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Tuesday, June 01, 2004 - Page updated at 12:49 P.M.
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Boeing parts, work go overseas

By Dominic Gates
Seattle Times aerospace reporter

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Determined to exit the business of making small, simple aircraft parts, Boeing is moving aggressively to shift overseas some work from its major parts-fabrication plant in Auburn.

Rather than finding a cheaper supplier already capable of doing the work, Boeing is creating the capability.

Last week, a new parts-manufacturing plant opened in South Africa equipped with 3-axis milling machines shipped from a Boeing machine shop in Kent closed since 2002.

By year end, Boeing plans to ship to Turkey four room-sized, 4-axis milling machines from Auburn. Other smaller production tools from Auburn are earmarked for Romania.

Local Boeing workers trained the South Africans to operate the donated heavy equipment and, if requested, will do the same for the Turks and Romanians.

During the next two years, Boeing plans to send out more parts-production work from Auburn to all three countries. By the end of 2006, the overseas factories will be sending the parts back to the Puget Sound region.

Boeing picked these specific countries to do the work to fulfill obligations from earlier airplane sales, even though the national flag carriers in all three are now Airbus customers and, in the case of Romania, an international trade agreement bars such sales deals with that country.

Offshoring and jet sales


Boeing said low-complexity work sent overseas from the Puget Sound area will, in part, fulfill obligations from previous airplane-sales deals. According to the company, the work will go to:

Romania — for the sale of 737s to Romanian national airline Tarom, five ordered in 1992 and four ordered in 1999.

South Africa — for the sale of five 737s to South African Airways, ordered in 2000.

Turkey — for the sale of 26 737s to Turkish Airlines, ordered in 1997, as well as a 2002 order for four 737-based Airborne Warning and Control System (AWACS) airplanes for the Turkish military.

Source: Boeing

Boeing insists the local job impact is limited. The company said the Auburn work force won't face further significant layoffs as this work disappears, though it may shrink through attrition as people retire.

"The machines were idle," said Wade Cornelius, Boeing vice president for business development and global strategy, "They would have been either auctioned off or scrapped."

The overriding impetus for getting rid of the work, Cornelius said, was not the sales deals but the relentless drive to cut costs. These overseas suppliers will make the parts more cheaply than Boeing's skilled Auburn work force.

"The decision to move that work and concentrate on our core focus was made independently of where the work would ultimately move," Cornelius said, "It would have gone out of here anyway."

Impact here

About 4,000 workers are employed at Auburn. In March 2003, the then-head of Boeing's fabrication division, Liz Otis, said the company intended to focus on more sophisticated manufacturing and to shed the rest.

"I want to prepare you for the fact that I expect we will do some outsourcing of the simpler, less complex parts," Otis wrote in an e-mail to employees.

Otis pegged the expected job impact at around 400 cuts through the end of 2004. Those cuts are mostly completed, said Boeing spokeswoman Deborah Dustman.

"Few Auburn employees were impacted; most were redeployed," Dustman said.

When Boeing outsources work, it reassigns employees according to seniority or skills, making it difficult to pin down the direct impact. "Total employment at Boeing reduces," Dustman said.

Mark Blondin, president of Machinists union District 751, objects to the basic premise that Boeing should get out of parts making.

"I've got thousands of members on layoff," said Blondin. "This is a package of work that could put them back in a job."

Jennifer Mackay, president of the Society of Professional Engineering Employees in Aerospace, which represents Boeing engineers and technical workers, said the Auburn outsourcing is one end of a spectrum that extends to sending the design of the 7E7's wings to Japan.

"You've got very complex to very simple work going out. They are getting rid of all this stuff," Mackay said. "All they want is to put the airplanes together."

Switching to Airbus

Ironically, the state-owned airlines in all three countries involved in this outsourcing are now Airbus customers.

• Turkish Airlines ordered 737s in 1997. Cornelius said Boeing hopes to sell more 737s to the airline. However, the carrier's wide-body fleet consists entirely of Airbus jets.

• Tarom, the Romanian national airline, ordered 737s from Boeing in 1992 and 1999. But at the end of last month, the airline ordered four narrow-body Airbus 318s.

Greg Dole, Boeing's director of international trade policy, linked that switch to Romania's bid to join the European Union. "The European Union has used extreme political pressure to convince the Romanians to buy Airbus," Dole said.

Nevertheless, Boeing said it still hopes for future 737 orders from Tarom.

• South African Airways (SAA) was once a solid Boeing customer. But in March 2002, it made a dramatic switch, with a $3.5 billion Airbus order. It currently has on order 34 Airbus jets and no Boeing jets.

The switch happened just months after Boeing had signed a "strategic partnership agreement" with South Africa. As part of that agreement, Boeing in November 2001 signed a deal to outsource parts work from Auburn and Spokane to Aerosud, an aviation-parts maker, creating 100 jobs in Pretoria.

Last week, in a new phase of outsourcing to South Africa, Denel, a state-owned defense manufacturer, opened a new plant in Johannesburg equipped with the machines from Kent.

But Cornelius said SAA's switch to Airbus didn't remove the continuing contractual obligation from the airline's purchase of Boeing jets in 2000.

"We take a long-term view in South Africa," he added. "We're not fair-weather friends with the key partners and customers we have around the world."

Payback for airplane sales

All three outsourcing moves, according to internal documents, are supporting proprietary "Industrial Participation" agreements — also called "off-sets" — between Boeing and the three governments concerned.

Such deals, struck with some foreign customers at the time of a Boeing sale, lay out a contractual obligation: Boeing has to bring business to that country, normally set at a precise percentage of the value of the original sales deal. Typically, the off-set's value is 30 percent or more.

An off-set agreement doesn't necessarily oblige Boeing to send work out. Often it can meet the requirement by offering flight training or other services, or just setting up a match with another U.S. company that wants to do business in that country.

As of Dec. 31, 2002, according to the company's annual report, Boeing had outstanding off-set obligations through 2013 totaling about $8.2 billion.

A World Trade Organization side agreement signed by 30 nations — the Agreement on Trade in Civil Aircraft — specifically prohibits off-set agreements for the sale of civil airliners.

Signatory nations are barred from "attaching inducements of any kind to the sale or purchase of civil aircraft."

Though South Africa and Turkey are not party to this agreement, Romania signed it in 1992, before its first 737 purchase.

"This was a very new agreement (with Romania)," said Dole, Boeing's trade-policy expert, "I don't think the salespeople really were being asked or should have known this was illegal. Our contracts staff probably should have engaged this more fully."

Even when a country is prohibited by international agreements from demanding off-sets, Cornelius said, that "does not rule out Boeing's willingness to place work in that country."

"If we had other objectives ... we may believe it's very expedient to do that," he said.

In this case, Boeing is not shy about its objective: it wants to shed the Auburn work quickly.

While the foreign suppliers gear up production over the next couple of years, Cornelius said, Boeing will in the interim off-load the work to domestic suppliers. The plan is that it be gone from Auburn by the end of this year.

Dominic Gates: 206-464-2963 or dgates@seattletimes.com

Sending machines, then the work, offshore
  Machines going overseas Company receiving work
South Africa 3-axis computer-controlled milling machines and ancillary tools from Kent (already delivered) Denel: state-owned defense manufacturer
Turkey Four large 4-axis, computer-controlled milling machines and ancillary tools from Auburn Tusas Aerospace Industries (TAI): state-owned; builds military aircraft
Romania Smaller hand-controlled machines, such as lathes, from Auburn To be determined
Source: Boeing documents and interviews

Copyright © 2004 The Seattle Times Company

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