State of Washington
Governor’s Aerospace Conference
Museum of Flight Briefing
June 25, 2008
Tom Captain, Vice Chairman
Aerospace & Defense Industry Practice
Deloitte LLP
Acknowledgments
• Grant County Economic Development Council
• enterpriseSeattle
• Economic Development Board for Tacoma-Pierce County
• Greater Spokane Incorporated
• Economic Development Council of Snohomish County
• Aerospace Futures Alliance of Washington
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2
Agenda
• Three premises
• Industry background
• Business imperative
• Compelling argument
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3
Three Premises
• Regional competitiveness should not be
singularly focused on “winning” final assembly for
the 737 replacement aircraft program
• World has moved beyond the success of “Action
Washington” 787 initiative
– Why did Washington “lose” Global Aeronautica, Spirit
Aerospace, Bombardier & Rolls Royce deals?
– Is Washington still competitive?
• The business imperative is to create & maintain
regional competitiveness in the A&D industry:
– Benefits are “defensive” as much as about job creation
– Not just about commercial airplanes
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4
Industry Background
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5
Industry Background
Grand Total Global Industry Spend – 2007
Defense Budgets
$1,158 B*
86.6%
Commercial Aircraft
$117 B
8.8%
Commercial MRO
$51 B
3.8%
Commercial Space
$11 B
0.8%
$1,337 B
100.0%
Total
Contrary to common understanding, A&D on a global basis
is mostly “Defense”, as opposed to commercial aircraft
Market estimates based on various
sources and Deloitte analysis.
Copyright © 2008 Deloitte Development LLC. All rights reserved.
* 2006 estimated
Commercial MRO reflects civil, regional, business, and general aviation.
Commercial Space reflects non-military satellites and launch vehicles..
Estimates for Global Defense Budgets from 2006 and 2007. Other data estimates from 2007.
6
Industry Background
Global Defense Spend by Region
South America
3%
The US DoD has the
largest spend of any
country
Asia and Oceania
15%
North America
48%
Western Europe
22%
Central &
Eastern Europe
5%
Africa 1%
Middle East 6%
2006(e) spend: $1.158 Trillion
Source: SIPRI (Stockholm International Peace Research Institute)
Data reflect all defense budget line items including Procurement, R,D,T&E, O&M, etc…
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7
Industry Background
Global A&D Procurement
Of the $1.337 Trillion global A&D industry spend, expenditures
are mostly defense related, and further, most is spent on
personnel, O&M and related services. Procurement is only 34%
ILS
15%
Commercial MRO
11%
Defense Electronics
10%
Missiles
7%
Total Industry:
$1.337 Billion
State of Washington
Target Market
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Land-Based Platforms
10%
Space
4%
Naval Platforms
5%
Commercial Aircraft
26%
Military Aircraft
12%
Total Procurement: $449 Billion; 34% of total
Market estimates based on various sources and Deloitte analysis. Estimates are for 2007
8
Industry Background
Industry Product Structure
Global A&D OEM Structure
Commercial
Aircraft
Military
Aircraft
Naval
Platforms
Space
Land
Platforms
Launch
Vehicles
Aircraft
Carriers
Fighters
Large
Regional
Reconnaissance
Business & VLJ
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Destroyers
Bombers
General
Aviation
C4ISR &
Missiles
Defense
& Systems
Electronics
Personnel
Carriers
Tanks
$449 Billion
Commercial
Satellites
ILS
& MRO
Artillery/Munitions
Military
Satellites
Submarines
Transports
Trainers
Helicopters
UAV/Drones
Helicopters
9
Industry Background
1992 – DOD - William Perry “Last Supper”
US A&D Industry Consolidation
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50 firms in 1985,
consolidated down to 5
key US A&D companies
within 20 years
10
Industry Background
US A&D Industry Employment History
• Industry consolidation, higher efficiency, automation,
retirements and outsourcing has resulted in reductions
• Despite rising defense budgets, and commercial aircraft
orders on a long term basis, the trend for industry
employment is stable to slightly declining
850
Employees (in Thousands)
800
750
708.5
700
672.6
637.3
650
600
587.1
550
500
450
Copyright © 2008 Deloitte Development LLC. All rights reserved.
