Economics: Boeing Move Unsurprising

TORONTO, ONTARIO - News sources outside of Washington state and South Carolina largely ignored Boeing's decision last week to place a second 787 assembly line in South Carolina instead of Everett, Washington. Nobody should have been surprised at the decision; no matter what the unions in Washington had offered, Boeing's decision reinforces what I see as clear tenets in North American business in this era, none of which make any sense from a long-term perspective but seem to have been adopted by most businesses anyway.

These tenets apply to the manufacturing of finished goods that are not interchangeable commodities produced by oligopolic companies (which are actually most durable goods and branded consumer goods, and thus quite of a few of the things still manufactured on this continent), and apply less or not at all in highly-competitive commodities, including some of the components of the finished goods.

(1) Timelines don't matter. Because customers have relatively few options in these products, taking a delay in the launch of a product does not lead to significant loss of market share or customer goodwill. Boeing already has taken delays in the 787 launch because of outsourcing, and the complication of two geographically distant lines will inevitably add more, but this is not perceived to hurt the company relative to the labor cost reduction.

(2) Quality doesn't matter. Again, mostly because of limited options, companies can afford to have modest quality problems and then fix them on finished products as customers have nowhere else to turn. While I have no doubt that the quality of planes from the non-union line in South Carolina will eventually match that of the line in Everett, a new line of recently-trained workers always starts at a disadvantage. Boeing is making the common calculation that the initial quality issues will not be significant in the long run.

(3) Experience is not worth paying for. Mostly because of points (1) and (2) above, companies would rather hire new workers that will work more cheaply and bring "new ideas" to a situation than continue to do things the way they have been done in the past. The working assumption seems to be that processes used in any given industry must automatically be flawed if they are time-tested, rather than things that have been refined with time into an efficient form. Thus, moving to a location with relative inexperience in an industry and cheap labor is always favored over expansion in an area with a qualified pool of workers that demand higher salaries, union or not. Boeing is saving a lot of money in labor costs by moving to South Carolina, but relative to Everett, the pool of potential employees is relatively inexperienced.

(4) Internal competition is always desirable. Rather than having to position themselves against competitors, any company of adequate size prefers to create "internal competition" between units at different locations doing similar things to push their productivity, with the threat of shutdown omnipresent. Companies that acquire competitors--such as pharmaceutical companies--are particularly adept at using this tactic between sites of the original and acquired company. The situation leads to undesirable conditions for workers at the sites under internal competition. Boeing has clearly set up this kind of situation between South Carolina and Washington.

While the union in Washington state can rightfully be accused of handling the situation poorly, in light of the above four tenets, there was probably nothing they could do to convince Boeing to place a second line next to the first. In fact, it was probably only for public relations and political negotiation with the union that the company made it seem like there was any possibility for a second line in Everett at all.

Much of the validity of these tenets depends on specific business circumstances that do not lend themselves to generalization, but in general I think they're crazy. Not living up to timelines and producing a quality product erodes one's customer base and makes it possible for competitors to gain market share, ultimately hurting profits in most situations. More importantly, creating internal competition leads to more stressed employees who care less about the success of the company, rather than building a team atmosphere with everyone working toward a common goal and rewarded for that. It's basically management by fear instead of management by positive incentive. It's harder to find ways to motivate people than it is to try to scare them, but it almost always leads to better work--that may actually be worth what it costs in salaries.

However, that's not how businesses are run on this continent today. Instead, they seem to be run on misguided principles like those cited above.