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Experts divided over 7E7 decision

As The Boeing Co.’s siting decision for its new 7E7 plant draws toward its final weeks, interest is high among corporate relocation experts around the nation.
/ Source: Puget Sound Business Journal (Seattle)

As The Boeing Co.’s siting decision for its new 7E7 plant draws toward its final weeks, interest is high among corporate relocation experts around the nation.

“WE’RE NOT AWARE of anything on the manufacturing side of a similar size,” said Jay Biggins, executive managing director of Stadtmauer Bailkin Biggins LLC in Princeton, N.J., a corporate relocation consultancy, explaining why the Boeing process is being so closely watched.

Outside experts seem to divide into two schools: those who believe the plant is still Washington’s to lose and the entire exercise is about squeezing the best terms from this state; and those who believe the real competition is among an array of states in the South and Southeast, one of which will almost assuredly win the plant away from the incumbent.

“I think the judgment is open, but conventional wisdom is this will go to Southeast U.S. or Texas,” said Dennis Donovan, director of global site selections for Wadley-Donovan, a Grubb & Ellis Co. company in Edison, N.J..

From just six miles away, in Fords, N.J., comes a contradictory view from Locations Advisory Service partner Saul Grohs: “The only buzz is that this may all be just a ploy to stay in the state of Washington, and see what they can do about raising the ante there.”

Some of the variables leading up to the decision were clarified Nov. 20, when Boeing announced that 35 percent of the structure will be manufactured by Boeing in existing plants in Oklahoma, Washington, Kansas and Winnipeg, and another large piece by a joint venture of Vought-Alenia, in Texas.

Boeing senior vice president Mike Bair, who leads the program to build the new superefficient 7E7 twin-jet, said during a press conference last week that the company probably will announce a 7E7 site in late December, although the announcement could “spill over into ’04.”

The fact that Washington’s Legislature passed $3.2 billion in tax relief over 20 years for Chicago-based Boeing if it builds the aircraft here seems at first glance to put this state ahead. The amount is larger than has been publicly offered by any other state.

But the experts say future tax breaks are generally considered less valuable by companies than cash in the present, and they add that by laying the outlines of its offer on the table so early in the poker game, Washington could find itself trumped by a slightly better hand that some other state has quietly assembled.

Texas Gov. Rick Perry of Texas in mid-November filed a suit to keep secret that state’s bid, after a Texas group requested that the numbers be made public under public records law.

“Everybody has looked at that number (Washington’s $3.2 billion) and said, ‘That’s the number to beat,’ ” said Paul Saldana, president and CEO of the Economic Development Corp. of Tulare County, Calif.

Washington’s Department of Community, Trade and Economic Development has rejected public-records requests by the Business Journal and others seeking details about the state’s offer, which has not been completely disclosed.

Industry relocation experts from around the country all agree the crux of the decision will come down to one point: Boeing’s profit margins and what site will help that most.

“What they’re trying to do is find the best location where we can assemble this product, and drive the most revenue to the bottom line,” said John Lombard, director of the Center for Real Estate and Economic Development at Old Dominion University in Norfolk, Va. “They’re all weighing the merits and importance of each of the areas, and trying to come out with an optimal factors that meets the needs.”

The complex factors include labor and other costs, the sites’ political implications, the incentives being offered by competing states, and even the strategic advantages of multiple manufacturing sites in a threat-filled world.

Many observers believe that labor costs, and the fact that several Southern states are home to nonunion auto plants, will be an important factor. About 4,000 Boeing workers are employed in Huntsville, Ala., building Delta rocket boosters and space station parts.

Huntsville Times reporter Shelby Spires, who writes about Boeing there, said he’s convinced the company is looking for a clean break from Washington state.

“One of the things the locals believe is that they have an edge because they have such a huge presence,” he said. “I really think, in talking to people, that Boeing’s had it with the West Coast, they want to move, and it all has to do with unions.”

Other observers are more circumspect about the union question, saying what’s crucial is how attuned union leaders are to global competition, and to a company’s need to stay competitive.

“The labor costs are far and away the largest line item in the operating budget, so even modest differences in labor costs can result in enormous competitive spreads between one location and another,” said relocation consultant Biggins. “A company can achieve competitive labor costs and productivity, even in a union environment, but it’s more difficult and requires more complex and challenging negotiations.”

A related area is the quality of labor in relationship to its costs, and here the experts are divided also. Some emphasize the need for a skilled labor force, but others point out that assembling an aircraft from a handful of major components is less demanding than primary manufacturing and design. They note that Southern states have proved proficient at staffing up the many auto plants that have located there, including expensive brands like Mercedes-Benz and BMW.

“What we hear in the industry is that they have had some challenges, but they are not insurmountable. With recruiting and training programs they can maintain an adequate supply of labor,” Biggins said.

Another area closely watched by observers is the political aspect of Boeing’s decision. With the company deeply dependent on defense work, which now makes up more than half its revenue, diversifying its political base is extremely important. This is especially so when Washington state has two Democratic senators in a Republican administration.

“By putting it somewhere else they get two Senate votes. That would argue against your area,” said Stephen Roulac, CEO of strategy adviser The Roulac Group in San Francisco. He points out that California companies were unusually successful in winning defense contracts during the Reagan and Ford years.

For instance, Alabama has two Republican senators, and Sen. Jeff Sessions sits on the Senate Armed Service Committee.

“Is there someone from the appropriate defense committee at the federal level? That’s always a consideration,” Lombard said. “I’m sure they’ve got it all mapped out. Who’s going to be pleased and who will be displeased, and what are the consequences of those decisions.”

Copyright 2003 American City Business Journals Inc.