Study Raises Red Flags on California Aerospace Industry

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,” saysa 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 isconcern 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.”

Topics: Business Trends, Doing Business with the Government, Procurement, Space