NEWS ANALYSIS : BOEING-McDONNELL DOUGLAS TALKS : A Partnership Could Fly : But Full-Scale Merger Is Likely to Harm O.C. Aerospace Industry
A limited relationship between McDonnell Douglas Corp. and Boeing Co. may not seriously harm Southern California’s fragile aerospace industry, but all bets are off in the event of a full-fledged merger.
A joint venture--say, between the companies’ space or helicopter operations--would probably have a limited impact, because the two firms have little overlap in those areas, their operations or suppliers are well entrenched here and the region’s beleaguered aerospace industry is showing new signs of life, analysts said Thursday.
But in the less likely event of a full-scale merger--or Boeing’s purchase of McDonnell’s commercial jet business based in Long Beach--Boeing may eventually want to close down or reduce McDonnell’s operations in Southern California in favor of its own in Seattle or elsewhere.
For now, it’s unclear what form any relationship between the two aerospace giants might take.
But under most scenarios short of a full-scale merger, it’s unlikely that the two companies would pull much work out of Southern California, in part because of existing contractual relationships. Also, it would take a huge investment to eliminate major projects, relocate existing plants and personnel or disrupt decades-old supplier networks.
In Orange County, for example, McDonnell Douglas contracts for services and material with more than 1,000 local companies. Hundreds of others also supply parts and services to Boeing. And McDonnell Douglas has 5,600 employees of its own at its space facility in Huntington Beach.
Subcontractors range from giants such as Rockwell International Corp.’s 3,000-employee aerospace and missile systems facility in Anaheim, which supplies electronic guidance equipment to McDonnell Douglas, to smaller shops such as Buena Park’s Aerofit Products Inc., whose 90 employees produce high-pressure hydraulic fittings for Boeing, McDonnell Douglas and other airframe makers.
Cosmotronic Co. in Irvine gleans about $3 million of its $14 million in annual revenue from sales to both companies and Peter J. Cohen, the semiconductor company’s chief executive, says he sees nothing negative in a merger of the two aerospace giants.
“If anything, it would be good for us and companies like ours,” he said. “We do business with both, and if a merger made them stronger, then our business might increase.”
Cohen said he is heartened by reports of talks between the two companies. “The willingness of their management to even consider this shows that both are progressive and willing to look at whatever it takes to be competitive. Those are the kinds of companies we want to do business with because they’re the ones that will survive and be around to buy our products,” Cohen said.
At the same time, many economists believe that the Southern California defense industry, which has been hemorrhaging jobs for the past seven years, is poised for a comeback. Major aerospace projects, such as McDonnell’s C-17 military transport plane, are thus in stronger position and less likely to be cut, analysts argued.
St. Louis-based McDonnell Douglas employs about 24,000 people in Southern California, assembling everything from space vehicles to commercial and military aircraft at plants in Long Beach and Huntington Beach.
For every one of those jobs, another two are created in the local economy, in the form of suppliers, retailers, landscapers and others, analysts said. McDonnell Douglas has more than 1,000 suppliers in Orange County alone.
Seattle-based Boeing, meanwhile, employs fewer than 1,000 people in Southern California, with many in Palmdale working on the B-2 bomber under a contract to the project’s prime contractor, Northrop Grumman Corp.
But Boeing relies on hundreds of local suppliers for its operations in Seattle and elsewhere. In 1993 in the Los Angeles area, Boeing invested $1.8 billion with 2,700 suppliers, creating 52,000 jobs, according to an estimate by the Los Angeles Regional Technology Alliance, a privately funded economic development group.
A key question for Southern California is the fate of McDonnell Douglas’ commercial aircraft operations in Long Beach, if Boeing decides to take over that unit.
In the worst case, Boeing might choose to close the Long Beach plant and move all commercial aircraft production out of state.
In other scenarios, Boeing might selectively eliminate production lines: McDonnell’s wide-body MD-11 aircraft, for example, can be seen as a rival to Boeing’s 747 and 777 aircraft and therefore might be expendable. But some analysts argue that the MD-11 might fit into Boeing’s fleet as a freighter alternative.