Source: 2007 AIA Study
20
07
(p
)
20
06
20
05
20
04
20
03
20
02
20
01
20
00
19
99
19
98
19
97
19
96
19
95
19
94
19
93
400
11
Industry Background
US DoD Top 15 Aircraft Program
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Source: US DOD Budget; Note: Figures include procurement and R,D,T &E
12
Industry Background
Commercial Airplane Customer’s Condition
• Lockheed, McDonnell Douglas, Boeing and Airbus were/are
selling airplanes to a cumulatively non-profit industry
• Cost and innovation are the key differentiator
Annual and Cumulative Airline Industry Profits
Global Airline Profits
1978-2008
20,000.0
15,000.0
10,000.0
(15,000.0)
Cumulative Profits
(20,000.0)
Annual Industry
Operating Profit
(25,000.0)
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
20
08
e
(10,000.0)
19
90
19
88
19
86
19
84
19
82
(5,000.0)
19
80
19
78
Billions
5,000.0
(30,000.0)
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13
Industry Background
Washington’s Aerospace Industry – Economic Impact
• Washington is the highest per capita
aerospace employer at 44 jobs per
1,000 workers
• Seattle SMSA has highest
concentration of aerospace
companies in world
• Aerospace accounts for nearly onesixth of Washington’s Gross State
Product
Sources: AFA, Washington Department of Community, Trade and Economic Development
• Washington’s aerospace cluster is
represented throughout the
production value chain
2006 estimates
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14
Industry Background
Washington’s Aerospace Industry – Employment
Source: AFA
Strong correlation between changes in aerospace industry employment
and total employment.
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15
Industry Background
Washington’s Aerospace Industry – Impact on Counties
Overall Average Wages by County
Source: Washington State Office of Financial Management
Average wages in counties with high aerospace industry concentration:
King, Snohomish, Pierce and Spokane—are among the highest in Washington
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16
Industry Background
Renton 737 Operations Impact on Washington State
2007 estimates
Sources: Various Sources, Deloitte Analysis
The Renton operations account for nearly $7 billion (2.7%) of Washington’s
Gross State Product and over 45 thousand direct and indirect jobs.
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17
Industry Background
Renton’s Dependence on the 737 Operations
Source: City of Renton Economic Forecast, 2007-09
Boeing 737 operations account for only about 30 percent of Renton’s
employment base, about half what it was in the early 90s.
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18
Business Imperatives
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19
Business Imperatives
Market Growth Drivers
• Armed conflicts
– Equipment replenishment
– Defensive buildup in global hot spots
• Defense modernization – net-centric warfare
• War on terror and homeland security – R&D
• Technology driven modernization; e.g.,
– Air traffic management
– Composites & materials
– Propulsion efficiency
– UAV’s
• Long term air travel growth - pax & freight
• Long term procurement commitments
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20
Business Imperatives
Competitive Environment
• Government support - Driven by need for power
projection, prestige & economic revitalization
• Technology - Design anywhere, build anywhere,
allowed by the digital product design revolution
– Enables global low cost sourcing
– Poland, Mexico, Czech Republic key beneficiaries
• Growing economies - Rise of China, Russia,
India and Japan
• US regional competitiveness
– South Carolina, Alabama, North Carolina
– Kansas, Texas
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21
Business Imperatives
Regional A&D Competitive Benchmarks
• Mobile, Alabama is highly competitive with attractive wage
rates and cost of living, outpacing King County
Key Statistics
US Average
Unemployment Rate
Annual Salary
King County
King County
Mobile, AL Gap
4.8%
4.2%
3.9%
Engineer Manager
$110,030
$129,710
$110,560
-17%
Computer Programmer
$69,500
$86,880
$43,510
-100%
Elementary School Teacher
$48,700
$52,370
$38,510
-36%
---
1,826,732
