Aerospace Moves: Hidden Costs Often Negate Gains : Defense firms: Few states have L.A.’s pool of skilled workers, trade and technical schools, and weather.
The lure of low wages, cheap homes and freedom from onerous regulations has prompted aerospace firms to flee the Los Angeles area during the last decade, but the savings from these moves are not always quite what they seem.
Allied-Signal’s AiResearch Manufacturing unit and its 1,250 jobs left Torrance in 1983, hoping to reduce labor costs at a new plant in Tucson for building aircraft data systems and cabin pressurization equipment.
But the costs to relocate professional employees were higher than expected; then employee training problems caused deliveries to fall six months behind schedule. AiResearch eventually recovered, but recent automation at the plant has sharply reduced labor costs, minimizing the benefit of the low wages.
“If we had to do it over again, we probably wouldn’t,” said James Robinson, the operation’s general manager. “There were significant start-up problems in Tucson.”
Although doing business in Southern California is clearly fraught with serious problems, the AiResearch case shows that a quick exit does not always reduce production costs or improve quality. Transfer expenses can be onerous and few states have the pool of skilled workers, trade and technical schools, weather and other advantages found in the Los Angeles region.
Indeed, Southern California retains many of the assets that made it the Western world’s aerospace hub. Top industry executives say that it is not too late to squelch the losses if state leaders return to the fundamentals that made California a leading aerospace center, especially government efforts to address industry’s concerns.
“We are a high-technology company that needs highly qualified people, and this area has an abundance of innovative workers,” said Northrop Chairman Kent Kresa, whose firm has stood out for its commitment to remaining in the Los Angeles area. “We haven’t been looking at this in a green eyeshade way, because innovation is part of our lifeblood. We would like to stay here.”
Although Southern California has lost important aerospace projects, facilities and jobs during the 1980s, the migration has fallen short of an exodus. Examples of firms making highly publicized moves tend to overshadow the significant growth and expansion that has occurred in the state.
During the 1980s, for example, Northrop invested $1.2 billion in a new aircraft plant in Pico Rivera. McDonnell Douglas added 1.4 million square feet of factory and office space at its Long Beach complex at a cost of several hundred million dollars.
Even while Lockheed is moving some operations from Burbank to Georgia, it is investing $100 million in new aircraft facilities in Palmdale and $20 million in an aircraft maintenance center in San Bernardino that will employ 1,000 workers.
“There are compelling reasons to stay in Southern California,” said Sam Iacobellis, executive vice president and chief operating officer for Rockwell International’s aerospace business. “We are not going to follow the crowd out. You leave and you lose that experienced pool of workers that you can call on.”
Industry leaders have long faulted the state for not paying close enough attention to their problems. This attitude, they say, shows up in the weak political support provided by the California congressional delegation, in the heavy environmental and other regulations imposed by state agencies, and even in special taxes levied by local cities.
“You have got to want this industry, because it is not so strong that it can stand on its feet and take all the regulation and bear the cost of all the other things that people want to do in the state,” Kresa said. “It is somewhat delicate, and with the downturn it could dry up quickly.”
Many aerospace executives contend that California takes the industry for granted.
Although smaller states often have aggressive industrial development strategies for aerospace, California has no such formal plan. If the nation’s aerospace citadel existed almost anywhere else but Los Angeles it would be showered with local attention.
But here the industry is only one player in a vast area with tremendous competing economic, political and social interests. Some of them--environmental concerns and a liberal political tradition, for instance--run strongly counter to the aerospace industry’s interests.
“They have some big problems in Los Angeles and maybe they have got so many bigger problems that worrying about whether the defense industry stays or leaves is not high up on their priority list,” said Kenneth W. Cannestra, president of Lockheed Aeronautical Systems Co., which decided to leave Burbank for Georgia. “I see it as a very serious problem.”
