Work Moving Out of Area : Cost Competition Erodes Local Aerospace Industry
Among the wind-swept mesas of the Navajo Reservation in New Mexico, General Dynamics Corp. is building an assembly plant for guided missile parts, production work that is now done in the Los Angeles area.
When it is completed next year, the electronics facility will employ 200 rural Navajos earning about $5.50 an hour--a bargain for General Dynamics, which pays its unionized workers in California more than $9 an hour to do comparable work.
Southern California boasts the greatest concentration of aerospace industrial activity in the Western world, but the region is facing an unprecedented threat: Aerospace contractors from the San Fernando Valley to Orange County are moving more and more work on missiles, spacecraft, airplanes and defense electronics out of the area.
“Labor costs in this area are significantly higher than in other places,” General Dynamics corporate Vice President Sterling Starr said. “In the last two years, we have come under heavy competitive cost pressure.”
The industry is far from staging a mass exodus. Aerospace activity and employment in Southern California appear strong, owing to growth during the Reagan Administration and robust orders for commercial jetliners. But that growth of the national market has masked a troublesome erosion in Southern California.
As Pentagon budgets continue to shrink and during the next cyclical downturn of commercial aircraft production, aerospace activity and employment here will drop. The move of local operations out of the region will steepen the decline.
In recent months, three aerospace prime contractors have significantly curtailed their operations in Los Angeles or acquired out-of-state facilities to accommodate future growth.
Lockheed announced that it will transfer to Georgia all parts production for a major new program to build Navy patrol aircraft and will shut down a large part of its Burbank complex. Douglas Aircraft leased a large plant in Ohio to make parts for an Air Force cargo jet. And Rockwell International disclosed that it will sell its historic El Segundo aircraft manufacturing facilities. The list goes on and on.
A variety of factors have motivated companies to build plants outside of California, including a growing need to develop more diversified political support in Congress and a lack of manufacturing space in the crowded Los Angeles Basin.
The most potent impetus for departure, however, is provided by the military services’ effort to cut weapons costs by stepping up competition.
“We have really leaned on the industry heavily to look for ways to reduce costs,” Gen. Bernard P. Randolph, chief of Air Force procurement and research, said in an interview. “This approach (to transfer work out of California) is one that the industry has found.”
In the old days, defense contractors won contracts because they had the best technology, which favored Southern California firms and their access to the tremendous pool of scientific talent here. And most of those contracts were so-called “single-source” arrangements, which gave contractors little incentive to cut costs.
Now, however, competition has become a dreaded reality for most prime contractors. The Air Force, for example, has nearly doubled the percentage of its contract dollars awarded competitively, going from 31.3% in fiscal 1984 to 60.9% in fiscal 1988. The Army and Navy have had similar increases.
Remote Facilities
In today’s cutthroat competitive environment, missile and aircraft producers have scrambled to set up remote facilities in the Southeast and Southwest United States, where labor rates are sometimes half the prevailing union-scale wages in Southern California.
Among those taking such steps have been Northrop with a plant in Perry, Ga.; Hughes in Eufaula, Ala.; Douglas Aircraft in Salt Lake City; Lockheed in Austin, Tex., and McDonnell Douglas Helicopters in Mesa, Ariz.
East Coast aerospace manufacturers, such as missile producer Raytheon, have taken similar steps to escape the high cost of operating in New England and New York.
It is not clear, however, how far the trend will go. Virtually all of the spinoff plants are small operations that conduct the most labor-intensive and lowest-value parts of their companies’ manufacturing tasks.
In addition, the cost of very sophisticated weapons does not depend greatly on the cost of labor, retired Air Force Gen. Lawrence A. Skantze said. “The cost problem is not something you can solve just by reducing wage rates. The more important thing is designing for low-cost production,” he said.
At the same time, companies are expanding research and development activities in Los Angeles, in part owing to the top engineering schools here. Los Angeles-area firms are also tied down by their scientific facilities that would cost billions to duplicate elsewhere.
“The talent necessary to do high-technology work is here and it is not going to go anywhere else,” said Randolph, the Air Force general. “We have to do the work here.”
For example, Hughes Aircraft considered moving the headquarters and the advanced design staff of its Missile Systems Group from Canoga Park to Tucson earlier this year but decided against it after an outpouring of opposition by its large technical staff. The Hughes missile group in Canoga Park has more than 1,400 scientists and engineers with advanced degrees, a notably large intellectual resource.
And despite the outflow of some production work from Southern California, aerospace manufacturing has expanded strongly during the Reagan Administration.
Los Angeles County had 301,800 aerospace jobs (as defined by the U.S. Department of Labor) in September, up from 228,000 a decade ago. And during the last decade, more than a dozen major aerospace industrial plants have been built in the Los Angeles area.