192,830
High School Graduation Rate
80.4%
90.3%
80.5%
Bachelors degree or higher
24.0%
40.0%
25.0%
$119,600
$236,900
$81,400
26
27
22
12.1%
20.2%
9.5%
City population
Median Home Value
Average Commuting time in minutes
Union Membership
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Source; US Bureau of Labor Statistics
-191%
22
Business Imperatives
Regional A&D Competitive Benchmarks
• Charleston, South Carolina is also a highly competitive
location, with attractive wage rates and cost of living,
outpacing King County by a considerable margin
King County
US Average King County Charleston, SC Gap
Key Statistics
Unemployment Rate
Annual Salary
4.8%
4.2%
4.2%
Engineer Manager
$110,030
$129,710
$95,080
-36%
Computer Programmer
$69,500
$86,880
$52,300
-66%
Elementary School Teacher
$48,700
$42,490
-23%
---
$52,370
1,826,732
High School Graduation Rate
80.4%
90.3%
50.0%
Bachelors degree or higher
24.0%
40.0%
37.5%
$119,600
$236,900
$139,700
26
27
20
12.1%
20.2%
3.3%
City population
Median Home Value
Average Commuting time in minutes
Union Membership
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Source; US Bureau of Labor Statistics
118,492
-70%
23
Business Imperatives
Regional A&D Competitive Benchmarks
• Kinston, North Carolina, after many attempts, has become
an increasingly competitive location, with attractive wage
rates and cost of living
King County
King
County
Kinston, NC Gap
US Average
Key Statistics
Unemployment Rate
Annual Salary
4.8%
4.2%
5.7%
Engineer Manager
$110,030
$129,710
$85,220
Computer Programmer
$69,500
$86,880
$61,080
-42%
Elementary School Teacher
$48,700
$52,370
$40,170
-30%
---
1,826,732
22,729
High School Graduation Rate
80.4%
90.3%
71.9%
Bachelors degree or higher
24.0%
40.0%
13.3%
$119,600
$236,900
$82,600
26
27
24
12.1%
20.2%
3.3%
City population
Median Home Value
Average Commuting time in minutes
Union Membership
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Source; US Bureau of Labor Statistics
-52%
-187%
24
Business Imperatives
Regional A&D Competitive Benchmarks
• Wichita Kansas has incumbency and continues to be
highly competitive with attractive wage rates and cost of
living, outpacing King County by a considerable margin
King County
US Average King County Wichita, KS Gap
Key Statistics
Unemployment Rate
Annual Salary
4.8%
4.2%
3.5%
Engineer Manager
$110,030
$129,710
$106,340
-22%
Computer Programmer
$69,500
$86,880
$65,200
-33%
Elementary School Teacher
$48,700
$40,530
-29%
---
$52,370
1,826,732
High School Graduation Rate
80.4%
90.3%
50.7%
Bachelors degree or higher
24.0%
40.0%
25.3%
$119,600
$236,900
$78,900
26
27
18
12.1%
20.2%
9.3%
City population
Median Home Value
Average Commuting time in minutes
Union Membership
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Source; US Bureau of Labor Statistics
357,698
-200%
25
Business Imperatives
Competitiveness Data Points
• Mexico wins Bombardier aero-structures plant 5/08
• $250M investment resulting in 1,000 new jobs
– New aerospace plant in Mexico to build composite parts for new
Learjet 85
– Program ramp-up over 7 years, will employ 1,000 people, in
addition to those already employed by the company at its
aerospace complex in the central state of Queretaro.
– Bombardier's existing plant will make electrical harnesses. Final
assembly will be done at Bombardier's facility in Wichita, Kansas.
– "This new investment implies a significant transfer of technology.
There is no doubt that the use of composite technology is strategic
for the aerospace industry," the official said.
– Cited as having a "good and flexible workforce," as well as federal
and state government support, for the company's decision to bring
the technology to Mexico.
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Business Imperatives
Competitiveness Data Points
• South Carolina wins Global Aeronautica plant, opened in
December, 2006
– Located in North Charleston, the 334,000 square-foot facility is
where Global Aeronautica assembles, integrates, tests and
applies surface finishes to 60 percent of 787’s fuselage
• Vought opened a 342,000 square-foot production facility
in 2006. Vought fabricates and assembles fuselage
sections 47 and 48 for the 787.
