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Study Raises Red Flags on California Aerospace Industry
By Sandra I. Erwin



A combination of unfriendly tax policies, military budget cuts and cutthroat competition is wreaking havoc on California’s storied aerospace industry, a new study cautions.  

“Aerospace is one of California’s most important sources of jobs and revenues. The state must take steps to support it into the future,” says a report recently published by the consulting firm A.T. Kearney.

While military budget cuts have hit aerospace manufacturers nationwide, California is being disproportionately affected because state tax and industrial policies make it difficult to compete against other U.S. and foreign firms, says Randall Garber, partner at A.T. Kearney public sector and defense services.

“California ranks 48th among U.S. states in terms of cost competitiveness and overall ease of doing business,” he says. Major corporations have relocated their operations to new states, including Northrop Grumman Corp., which moved its headquarters to Northern Virginia; Raytheon Space and Airborne Systems, which moved its headquarters to McKinney, Texas; and The Boeing Co., which moved two aircraft modernization programs — the C-130 Hercules transport aircraft and the B-1 bomber — from Long Beach to Oklahoma City.

Other recent setbacks include Boeing’s decision to shut down the C-17 military cargo aircraft plant in Long Beach due to a lack of orders. The unmanned aviation industry in California also was disappointed for not making the cut of drone-testing facilities that the Federal Aviation Administration selected earlier this year.

Garber says that while industry revenues and employment have been stable in recent years, the future is uncertain, and executives worry that aerospace and defense are underappreciated industries in a state that is better known for Hollywood films than for making aircraft and rocket engines. Aerospace is one of California's largest industries, with annual revenues equal to agriculture and entertainment combined, he says.

With $62 billion in revenues and $38.8 billion in indirect revenues it feeds to adjacent industries, the  aerospace sector's total economic impact is more than $100 billion, says Garber. “The message to the government is, ‘Don't take it for granted.’”

The state legislature since 2009 has passed several laws to make aerospace firms more competitive via tax relief and hiring credits, but there is still not enough awareness of what the state stands to lose if more companies depart or go out of business, he says. “It is the best kept secret for many politicians. They are not aware of the size of the industry.”

In the space sector, dominated by giants Lockheed Martin and Boeing, there is concern that a new procurement strategy for future satellites could mark the end of big-ticket spacecraft manufacturing in Southern California. The buzz in the industry is that the Air Force wants a “disaggregated” space architecture made up of less expensive, smaller satellites and hosted payloads. “What does that mean for the big space players in California?” Garber asked. In the rocket launch sector, the good news is that California-based SpaceX is expected to become a major player in the space industry. It is now focused on commercial business but soon will be challenging the Boeing-Lockheed joint venture, United Space Alliance, for military satellite launches. The downsize, says Garber, is that if SpaceX takes business away from ULA, it would be a loss for another California firm, Aerojet Rocketdyne, a key supplier to ULA.

In 2012, California’s $62 billion in aerospace industry revenues accounted for 9 percent of the global market and 21 percent of the U.S. market. The sector employs 510,800 workers in California — 203,400 directly and 307,400 in indirectly related industries such as finance, real estate, construction and transportation. Aerospace wages rate in the top 3 percent of all industries

“The aerospace industry has enjoyed tremendous success in the state, but competitive challenges exist, including high corporate and personal income taxes, a difficult regulatory environment and an aging skilled workforce,” the A.T. Kearney study says. “While recent state legislation is a step in the right direction, to grow its aerospace footprint, California should proactively pursue competitive policies that encourage commercial investment as well as investments in STEM instruction for its students.”

Credit: A C-17 Globemaster III aircraft nears completion in the Boeing assembly plant in Long Beach, Calif. in 2009 (Defense Dept. photo)

Comments

Re: Study Raises Red Flags on California Aerospace Industry

The politicians as well as the citizens in CA are so stupid that they can not understand the importance of aviation industries to their well being financially and maintaining a place that encourages businesses to make their headquarters. They are more interested in tourism and the low paying jobs that result from that type of environment.

I speak from 42 years experience there prior to relocating last year. 
Walter H Polk at 4/14/2014 8:00 AM

Re: Study Raises Red Flags on California Aerospace Industry

I retired from Boeing in Long Beach.   Formerly known as McDonnell Douglas.   My last ten years was on the C-17 aircraft for the Air Force.   A GREAT aircraft with so many awards, its staggering.  BUT, good ole California, it there's a way to lose money, they will deploy that in a minute.  So many restrictions, it's hard to compete.   It seems losing jobs in the South land is number one priority.   We left and moved to Utah.   The shame of it all is, it used to be so wonderful living in Southern California and working in aerospace. 
Mack Sutton at 4/14/2014 10:39 AM

Re: Study Raises Red Flags on California Aerospace Industry

Maybe California is getting tired of not getting any tax revenue from the aerospace industry.  It seems to me they have had some finnacial issues lately.  Maybe they should look for an industry that pays taxes.  Maybe that industry does not exist.
Kurt at 4/15/2014 12:43 PM

Re: Study Raises Red Flags on California Aerospace Industry

As a transplant to California, but a resident for nearly all of my adult life (the last 30 years), I've witnessed the steady decline of a once thriving and robust economy.  Aerospace is just a haggard remnant of what it once was -- A.T. Kearney's study is about two decades too late.  The major players in the industry have all but cleared out and will grasp at the flisiest of excuses to relocate what's left.  SpaceX may, in the end, be a success, but will it remain in California?  Doubtful. Sacramento politicians are as clueless as ever--more interested in a "progressive" agenda that mollifies their morally and ethically bankrupt consciences by claiming an environmental and morally-tolerant "enlightenment".  There is a near vacuum of common sense, honesty, and integrity in California politics.  Sadly, there seems to be little interest in fixing California's problems.
Jim S. at 4/15/2014 8:23 PM

Re: Study Raises Red Flags on California Aerospace Industry

California's Inventory Tax was the beginnig of the end for Aerospace, and their inabillity to run the State Government within a reasonable budget, which continues today. These are the simple but real cost issues that drove many businesses out of CA, MACDAC, Northroup, and many others todate. California's Government is not capable of understanding the real worth of the Aerospace Industry in CA, but they will when its gone!
MAC at 4/15/2014 11:04 PM

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