Thursday, November 26, 2020
Nov. 26, 2020

Linkedin Pinterest

Profit, not pandemic, is driving closure of aerospace supplier’s 575-employee Kent plant

By
Published:

When the Carlisle Companies conglomerate announced in August that it would shutter its assembly plant for airplane wiring in Kent by the end of next year and lay off almost 600 people, it blamed the pandemic-driven aerospace downturn.

But documents obtained by The Seattle Times show the real reason for the planned shutdown is to move most of the work to China and Mexico to boost the operation’s profitability.

The estimated cost of shutting the plant and moving the work has risen steeply in the months since management made the decision, and at least one customer is walking away because of the changes.

Yet though production workers in Kent offered to take pay cuts to keep their jobs, the shutdown is moving ahead.

A senior employee familiar with the internal discussions said Carlisle’s top executives in Arizona and Florida see the factory closure as necessary to impress Wall Street and boost the stock price — and thus their bonuses.

“We live and die for shareholder reaction,” said the senior employee, who asked not to be named so as to stay employed until the facility closes. “It will maximize compensation for a few at the top. The people who get hurt are the ones with house payments, with no second home.”

Acquiring facilities outside the U.S.

Carlisle, a sprawling multinational company headquartered in Scottsdale, Ariz., that’s grown by a long series of acquisitions, last year made a profit of $473 million on revenue of $4.8 billion, an almost 10% profit margin. Chief executive Christian Koch received total compensation of $9.6 million.

Its leadership did not respond to multiple requests for comment made over several weeks via email, text and voice calls.

The Kent facility is part of the diverse company’s aerospace and medical device division, which has manufacturing plants in the U.S., China, Mexico and Europe.

The division, called Carlisle Interconnect Technologies (CIT), headquartered in St. Augustine, Fla., and headed by president John Berlin, makes wiring products for both Airbus and Boeing and their suppliers, as well as defense customers.

The main product is airplane wire harnesses, custom-built bundles of disparate wires assembled and tied together with appropriate connectors fitted at the end of each wire.

Kevin Michaels, managing director of consulting firm AeroDynamic Advisory, said in an interview that assembling such harnesses is very labor intensive work and therefore a prime candidate for outsourcing to low-cost countries.

Michaels, who has written extensively about trends in the aerospace supply chain, said Boeing, Airbus and the engine makers outsourced the making of wire harnesses about 15 years ago.

A great deal of that and other aerospace parts work migrated to Mexico, where U.S. and European suppliers set up factories. Before the pandemic, the Mexican aerospace sector had grown to exporting $8 billion per year into the U.S., Michaels said.

With growing labor costs in China, concern over protection of intellectual property and recent political tensions, that country’s slice of the American aerospace market is much smaller, with only about $1.5 billion of annual exports to the U.S. prior to the pandemic.

CIT has set up shop in both locations. It acquired its wiring plant in Dongguan, China, in 2007, and in 2012 another in Nogales, Mexico. Today, the Dongguan aerospace wiring facility employs about 600 people and the Nogales plant about 1,300 people, company presentations show.

A former employee still in touch with many of the current staff said the Kent CIT plant for years was regarded as the division’s prime location for complex work. Many of the employees facing layoff have been there two decades or more, and production of new, more intricate wiring work often is perfected there, then passed on to lower-cost plants.

Yet the former employee said the constant push for ever-lower fares in the airline business created intense pressure on CIT to reduce pricing by shaving costs.

Over recent years, work on Inflight Entertainment Systems (IFE) for passenger airlines was commoditized and much of it transferred to the cheaper labor locations, the former and the current employees said.

As part of agreements with major customers like Panasonic and Thales to lower prices, Carlisle has already shifted much work from the U.S. to its plants in China and Mexico, including the majority of its IFE contracts.

Last year, CIT closed its manufacturing plant in El Segundo, Calif., and transferred the work to Nogales.

“They are making strategic moves for shareholders. The writing is on the wall,” the former employee said. “Eventually, Kent would have closed anyway. COVID was a catalyst.”

Project Cyprus

COVID was the reason Carlisle vice president and general counsel Scott Selbach cited in August for the Kent facility closure.

“With the severe decline in passenger airline travel … our business has gone away, frankly,” Selbach told The Seattle Times then.

But the work hasn’t actually disappeared. The shutdown of the Kent plant is one more move in Carlisle’s relentless shifting of work to lower its costs.

Internal company documents reveal a plan — internally code-named Project Cyprus — to move 30% of the annual business previously projected for Kent to China, another 26% to Mexico and most of the rest to other U.S. locations.

