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Business – Boeing Doubles Bets on Strategy for 787 Already Two Years Late

Peter Robison and Susanna Ray

Oct. 29 (Bloomberg) — Boeing Co.’s decision to put a new assembly line for the 787 Dreamliner in South Carolina, instead of its historic Seattle hub, doubles its bets on a global supply strategy that is more than two years late delivering the plane.

The second line will create “several thousand” jobs in the southern U.S. state, according to Boeing, and represents a blow to the Puget Sound region a continent away where the company has built jets for 93 years.

Boeing chose South Carolina in part because of frustration with labor strife in Seattle, where four strikes in the past 20 years by the machinists union delayed deliveries. Yet the move also puts further responsibility on a far-flung production network and asks more of relatively inexperienced workers, adding to the risks for the 787, Boeing’s most important project, with $150 billion in orders.

“It’s going to be a more complex supply chain, and we’ve seen Boeing’s recent problems with that,” said Harley Shaiken, a professor at the University of California at Berkeley who specializes in labor issues.

Boeing, based in Chicago, rose 4 cents to $47.26 at 6:40 p.m. yesterday after the regular close of New York Stock Exchange trading. The shares have dropped 52 percent since the first of five 787 delays became known in October 2007.

The decision yesterday stunned political and business leaders in Seattle, so closely tied to aerospace that it’s nicknamed Jet City, and infuriated the machinists union. The union offered a 10-year agreement that would guarantee no strikes, and Boeing showed little interest, said Tom Wroblewski, president of Seattle-based Local 751 of the International Association of Machinists and Aerospace Workers.

‘A Smoke Screen’

“Most of the time, they didn’t even take notes,” Wroblewski said. “It’s now clear that Boeing was only using our talks as a smoke screen, and as a bargaining chip to extort a bigger tax handout from South Carolina.”

The tipping point was the union’s demand that Boeing not communicate with employees if the labor group tried to organize in any non-union plants, including North Charleston, said Yvonne Leach, a Boeing spokeswoman in Everett, Washington. “We would be giving up the right to address our employees, and that wasn’t something we were willing to give up.”

Unlike Washington, South Carolina is a right-to-work state, meaning workers there can’t be forced to join a union. The 787’s rear fuselage is already made in North Charleston, where Vought Aircraft Industries had a contract to ship sections to Boeing for final assembly in Everett, Washington. Boeing bought the operations from Vought in July, and workers there voted to drop their representation by the machinists union last month.

Once ‘Unthinkable’

“It reflects the realities of a global aerospace market for labor,” said Howard Rubel, an analyst who follows Boeing for Jefferies & Co. in New York. “While this might have been unthinkable a number of years ago, the last strike hurt Boeing and its customer relationships. It needs to have more than one source of supply.”

A two-month strike in Seattle at the end of 2008 delayed production of 105 aircraft.

Boeing’s center of gravity began shifting away from Seattle after the company’s 1997 purchase of St. Louis-based McDonnell Douglas Corp., which had a large military business. In 2001, Boeing moved its corporate headquarters to Chicago to be closer to financial centers and its defense operations.

The company is the second-largest defense contractor and trails only Toulouse, France-based Airbus SAS in building commercial planes.

Boeing declined to say how much it will spend on the new facility in South Carolina, where it also got an incentive package from the state legislature for infrastructure, equipment, training facilities and tax breaks that unions valued at about $170 million.

2012 Target

The second line may be operational by July 2011, with a first delivery from Charleston in the first quarter of 2012, according to a blog by Randy Tinseth, the marketing chief of Boeing’s commercial-jet unit. The South Carolina site will have capability for flight test and delivery as well as final assembly, Boeing’s commercial-jet chief, Jim Albaugh, told employees in an e-mail yesterday.

Boeing is using suppliers to make large sections of the 787 that the planemaker then assembles in Washington, unlike the way previous models have been built. Delays have ranged from parts shortages to unexpected stresses in engineering tests to vendors failing to complete required work. The jet is due now to fly for the first time by year-end and be delivered by late next year. The original target was May 2008.

Boeing Doubles-Down

“Boeing has decided to double-down on its failed 787 strategy and place an ill-advised, billion-dollar bet on a strategy that’s a proven loser,” Wroblewski said. He added that the union has no plans to disrupt work over the issue.

“Retaliation is Boeing’s tactic, not ours,” he said.

The new plant, added to the one Boeing just bought, will be the first commercial assembly line it has built outside Seattle, raising concern in Washington that it might siphon away more jobs as the company considers other new aircraft models.

The new line may eventually bring 3,000 jobs, said Keith Summey, the mayor of North Charleston. “Immediate jobs could come from construction and then they will bring their top-level people,” he said.

Boeing’s Albaugh said the two lines will together deliver 10 787s a month and the planemaker remains committed to the Puget Sound area.

Impact on Washington

The state will have to reduce taxes and reconsider labor- friendly rules to win future work, said John Stanton, a cellular-phone entrepreneur and chairman of the Washington Roundtable, a nonprofit policy group that lobbied to keep the second line in-state.

“This process has clearly gone on over months,” said Stanton, whose father worked on Boeing’s 727, 737 and 747 models as an engineer. “Maybe over years. Today was just the day for the big-font headline.”

Duane Lafrombois, a car mechanic who said Boeing workers account for as much as 40 percent of his business at Superior Transmission Inc., a mile from Boeing’s flight-test center and its old headquarters building in Seattle, watched the relationship deteriorate firsthand.

“I think Boeing’s just had it,” Lafrombois said.

To contact the reporter on this story: Peter Robison in Seattle at robison@bloomberg.net; Susanna Ray in Seattle at sray7@bloomberg.net.

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October 29, 2009 - Posted by | Uncategorized |

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