– Facility employs 300, with two-third in a manufacturing capacity.
Vought employs about 600 people at its South Carolina facility,
targeting 775 by 2011.
• A separate 14,000 square-foot training facility serves both
nearby Vought and Global Aeronautica operations
• Boeing in process of purchasing Vought’s JV interest
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Business Imperatives
Competitiveness Data Points
• Kinston, North Carolina wins Spirit Aerospace composite
aero-structures plant in 2Q08
– Initial production for Airbus A350-XWB barrel sections.
– Spirit will design and manufacture Section 15 center fuselage
frame section, a composite structure approximately 65 feet long,
20 feet wide and weighing nearly 9,000 pounds.
• Facility will cost about $570 million and result in the
creation of 1,031 jobs over the next six years.
• According to Spirit President and CEO Jeff Turner: “The
State of North Carolina met our requirements for financial
incentives and this location offers a strong industrial base,
a runway and port access, a growing labor force and an
excellent technical training system.”
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Business Imperatives
Competitiveness Data Points
• Late June 08, US GAO rules in favor of Boeing protest
over selection process in NOC/EADS KC45A contract
• Initially, Mobile, Alabama won Northrop Grumman Air
Force tanker based on Airbus A330 platform
– Initial award of $35 billion was made on February 29, now tbd.
– Located at Brookley Field, plant consists of two buildings and
initially employ 1,500 workers,
– The longer term economic benefit to Mobile area expected to be
far greater than that directly associated with Tanker work.
• EADS, Northrop Grumman’s partner, agrees to perform
production work on commercial A330 freighter at facility
– Would be 1st new manufacturing center for large commercial
aircraft built in the U.S. in last 40 years.
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Business Imperatives
Competitiveness Data Points
• Virginia wins Rolls Royce engine plant in 1Q08
• Will build/test RB262 regional and corporate jet engines
– To convince Rolls Royce, the governor and his team put together
an incentive package that included “generous” tax breaks
– As part of the deal, and with state subsidy, UVA will construct the
Commonwealth Center for Advanced Manufacturing on land
donated by Rolls Royce, near the new plant
– James M. Guyette, president & CEO for Rolls-Royce's North
American operation, said company's decision to locate plant in
Virginia has to do with its people and strong education system
• The facility, located in the Tri-City area and set to open in
2009, and will require an initial investment of $170 million
with an initial 100 skilled workers and 500 jobs overall
• The jobs are expected to have an average salary of
$48,000, above Prince George County average.
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Business Imperatives
Competitiveness Data Points
Canada retains Pratt & Whitney Canada, providing more
than $1.6 Billion1 in assistance from 1982 To 2006
–
Pratt Canada has received economic assistance for at least 25 years for engine development. US$329M (CAN$350M)
was recently granted for next generation technology
–
Although most aid is provided by the Canadian federal government, significant regional aid is provided by Investissement
Quebec (loan of $61M in 2005 for engine development repayable in 2030)
–
Succession of programs2, have offered assistance:
•
DIPP was phased out and eliminated right out grants
•
TPC offered increasingly conditionally repayable contribution3
•
–
SADI was launched in 2007 to succeed TPC partly to increase transparency and economic return on aid
Tier 1 and tier 2 suppliers also receiving economic assistance
Source: Industry Canada, Canadian Taxpayers Federation; 1) Amount of economic assistance is likely larger if economic assistance to tier 1 and tier 2 suppliers are considered. Financial amounts expressed
in US$ in the year when aid was authorized based on historic CAN$/US$ exchange rates. Value of economic assistance in historic CAN$: 2B; Value of economic assistance in inflation-adjusted US$: 2.27B
(based on 3.25% historic average). 2) DIPP: Defence Industry Productivity Program until ; TPC: Technology Partnerships Canada; SADI: Strategic Aerospace & Defense Initiative. 3) Terminology used by
Canadian government
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Business Imperatives
Competitiveness Data Points
• Missouri news report:
– Bombardier is shopping for final assembly location for new CSeries next-gen regional jet production
– Government officials hoping to land Bombardier plant
– Missouri's governor and economic development officials visited
Montreal in May 2008 to convince Bombardier to locate an
airplane assembly plant in Kansas City, MO