Michaels said that while transferring manufacturing to Mexico remains standard for U.S. aerospace companies, sending it to China is “against the grain” at this moment of high political tension in U.S.-China relations.

He speculated that CIT products from there may be destined mostly for the domestic Chinese market.

The Project Cyprus plan was laid out in internal documents prepared for presentation to the Carlisle board this summer.

One document states that the impact of COVID-19 has cut the projected annual revenue for the Kent plant by $100 million and reduced the anticipated profit margin to 2% or 3%.

That’s not the 10% margin the corporate parent targets.

So the work contracts for the Kent plant were instead to be parceled out to five lower-cost Carlisle plants — dubbed LCCs or Lower Cost Centers: Dongguan and Nogales, as well as Tijuana, Mexico; Franklin, Wisconsin; and St. Augustine, Florida.

The documents projected that the 575 jobs in Kent would be replaced by 105 jobs in Wisconsin, 90 jobs in Florida, 144 jobs in China and 135 jobs in Mexico. The location of 15 other jobs remained undecided and 86 jobs would just disappear, not to be replaced.

CIT’s goal set out in the documents was that within three years, though annual revenue would be reduced by just over $11 million by charging lower prices, the cost savings from “moving from high labor cost region to LCCs” would be twice that.

Out of a projected $107 million in future annual revenue from Kent’s contracts, China is to take $31 million, consisting of IFE wiring, backbone wiring on commercial airplanes, and some medical device and test and measurement equipment. Mexico will take $27 million, consisting of IFE work, fiber optics and medical devices.

The document also stated that Carlisle will set aside $500,000 to set up a small site somewhere in the Renton/Kent/Tukwila area that would be used for research and development of new products, with no actual production work. This site could employ about 50 people.

However, since then, the plan has shifted a lot, the senior employee said.

In late September, the jobs previously earmarked for Florida were switched instead to go to a CIT facility in Cerritos, Calif.

The R&D facility here has also been given an additional role: Because of the difficulty of traveling between the U.S. and China and Mexico during the pandemic, CIT has decided to retain a small team at the R&D facility — about 10 engineers, planners, sales and customer contact personnel — who after Kent closes will remotely support the plants in China and Mexico as they transition to taking over the production work.

Swelling costs The senior employee with knowledge of the internal discussions said that as details of the Kent closure have been worked out, the overall cost to Carlisle is proving significantly higher than the figures presented to the CIT board this summer.

An early financial analysis in one document projected the one-time cost to Carlisle of Project Cyprus at $21.8 million, a figure that it estimated could be recouped in just over 2.6 years through the higher profits from lowering costs.

However, by mid-November the internal estimate for the cost of the shutdown and move had ballooned to around $26 million, with a longer payback period, the senior employee said.

The original plan anticipated Carlisle losing just 5% of the Kent plant’s business due to the move. However, more will be lost than anticipated then.

The senior employee said at least one customer producing equipment for the U.S. military is balking at the move of its contract to a different U.S. plant.

Just two years ago, that defense customer paid for certification of the Kent site as compliant with International Traffic in Arms Regulations (ITAR) rules. Facing the prospect of repeating that process elsewhere, it’s pulling out of further contracts.

A plea to save jobs

On August 7, Carlisle CEO Koch sent employees a message noting the board had just approved a 5% increase in its dividend payout to shareholders and declaring this “an unmistakable message about our lasting financial strength.”

Five days later, employees in Kent got their first layoff notices and a letter from CIT president John Berlin announcing the plant was “being completely closed by the end of 2021.”

Employees were offered a retention bonus — for a one-year employee, it came to just over $2,600 — to stay until the ax falls.

The production workers at the Kent plant — mostly women and many of them immigrants — were long paid relatively low wages. In 2013, when the Kent facility employed 620 production workers, 84 percent earned $10 to $15 an hour, according to past filings with the state.

Wages rose in subsequent years. By 2017, the last year CIT was required to provide the wage breakdown, 70% of the production workers earned $15 to $20 an hour.

But that year, CIT cut the production workforce almost in half as assembly work moved elsewhere, down to today’s roster of about 330 production employees.

In mid-September, about 75 mostly senior production workers signed a petition asking Carlisle management to consider keeping a smaller manufacturing facility in the Puget Sound area.

They pledged to work for three years with a 15% pay cut from their current wages if management would save their jobs.

Top management thanked them for their loyalty but turned down the request.

Indeed, the schedule for complete closure of the Kent plant may have accelerated from the previously stated exit date at the end of 2021. A person with knowledge of the deal said Carlisle has extended its expiring lease on the building, but only through August 2021.

The senior employee said that despite the swelling costs and the stumbling plans to redistribute the work, Carlisle won’t reconsider its decision.

Loading...