Boeing's High-Speed Flight

A pivotal fight is brewing over plans to ship more work abroad

After years of mounting conflict with its powerful labor unions, Boeing Co. (BA ) may be headed for a showdown over the company's aggressive new globalization strategy.

In the past year, the Chicago aerospace giant has laid off nearly 30,000 workers following the September 11 terrorist attacks, which caused many airlines to cancel or delay plane orders. Since then, Boeing has decided that instead of hiring them back as demand for planes picks up, it will shift most of their work--including advanced design and engineering tasks--to lower-cost suppliers in the U.S. and countries such as Russia and China. On July 21, at the Farnborough Air Show in Britain, Boeing commercial airplane unit CEO Alan R. Mulally publicly discussed the company's plans for the first time and said Boeing's two largest unions "are aligned and in tune" with the grim reality that the company will never rehire the 30,000 workers that got laid off.

The reaction was immediate and intense. "We absolutely reject Mr. Mulally's suggestion that Boeing will turn its back on 30,000 loyal employees," retorted Dick Schneider, the chief negotiator for the International Association of Machinists, whose contract covering 26,000 Boeing workers expires on Sept. 1. "If Alan Mulally thinks the IAM is in tune with that idea, he must be tone deaf."

Indeed, Boeing's new strategy runs headlong into the top bargaining priority of the IAM and the 18,000-member Society of Professional Engineering Employees in Aerospace (SPEEA), whose labor pact with the company expires three months after the machinists'. Both unions have focused on preserving jobs and have called on Boeing to stop sending work to low-wage outposts around the globe. But Boeing, which has steadily lost market share to archrival Airbus Industrie, is determined to slash costs by outsourcing globally. CEO Philip M. Condit sees globalization as a way to both expand sales to nations that sign on as manufacturing partners and to tap into cheaper labor markets. "We are an assembler, an integrator," he told reporters in Farnborough. "We will probably [make fewer] parts, which are most efficiently made by people who focus on doing that."

And so, as the IAM and Boeing move into the final month of bargaining before the contract expires, a potentially pivotal battle is shaping up over whether the company will remain primarily a U.S.-based enterprise. Boeing has been relatively slow to shift production and design work abroad, though Condit has stepped up the pace in recent years (table). If he can use the window of opportunity opened by the layoffs, Boeing could be transformed into a global enterprise that's much less dependent on the U.S. for both brawn and brains. Boeing's unions, however, hope to persuade Condit to compete against more efficient Airbus by boosting the productivity of its U.S. workers. "We're looking at being partners at creating value--or adversaries who will be fighting over an ever-shrinking pie," warns IAM strategic-resources director Steve Sleigh.

Boeing and its unions have long struggled with the issue of outsourcing, both in the U.S. and overseas. It played a big part in the IAM's last strike, in 1995. To settle that 69-day brawl, Boeing agreed to allow the union to try to retain jobs in-house by matching the costs of suppliers bidding on work to be outsourced. The two sides averted another walkout in 1999 over the IAM's effort to strengthen the process. In the end, Boeing agreed to limited guarantees against outsourcing layoffs.

This time, the IAM wants a commitment in the contract specifying machinist employment levels, similar to provisions in IAM and United Auto Workers contracts with Detroit carmakers.

The machinists argue that globalization is ultimately a self-defeating strategy for Boeing. They maintain that if too much work is handed off to suppliers, it would drain the company of critical skills and sap its control of the processes that create added value. Schneider also points out that Boeing has spent $10 billion on share repurchases since 1997. That's the price tag of a new plane model--and Airbus has unveiled three since then, while Boeing has done nothing but upgrade its 777. "So while Boeing is giving money back to investors, Airbus is ensuring that it will dominate market share in years to come," says Schneider. Boeing has explained the repurchases as a way to lift the stock price.

Surprisingly, labor's position has some support within management's ranks. A number of executives are concerned that excessive outsourcing could lead to a shortage of cash flow needed to develop new planes. Last year, for example, Boeing senior scientist L.J. Hart-Smith presented a controversial paper making this argument to Boeing senior executives. Ironically entitled "Outsourced Profits--The Cornerstone of Successful Subcontracting," it said that too much outsourcing diverted profits to suppliers and led to the downfall of the once-dominant McDonnell Douglas Corp., which Boeing acquired in 1997.

While top Boeing officials declined to comment for this article, they have argued that the advantages of global outsourcing--lower costs and higher sales--outweigh potential drawbacks. Last year, Condit appointed former American ambassador to the U.N. Thomas Pickering to be Senior Vice-President of International Relations. Pickering has been scouring the globe for what he calls "strategic partners"--often government-owned aerospace companies that will agree to purchase Boeing aircraft in exchange for production and design work being located in their countries.

And it's no longer just blue-collar factory work, as SPEEA has discovered. Boeing has opened aircraft-design centers in Spain, Italy, and Moscow, with more in the works. Its 500-plus Russian engineers make about $10,000 a year, vs. $72,000 for SPEEA members. Fumes SPEEA Executive Director Charles Bofferding: "They have to stop boxing up our work and sending it to Moscow."

Right now, Boeing seems unlikely to commit to the kind of employment promises its unions desire. But that could change if the possibility of a walkout looms larger. Given workers' strong feelings on this issue, management may need to brace itself for a bumpy ride.

By Stanley Holmes in Farnborough, Britain

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