– Gov. Matt Blunt already has signed legislation authorizing up to
$240 million in tax credits for Bombardier Aerospace to locate in
Missouri
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Business Imperatives
What’s Important to A&D Companies
• Inevitable march towards commoditization, means product
cost, and its value chain, is of paramount importance
– Wages, benefits and entitlements
– Cost of living
– Transportation and infrastructure
• Innovation environment
– Academic and government partnerships
– Skills and educated workforce
• Purchased parts
– Cost
– Supplier co-location
– Schedule commitments
– Design, reliability and quality
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33
Compelling Argument
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Compelling Argument
Washington’s Aerospace Industry – What is at Risk
Industry Characteristics
Economic Concentration: Aerospace is fundamental to
the state economy and key determinant of state’s
economic welfare
Wealth Generator: Aerospace in Washington is highly
export-intensive and benefits the larger state economy
through the multiplier process. Each aerospace job
indirectly supports 2.2 other jobs on average
Major Employer: Aerospace accounts for nearly 25% of
Washington’s manufacturing employment
High Wages: Aerospace industry has recorded high
productivity growth rate which in turn has allowed
aerospace companies to pay increasingly higher wages
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35
Compelling Argument
Key Messages
• Washington is getting outgunned, and is no longer
competitive, according to the data and the recent deals
• Can’t do much about cost of living and wage rates
• Governments and academia can become gap closure
weapons
• Commercial aerospace is only 37% of the entire industry;
defense and military A&D is important, representing a key
opportunity
• Cost of change and inertia keeps companies from
moving, but it is getting easier to do so
• Regions have to pay to “play”, and have to pay to “stay”
competitive in the economic development game
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36
Compelling Argument
Opportunities
• The Euro-USD FX rate differential currently favors US
aerospace industry manufacturers
– Airbus desperately needs to “dollarize” its content
– Finmeccanica, EADS Defense, Thales, Dassault, BAE Systems,
Safran, MTU, and Rolls Royce reportedly have, or are looking, to
invest in new efficient, low cost plants
• North American A&D firms continue to scan for lower life
cycle cost locations
– Lockheed Martin, Raytheon, Bell and other Texas based
businesses continue to stress the importance of costs*
– East coast defense contractor businesses of GD, UTX, TXT,
Harris have also stated the importance of competitiveness*
• Logistics and transportation costs naturally favor
incumbent final assembly sites
*Opinions based on company annual reports and comments by CEO, CFO’s and others at industry conventions
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37
Compelling Argument
Some Ideas to Explore Further
• Land grants, with buildings built to spec, leased on
favorable terms
• Additional B&O tax rate reductions for aerospace industry
• B&O tax holiday incentive for industry, pending deal
completion, with clawbacks
• Incentives to link software skill base with defense
electronics marketplace
• Direct linkage of State hardware & software engineering
and schools to applied research for A&D industry
• Increased marketing budget for State CTED-Aerospace
• Effective direct marketing and capture strategy and
pursuit program
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38
Compelling Argument
Summary
• Inevitable realities
– Difficult to cost justify on direct job creation
– Highly ambitious and well financed competitors
• Time to take the gloves off and protect your franchise
• Government economic and academic incentives for
industry needs reconsideration
– Close the gap
– Consider the ideas presented
– Proactive pursuit campaigns required
– Work together as a region
• Becoming competitive all around will get Washington in
fighting shape for eventual narrow body replacement
program
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Disclaimer
Report subject to conditions of engagement agreement email dated June 12, 2008 the between Deloitte Consulting LLP
and Economic Development Council of Snohomish County (client). This report is intended for the exclusive use of
Grant County Economic Development Council, enterpriseSeattle, Economic Development Board for Tacoma-Pierce
County, Greater Spokane Incorporated, Economic Development Council of Snohomish County, and Aerospace Futures
Alliance of Washington. Written permission must be obtained from Deloitte Consulting LLP for further use.
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