire built on and maintained via the cold war.

      Milking this situation for all it was worth ( and more, ofshoring first production
      then design and then retooling for lawyers is expensive.) led to enough
      pressure to founder this situation after the “evaporation” of the Soviet Union.

      IMHO the US will have to live with the status quo and compete like everybody else is doing 😉

    • I am wondering if you are talking about different things. I am guessing the 13% refers to inputs to the plane. In other words, Northrup would have contributed 13% of the dollar value of the plane. But the original arrangment was that Northrup sells the plane to the US and EADS acts as the major contractor. Northrup’s margin in this case is on the entire plane, not its 13% contribution to it. EADS would have struggled to make a margin on its contract with Northrup. By taking over the relationship with the US Government, EADS gets the top margin or can use it to reduce the price.

      Something similar is in place for the 787. I think it’s fair to say that Boeing will make more money out of the 787 that its contractors.

  2. Depends on how one defines costs and margins. For example, on a govt contract, benefits such as pension and healthcare are also funded by the government.. In most military contracts, the workers often get a higher pay scale than the commercial workers due to the befits issue. At Boeing for example, years ago, the difference was on the order or 12 to 15 percent for Engineers and Techs . .

    • “Interesting” concept, getting higher pensions and better healthcare
      for building weapons.

      How would this apply to EADS/Airbus?

  3. The whole WTO thing on both sides is nothing more than ‘PR smoke and mirrors’.

    Should EADS win, they will have to pay US workers at least at “union wages”, what ever that is. Boeing already pays a union wage scale. The difference is any new EADS workers will be paid at the bottom of the wage scale as they will all be considered “new employees”. Boeing has a mature work force with most paid well above the minimum union wages.

    Taking NG out of the EADS bid may save them 10%-15% in the profit NG was going to take. Boeing is not going to double profit on their offer, according to them. So, my guess is each offered unit price will still be close to each other, perhaps less than $5M apart.

    So, it still comes down to fuel burn, LCC and MilCon costs that will decide the KC-X contract.

    • How do Union Wages at the Detroit Bigs compare to wages paid
      at factories in righ to work states managed by Toyota, BMW, * ?

      And I seem to remember we had this item before:
      How does productivity and workforce satisfaction compare?

      • Wages at the Detroit bigs and the Japanese and European transplants are about the same for the basic wage. Where the wages differentiated between the two was in benefit costs. For example the basic wage would have been close to $30 an hour for both, but once you included the health care and benefits the detroit wage would be closer to $55 an hour while the transplant might be $45. Before the bankrupcy of GM and Chrysler though the full cost of a Detroit union worker was about $70 per hour. This was because the unionized companies maintained a jobs bank where they essentially paid workers 90 percent of their wages to do nothing. It was bad enough that senior workers would actually bump junior workers from the job bank and voluntarily accept unemployment in order to get the benefits and not work. It was the high benefit costs that did the autoworkers union in not the basic labor costs.

        In the case of EADS they would likely pay the same basic wage as Boeing, but having a younger newly hired work force with fewer health issues would save on health care costs, and not having to pay for the retirement of older workers would also help. So in the end saying a non-union work force would save around 20 to 40 percent in labor is reasonable, but it wouldn’t be due to wages it would be due to the cost of the union benefit packages.

    • No it comes down to who offers the best aircraft at the best price; price includes all cost to the procurer and who in the Air Force’s evaluation can deliver, based on risk assessment and past performance.

    • Actually, Alabama is a non-union, Right to Work state. The median hourly wage for production occupation is $12.76 in Alabama and $15.99 in Washington. This is a different of 20%, giving EADS an advantage on assembly numbers–which is only about 5% of the cost of the airplane. Of course, we don’t know the average wages of the Boeing workers on the 767 assembly line nor the actual cost benefit from going “Lean” (though we do know this is a 20% cost reduction on production).

      Quite the chess game…..

      • Alabama’s wages for Aerospace workers are 20 to 40% below the average of Washington State. This is due mainly to the cost of living, of course if you want Gulf front with sugar white sand then you will pay more, a lot more! The Oil cleanup is free, just call BP!

      • In addition to the wage differential, Alabama offers the advantage of less chance of a work stoppage and delivery interruptions due to strike actions. I believe that work force reliability and flexibility trumps the wage differential. Conversely Washington has a more experienced work force that theoretically would be more productive when they work.

  4. Re Average wages at Boeing and Wichita

    AFIK – the IAM dues are based on 2 times the AVERAGE hourly wage of the local bargaining unit
    for example in 2005 . . .
    onthly Union dues rate for IAM hourly workers at Boeing will be $56.10 for the year 2005. The 2005 dues are calculated at two times the average hourly wage (based on wages from September 2003 through August 2004) plus $1.10 per capita tax to the Grand Lodge. Note: This is a decrease of $3.40 per month – 2004’s dues rate calculations included the 8 percent ratification bonus. If you have any questions on the dues rate, please contact Secretary-Treasurer Bruce Spalding on 206-764-0310 and 1-800-763-1301, ext. 3310.

    ++ I suspect the IAM wichita local has the same dues structure, but under a different contract.

    SPEEA dues are also public – being set at 85 percent of the Average wage of ALL SPEEA members of the bargaining unit ( seattle, wichita, texas, florida, portland, utah, etc.

    . . SPEEA Monthly Dues for 2010: $35.70

    SPEEA members have voted on how we calculate dues. The SPEEA constitution (Section 3.3) provides for the recalculation of the dues annually. The monthly dues are set at eighty-five hundredths (0.85) of the average hourly wage.

    Dues are adjusted with the first paycheck in February each year.

    There is no initiation fee and newly-organized members do not pay any dues until they have voted to approve their first union contract and are enjoying the benefits of union membership. . .

  5. The Tea Bagger party might protest, but “if you can’t beat them…”

    The US government should begin an overt and direct subsidy program for its civilian aerospace industry. The US Treasury can dump money into the industry outright. And, the impotent WTO can analyze til the Jet d’eau ceases to spout. All of Boeing’s competitors shall be silent.

    • The “Tea Baggers Party” is a movement, not a Party. It has no head person and no formal organization that’s why the Dems fear it and rightly so! It has no face, no structure but it is there and it is growing.

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