Boeing's move to South Carolina cuts 787's costs, but risks labor turbulence

boeings-750-million-move-to-s-c-how-much-will-it-really-saveAs I posted, Boeing (BA) is opening a plant in South Carolina to help build its 787 Dreamliner -- the up to 330-passenger aircraft whose scheduled delivery date has been delayed six times. BusinessWeek reports that Boeing is investing $750 million in that plant and expects to pay the workers there $15 an hour, 42% less than its unionized Washington state workers get. With 850 Dreamliner orders worth $110 billion on the books, Boeing can hardly afford more problems with this plane. Is this move by the company short-sighted?

The answer depends on whether Boeing can train those South Carolina workers to do what those in Washington can. Lately, things haven't worked out so well for Boeing in its relationship with those Washington workers. About a year ago, Boeing's 27,000-member machinists union there went on strike for 57 days, which contributed to one of those six 787 delays and cost the company $2 billion.

But Boeing has had its troubles in South Carolina too. For example, at one of its 787 suppliers, Vought Aircraft Industries, the 900 workers could not meet Boeing's requirements for the 787's rear fuselage -- so Boeing bought the facility this July. Yet by shifting substantial production to South Carolina, Boeing is giving itself better negotiating leverage with the union in Washington.

And it also will get new supporters in Congress -- South Carolina's House and Senate members, who are always seeking jobs for their constituents -- which could help Boeing win the bid for the Air Force's $35 billion airborne refueling tanker.

However, Boeing's now-angrier Washington workers are the linchpin. BusinessWeek notes that they could decide to slow production there through "work by the rules" actions and by tagging work that comes from South Carolina to Washington as not being up to specifications.

Furthermore, the Washington workers believe they have the edge when it comes to fixing the problems created by the 787's far-flung supplier network. And as Boeing disperses more production, it will either need to find a way to improve the quality of its suppliers' work or depend more on its in-house workers to fix those problems.

Through the shift to South Carolina, Boeing will save money in the short run, and if its workers there gain the technical know-how Boeing needs, they will indeed pose a threat to its unionized Washington workers. But its big South Carolina investment will delay the 787's break-even point.

In the interim, Boeing will be in for turbulent times.

Peter Cohan is a management consultant, Babson professor and author of eight books including, You Can't Order Change. Follow him on Twitter. He has no financial interest in the securities mentioned.


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