“They wouldn’t want to disturb existing marketing arrangements,” said Rohit Shukla, executive director of the Los Angeles Regional Technology Alliance.
McDonnell Douglas’s main Southland operations are in Long Beach, with 18,000 employees, where its commercial aircraft unit, Douglas Aircraft Co., builds jetliners and a military unit builds the C-17 transport for the Air Force.
In Huntington Beach, McDonnell Douglas’ Aerospace Space Systems operation and its 5,600 employees assemble the Delta rocket and work on components of the proposed space station under a Boeing contract.
Workers took the news of partnership talks with equanimity.
“There’s no buzz around the water cooler,” said John Rice, chairman of the bargaining committee of United Aerospace Workers Local 148 at McDonnell Douglas’ Long Beach plant.
Among suppliers, there is little overlap between those that perform work for McDonnell Douglas and those that work for Boeing because of the specialized nature of components--suggesting that a partnership between the two companies would not necessarily mean elimination of existing supplier relationships.
“There are so many components to these products, there may not be that much of a problem in terms of duplication,” Shukla said.
In the long run, a combined company might even look more favorably on the web of suppliers and support companies that already make parts for both companies, to the detriment of suppliers in Seattle, Dallas and elsewhere, some analysts said.
“Boeing gets a bigger toehold here, and much of the work will continue here because of the pool of skilled labor, suppliers and industrial efficiencies already in place,” Shukla said.
For their part, suppliers were loathe to speculate about the impact a Boeing-McDonnell partnership would have on their business.
AlliedSignal Aerospace employs 2,000 people in Torrance, making environmental controls systems and other products for McDonnell Douglas, Boeing and others.
Spokesman Dennis Signorovitch declined to comment on merger speculation. But, he added, “The types of equipment we sell are engineered and designed for particular aircraft,” regardless of who owns the company.
Northrop Grumman, meanwhile, is one of Boeing’s largest Southern California suppliers, building fuselages for the 747 jet aircraft in Hawthorne, as well as parts for other aircraft.
Northrop Grumman spokesman Tony Cantafio attributes 900 of his firm’s local jobs to Boeing contracts.
Northrop is also a contractor to McDonnell Douglas, most notably building components in El Segundo for the F/A-18 strike fighter.
Cantafio also declined to speculate on the effects of a merger. But he added that Northrop’s work for either company doesn’t overlap: “Our work for Boeing is primarily in the commercial area, and our work for McDonnell Douglas is on the military side. We’re large suppliers to both of those companies.”
That the two firms are even considering a partnership says something about the need for major aerospace and defense firms here to continue cutting costs and finding economies of scale as defense budgets fall, analysts said.
But it also is a sign that the worst may be over for the industry here. Boeing may be attracted by McDonnell Douglas’s recent win of an $18-billion contract to build more C-17 cargo planes here.
McDonnell Douglas, which also has had success in winning overseas contracts for its commercial aircraft, may see synergies with Boeing, the largest U.S. maker of such aircraft.
Though the aerospace and defense industries have lost the prominent position they once held in the local economy--supplanted by entertainment, trade and other industries--various forecasts say that the industry may have bottomed out.
“The state’s aircraft industry may emerge from defense cuts to face growing commercial markets,” said a forecast this month by the Center for Continuing Study of the California Economy in Palo Alto.
Estimates vary, but the Economic Development Corp. of Los Angeles County says that aerospace and defense employment peaked in the five-county region in 1988 at 393,000, or roughly 6.5% of total employment. It has since fallen to 211,000, or 3.6% of total employment.
For the future, “civilian and export markets should start to pick up,” said Stephen Levy, director of the Center for Continuing Study. “In the beginning of the next century . . . defense spending may begin to rise again.”
Times staff writers John O’Dell and Emi Endo contributed to this report.
* GIANTS CONFER
Boeing, McDonnell in talks. A1
* NOT UNTHINKABLE
Deal has support despite antitrust issues. D13