In such exotic fields as stealth aircraft technology, California contractors seldom lose competitions. Los Angeles-area firms will be prime contractors on the three largest Air Force programs for the 1990s, the B-2 stealth bomber, the Advanced Tactical Fighter and the C-17 cargo jet.
Northrop located all of its B-2 stealth bomber work in Los Angeles County, adding two large industrial facilities in Palmdale and Pico Rivera that now employ 13,500 people.
Meanwhile, Douglas, which has also experienced a boom in commercial aircraft orders, has undertaken a massive building and leasing program that added more than 3.85 million square feet of office, factory and warehouse space to its facilities in the Long Beach area. Douglas employment has increased from 12,000 in 1982 to more than 38,000 today and is likely to break 40,000 any week.
But in September, Douglas agreed to lease a 3.4-million-square-foot plant in Columbus, Ohio, to build parts for its C-17 Air Force cargo jet. The plant, which formerly was used by Rockwell to build parts for the B-1 bomber, will initially employ 2,000 workers and has the capacity to greatly increase that number.
“The rationale was that we are full here and Columbus was available” Douglas spokesman Don Hanson said. “We couldn’t really find available facilities in this area. The Columbus plant had good equipment and had an experienced work force in place.”
But the huge C-17 program has become highly politicized, and the Douglas move to Columbus is seen by some experts as a political initiative as much as a business decision.
“I am not sure the decision was based on cost but on Douglas’ recognition that they have to use work forces from all over the country,” said Gen. Duane H. Cassidy, commander of the Military Airlift Command, the ultimate user of the C-17. “It is a monumental task. It was a logical recognition that they have to put their work force around the country.”
The need for that “logical recognition” has grown out of the new role Congress has cut for itself in managing major weapons programs. The new congressional activism has meant that defense contractors must seek broad political support, and that has led to parceling out jobs throughout the country.
“There is a whole lot of political pressure put on defense officials,” acknowledged former Air Force Secretary Verne Orr in an interview. “Every time you make a contract award, you stir up all of the senators and representatives.”
In its decision to transfer parts production and 1,500 jobs on a new Navy patrol plane to Georgia, Lockheed may have been trying to gain the support of Senate Armed Services Committee Chairman Sam Nunn (D-Ga.), some Lockheed employees say.
Arnold Punaro, director of the committee’s Democratic staff and Nunn’s top aide, said Nunn was not involved in Lockheed’s decision. Nonetheless, Punaro applauded the move as an “excellent idea” and said, “The overhead in Georgia is without question lower than the overhead in California.”
Long-Term Effect
Compliments such as those from a powerful Democrat are not lost on defense contractors. Some Los Angeles business leaders are worried about the long-term effect.
“We are very concerned,” said Jack Kyser, chief economist at the Los Angeles Area Chamber of Commerce. “There are a variety of forces involved--the business costs of Southern California, the environmental concerns here, the cost of housing and a lot of others.”
Undoubtedly, the character of the industry in the Los Angeles area is changing, probably permanently. The region is likely to continue losing labor-intensive, low-skilled work in aircraft and electronics assembly, which account for thousands of jobs.
At the same time, high-value work will continue here. In the last year, Rockwell International has moved its corporate headquarters to El Segundo from Pittsburgh, and Allied Signal Aerospace moved its headquarters to Torrance from Washington.
Also, large aircraft and spacecraft assembly operations are unlikely to leave because the contractors have invested billions of dollars here in wind tunnels, computerized weapons simulators, thermal vacuum chambers and myriad other high-technology facilities.
Moreover, Southern California has other underlying strengths that will anchor the aerospace industry, including a large base of subcontractors that build everything from exotic machined metal parts to advanced electronics.
“In the Southern California basin, there’s an awful lot of support shops that are used by ourselves and other companies,” said Sam F. Iacobellis, president of Rockwell International’s aerospace operations. “Sometimes you need a (specialized) machine or a plating. My point is, that’s a very good asset . . . and it’s very convenient to have that pool of resources in the basin. So that’s an impediment to just moving out.”
In 1985, Los Angeles County had 27 guided missile and spacecraft companies; 219 aircraft and aircraft parts firms, and 466 machine shops supporting aerospace, according to Census Bureau data. Orange County had six missile firms, 56 aircraft firms and 183 machine shops.
“There is a very high-technology requirement to do business in aerospace, and you have to have all of the bells and whistles just to bid,” said Frank Power, chief executive at Sonfarrel, an Anaheim machine shop. “Other companies are gravitating to California, as it is recognized as the national hub of aerospace.”
Yet the California cost-of-living problem may be the ultimate threat to the industry, driving up local wages over the national average and making it more difficult to recruit people from other areas.
“It is excruciatingly difficult to get people relocated here,” said Otis Booth III, an executive recruiter at Russell Reynolds Associates.
Booth said it is not unusual for local aerospace firms to pay $15,000 signing bonuses and offer large housing allowances to recruit even middle managers. “The sky is the limit in terms of negotiations.”
