Monday, February 1, 2010

The Dayton Aerospace Cluster

This post is about the competitive advantage Dayton may or may not enjoy as an Aerospace Innovation Hub. This month’s Aerospace America has an interesting article titled “Changing aerospace cluster dynamics”, by Philip Butterworth-Hayes. A cluster is a group of similar or competitive businesses that locate in the same region, also known (in Ohio) as an innovation hub. The reasons given in the article for the increase of attractiveness of aerospace clusters are

  • development of research institutions
  • local and national government subsidies
  • specialized work-force availability
  • just-in-time production techniques

For these reasons, locating in a cluster gives a business a competitive advantage (see the Cluster Meta-study for more details). Like everything else in the world economy, the dynamics of clusters is changing and businesses in clusters are developing links with clusters around the world. Butterworth-Hayes claims that aerospace clusters in “North America and Europe will do less manufacturing and concentrate more on developing high-end integration and high-technology skills, outsourcing the labor-intensive manufacturing work to clusters in low-wage economies.” A familiar refrain to the folks of Dayton who have been struggling with the effects of the off-shoring (or down-southing) of manufacturing for decades. He continues, “This is exactly what seems to be happening. The key to transforming manufacturing clusters in North America and Europe to centers of aerospace excellence is access to innovation skills – corporate and academic. There is a new imperative for traditional manufacturing clusters to attract companies skilled in design and engineering, rapid prototyping, software development, part manufacturing, testing and research capabilities.”

Ohio’s governor has been in the news lately after designating Dayton an Aerospace Innovation Hub. The main focus of the Governor’s plan seems to follow the “transformation formula” described by Butterworth-Hayes. Grants to local research institutions and trade deals with foreign countries where the manufacturing will take place. So how good an idea is the Governor’s strategy? First it’s a good idea to find out what we’re starting with. Figures 1 through 5 come from the Cluster Mapping Project. They illustrate the relative size / employment / wages in traded clusters in the state of Ohio.

Figure 1 shows that Ohio has a significant and growing share of the turbine engine manufacturing employment in the US. The other good news from Figure 1 is the “Production Technology” cluster, relatively large and growing. The bad news shouldn’t be any surprise, “Automotive” and “Metal Manufacturing” are both large and shrinking.


Figure 1: State of Ohio: Specialization by Traded Cluster, 1998 – 2007

Figure 2 shows the part of the reason Ohio (and Dayton) is feeling some pain. The 2nd and 3rd largest employers are the shrinking ones. Production Technology is 9th on the list and Aerospace Engines is 24th.


Figure 2: State of Ohio: Employment by Traded Cluster, 2007


Figure 3: State of Ohio: National Employment Rank by Traded Cluster, 2007

Figure 4 shows that our Ohio workers in Aerospace Engines are well-paid compared to the national average. Our Aerospace Vehicles and Defense folks (2nd on the list) are a paid a little less than the national average.


Figure 4: State of Ohio: Wages by Traded Cluster, 2007

The key political graph is Figure 5. Which sectors are creating the most jobs? The surprising (at least to me) big winner is “Transportation and Logistics”. Aerospace Engines added a tiny number of jobs over the time-period. Production Technology lost jobs over this period (Figure 1 showed the relative nationwide change).


Figure 5: State of Ohio: Job Creation by Traded Cluster, 1998 – 2007

For the Dayton region, the contribution to the Aerospace Engines cluster is basically GE in Cincinnati, that’s close enough to Dayton to be part of a virtual cluster (though their immediate outlook probably depends significantly on the fate of the F-136). The Aerospace Vehicles and Defense is basically WPAFB. So the cluster map seems to indicate that designating Dayton an ’aerospace innovation hub’ is at least somewhat reasonable. There’s a significant number of people in the region already doing the job. What about the rest of the “cluster checklist”?

  • development of research institutions: DAGSI, AFRL
  • local and national government subsidies: well $250k is a start…
  • specialized work-force availability: GE’s big facility in Cinci, various small local shops in Dayton
  • just-in-time production techniques: this isn’t really a characteristic of the region, just what efficient manufacturers are doing these days

This actually looks pretty good for Dayton. According to the formula, the well-educated, white-color professionals at the “top” of the value chain will be “innovating” and inking international trade deals while coordinating production at low-wage manufacturing clusters in Mexico and Asia. So what’s the problem? The problem for Dayton is Figure 5. Tiny growth in aero-manufacturing and defense / research jobs is a poor dressing for the sucking chest wound of automotive and metal manufacturing job losses. If we want Dayton to succeed, if we want all of Dayton to succeed, then Dayton needs a different approach than the commonly accepted “transformation formula” for aerospace clusters.