Without manufacturing jobs, Southern California risks having an economy of high-paying professional jobs and low-paying unskilled service jobs. Although aerospace is a volatile industry with severe economic upturns and downturns, it has been a cornerstone of California’s middle class, offering top manufacturing wages and social mobility.
What needs to be done to avoid a future without these jobs?
“The state needs to take a better interest in the long-term strategic plans of the companies and to work with them to see how that will evolve to the mutual benefit of the city, state and the company,” Cannestra said. “They really need to consider the ramifications and consequences of some of the things that they do.”
Aerospace executives agree that it is not too late for California to address the problems.
“My feeling is if we really understand those things that aerospace came here for in the first place, and if we can re-create those and re-energize those, maybe we’ll have something,” said Hughes Aircraft Chairman Malcolm Currie.
Although state and local governments have been lethargic in comprehending the economic risks in the exodus of aerospace, there are signs of change.
While public education in California has slipped badly, aerospace training here remains the most innovative in the nation. The state has such well-known resources as Caltech, Stanford University, UCLA, Cal State’s polytechnic schools and 107 trade-oriented community colleges. But recently, even local public education is responding to the need for better training.
Long Beach, for example, has initiated a $6.2-million aerospace education program for students from the 12th-grade level down to the fourth grade. The program boasts 500 Macintosh computers, modern factory cells in which students design and build aerospace structures and an intensive mathematics curriculum for college-bound students.
“Our goal is to reduce the aerospace industry’s training costs for new workers,” said Gail Quinn, head of the Long Beach Aerospace Technology Magnet Program. “We believe it is the first in the nation.”
On another level, the state is pumping $7 million into a training program this year to help small aerospace subcontractors improve the quality of their products and reduce costs.
It is a program fundamentally different from the direct givebacks favored by many states seeking aerospace investments, but it goes to the heart of the long-term problems facing companies here.
“It is seen as a key solution to help aerospace firms remain competitive when you have a decreasing defense budget and increasing international competition,” said Janet Turner, director of California’s Office of Business Development. “Most of the prime contractors in the state can prosper only if their suppliers remain strong.”
When aerospace firms move out of the state, the lack of Southern California’s subcontractor network is apparent.
McDonnell Douglas set up a $12-million plant three years ago in Salt Lake City to produce fuselage panels for its MD-80 jetliner. Plant manager Alfred Egbert praises the success of the plant, but admits that Utah’s lack of an industrial infrastructure for aerospace is a hindrance.
Nobody in Utah, for example, can “stretch form” aluminum aircraft panels, a fairly common metalworking process in aerospace. So McDonnell must ship partially processed panels to its Long Beach plant for stretch-forming and then ship them back to Utah. After further processing, the panels are again sent to Long Beach for final assembly, Egbert said. The shipping increases inventory and cost.
Egbert hopes that Utah will eventually be able to produce aircraft structures at 20% to 35% less than Long Beach, thanks to an innovative team approach at the plant. But so far costs are not significantly lower, he said.
In some cases, major aerospace firms stay in Southern California not for their love of the region but because they are stuck with huge investments in existing plants that would be difficult or unaffordable to duplicate.
“The good news is that with a shrinking defense budget, many of these companies will not be able to afford to move,” said Robert Paulson, who heads McKinsey & Co.’s aerospace practice. “Their sunk investments are very high.”
The high costs of moving and the risk of disrupting production were two key elements in the recent decision by Hughes Aircraft not to move its Electron Dynamics Division from Torrance, where it employs 1,200 workers.
The division makes electronic amplifiers called “traveling wave tubes,” a foundation of the firm’s satellite and radar businesses. The devices, costing up to $150,000 each, are tricky to build and require skill that comes only with experience. The average employee at the Torrance plant has 10 years of service.
“These processes are very complex and not well understood,” said Jeffrey E. Grant, president of Hughes’ industrial electronics group.
Hughes stayed in Torrance because it was worried about disrupting production and losing the know-how to build the tubes. “The answer to the business challenge we face is how we do business rather than where we do business,” said Ronald A. Forbess, manager of the Hughes division.
