Are U.S. Defense Contractors Abandoning California?

U.S. Defense Contractors Shifting Operations East
U.S. Defense Contractors Shifting Operations East

The Oklahoma City press has been having fun with the news that Boeing (BA) plans to relocate two major defense programs from Long Beach, Calif., to their town -- calling it a reverse Grapes of Wrath, a reference to the Depression-era exodus of "Okies" to hopefully better jobs and futures in the Golden State. But last month's announcement could also signal the start of a major shift in the locations of U.S. defense contractors, and how they work.

"This may just be the beginning of a lot of production decisions by those companies, across the entire aerospace defense industry," says Andrew Sherbo, a lecturer on finance at the University of Denver's Daniels College of Business who also spent decades with the Air Force. "It's a good example of it."

Boeing's C-130 Avionics Modernization and B-1 Lancer Bomber programs currently employ about 800 people in southern California. The company says it is moving about 550 positions from Long Beach, with other jobs posted and hired locally in Oklahoma City. Boeing already has about 900 people in Oklahoma.

In a press statement, Boeing Vice President Mark Bass said the relocation is about remaining competitive. "[A]s we reviewed anticipated operating costs over the next several years, it became clear that Boeing needs to take major actions on these programs in order to remain affordable for our customers," he said.

Lower Costs Lure Companies Away From the Coast

Sherbo says the move makes sense for Boeing's bottom line. "There's a lot of pressure with defense budgets starting to go down," he says. "Companies want to keep their profit margins, and they want to keep business with with the Department of Defense. Long Beach is expensive. If you look at your average wage and manufacturing in California, versus an area like Oklahoma City, it's about 20% higher in Long Beach."

Boeing will also relocating its C-130 and B-1 programs down the road from Tinker Air Force Base - whose Oklahoma City Air Logistics Center provides maintenance to a variety of Air Force weapons systems, including the C-130 and B-1 Lancer.

Oklahoma has also gone out of its way to welcome Boeing with economic incentive packages. Along with what the state offers to companies, Oklahoma City Mayor Mick Cornett says his city has its own pool of funds "that the voters gave us control of in 2007 through a bond issue. And it's totally performance-based, and it's based on creating jobs -- and the higher the income, the greater the incentive."

Mayor Cornett is aware his city has an image problem to counter.

"If you're an engineer in Long Beach, you have no reason to wake up one morning and to think you're life is going be better if you were to move to Oklahoma City," Cornett says. "I think once they're exposed to what we have to offer, they'll have a much different opinion." Quality of life in Oklahoma City, he notes, is very high -- with affordable housing, higher-than-average incomes and a cost of living rate below the national average. "[W]e're creating a city that people want to live in," he says, "and the job creators and entrepreneurs are going to be successful in Oklahoma City because highly educated young people are moving here -- and the secret to building jobs in the future is creating a city where they want to be."

Boeing's move is just the latest in a trend of West Coast-based contractors shifting east, This past January, Northrop Grumman, which was founded in California in the 1930s, announced plans to move its corporate office from Los Angeles to Washington, D.C., by next year.

"It's not going to be just Boeing," says Andrew Sherbo, "it's going to be the rest of them, having to take a look at some of these [economic] issues."