Lower wages by themselves seldom reduce costs enough to offset the upfront expenses of a move, because just 20% of a typical defense firm’s costs involve direct production wages.
“Standing in place and getting more efficiency beats moving,” says Thomas C. Shull, director of Meridian Strategies, an aerospace consulting firm in Redondo Beach. “Chasing low wages is not a viable strategy.”
Adecision to leave Southern California inevitably means losing employees. In general, 65% of professional and technical workers asked to relocate will not go, because “a lot of people buy into the California lifestyle and are reluctant to leave,” said Dennis J. Donovan, senior vice president of the New York-based relocation consulting firm Moran, Stahl & Boyer, which advised Hughes on its decision.
A company bears $60,000 in average relocation expenses to move each employee, Donovan said, and additional expenses of up to one year’s salary to prevent the early defection of key workers who don’t transfer. Such staggering expenses will not stop firms from leaving California, but the decisions will be increasingly difficult, he said.
Ultimately, aerospace companies relocate plants based only partly on economics and partly on a sense of the political support offered by local, state and federal officeholders.
“We have been growing here despite the lack of public support, because of the intellectual capability of the people,” Northrop’s Kresa said. “But that can only go so far. This area could have tremendous political power if it chooses to exercise it. There are very good signs. There are signs that people understand that the economics of this area have to be faced.”
A turning point in Hughes’ decision came when Torrance city officials and state officials met with Hughes to address the firm’s concerns. “Prior to that, we saw very little reaction from the local area,” Forbess, the division manager, said.
Even though state and local representatives made no specific promises to Hughes, the case appears to show that a coordinated local and state effort can go a long way to retaining industry. But such a response in California is still an exception.
“In my opinion, our decision is in no way trend-setting,” Grant said. “California has to do a much better job in understanding the issues.”
In the eyes of the aerospace industry, the single biggest government troublemaker in Southern California is the autonomous South Coast Air Quality Management District, which has set stringent regulations on the solvents and paints used in aerospace electronics and aircraft.
Aerospace executives don’t directly fault the regulations, but they complain about the pace of change, the uncertainty of future regulations and the complexity of getting permits.
“The trend in California has been to clean up the environment, and everybody has been for that, but perhaps we should examine the pace if it raises the prospect that firms will leave,” Kresa said. “California is only five years ahead of the new regulations in a number of states, so you don’t put a plant in a new area just to escape California regulations. (But) with respect to the whole process of getting permits, that is a serious problem in California.”
The most troubling aspect of the regulations, industry experts say, is that no distinction is made between the economic contribution a plant makes and the amount of pollution it is authorized to generate. Thus, a small factory paying minimum wages to low-skilled workers faces the same environmental regulations as an aerospace plant paying workers $15 an hour.
“We should be cutting emissions with the smallest possible economic impact,” said Turner, the director of California’s business development office. Turner’s office attempts to intervene on behalf of companies having trouble with permits, but she admits that her office has no authority over California’s autonomous regulatory agencies.
Some environmentalists are sympathetic to complaints that the regulatory system in California is too complex and slow.
“I don’t think environmental organizations are opposed to streamlining (regulations),” said Mary Nichols, senior staff attorney for the Natural Resources Defense Fund in Los Angeles. “The major resistance to eliminating permitting comes from local government and neighborhood groups.”
But Nichols also gives low marks to the aerospace industry for its interest and effort in helping to solve pressing environmental problems. She asserts that environmental compliance is a minor issue in corporate decisions to leave California.
But aerospace executives say that if solutions aren’t found to such conflicts, the aerospace erosion threatens to not only continue but accelerate.
“The point now is not retrieving jobs, but making sure the slide doesn’t continue,” said Bastion Hello, former chief of Rockwell International’s aircraft business and now an official at an aerospace trade group in Washington. “The industry is slipping away in pieces. It could take on the aspect of a sugar cube in a cup of coffee.”