Why not coordinate manufacturing in a (relatively) low-wage cluster in Dayton’s hollow core? Wages couldn’t be as low as developing nations, but there is significant value in locating the engineers and the assembly lines in close proximity (see Gulfstream in Savanah or Cessna in Wichita), and coordinating the far-flung manufacturing is not without it’s significant costs/risks (see Boeing’s 787 experience). Don’t get me wrong, this won’t be a return to the glory days of gold-plated labor contracts. Labor in Dayton has to understand their competitive position and the value proposition that they bring. The availability of inexpensive foreign alternatives must temper their demands, but it doesn’t have to be a race to the bottom. The value of having design and manufacturing collocated means that wages can be higher than in the foreign low-wage alternatives, while still offering a competitive return on capital.

Dayton is different, generic transformation recipes don’t fit. Real innovation is finding a way to go after the top of the value chain (research / innovation / design) and provide opportunities for people in the middle and the bottom of the value chain at the same time. Not everyone can be a Chief, we need ways for Indians to contribute constructively too, or as Esrati put it: What do elevator attendants do in the information age?


  1. Opportunity knocks:
    U.S. Defense officials outlined plans to double production of unmanned aircraft...

    Dayton's aerospace cluster is missing a significant airframer; doing UAV airframes would be a good way to start.

  2. Well, it looks like Cessna has decided to follow the 'formula': Cessna to Move Some Production to Mexico

    Before you blame those damn dirty executives, realize that Capital is the most mobile thing in the world, second only to ideas, and it demands a competitive return. Complaining about it won't change that fact, but it will distract you from being more competitive.

  3. Interconnected clusters:
    Wichita-based Spirit AeroSystems Inc. (NYSE: SPR) is a major Boeing (NYSE: BA) supplier and assembles around 70 percent of the 737.
    Boeing 737 re-engine decision to come this year

  4. Europe aims for an end to tooling, guess it's a good thing Dayton changed from Tool Town to Tech Town. Don't worry, the record of local government as venture capital firm has been stellar...

  5. The unintended consequences of political theater: Aerospace Cluster Buster

  6. GE Aviation to create $51M R&D center in Dayton: “The close proximity to the University of Dayton Research Institute, Wright-Patterson Air Force Base, and its Air Force Research Labs was a big part of GE’s decision to come to Dayton,” said Vic Bonneau, president of Electric Power for GE Aviation Systems, in a statement “This center will be used to design products that will deliver electrical power efficiently for our military and commercial customers.”

    Ohio’s Third Frontier Commission awarded a $7.6 million grant to lure the project.

  7. Airbus packs house for supplier conference: “Ohio is one of the most important states to us,” McArtor said. “We like the innovation, we like the suppliers, we like the attitude and the work ethic … we’ve got a lot of big companies that already supply us, a lot of embryonic companies that want to become part of the aerospace supply chain.”

  8. The 8th Continent Project is an interesting example of an aerospace cluster that is focused on commercializing space related technologies:
    Nov. 19, 2008 – The nation’s first aerospace business incubator opened it doors today at the Colorado School of Mines, positioning the state as a global economic center for the commercialization of space-derived technologies.

    With primary funding from the Colorado Economic Development Commission (EDC), the 8th Continent Aerospace Business Incubator now serves as a virtual home for entrepreneurial companies that turn innovations from the Space Program and defense industries into profitable businesses and investment opportunities.

    First Colorado Aerospace Business Incubator Opens Doors

    Colorado’s first aerospace business incubator opens doors

    The focus here seems to be much more on kick-starting start-ups and technology transition from aerospace / defense into the services and energy sectors. There's a combined incubator, venture funding network and research consortium.

  9. Clusters are coming, courtesy of Uncle Sugar: of the great flaws of U.S. innovation policy today is that it pays too little attention to the practical commercialization of ideas and is still based on what the economist Greg Tassey calls the “black box model” of growth that assumes desirable goods and services magically appear as a result of the combination of R&D spending with the traditional inputs of capital and labor.

    This “magical” or linear model is misleading because it assumes that basic research gets easily or almost automatically translated into commercial activity. But commercialization doesn’t happen automatically. In fact, the real-life commercialization process is pursued by small and large firms, trade associations, universities, community colleges, investors, and entrepreneurs in a universe jam-packed with complications, including information breakdowns, institutional inertia, coordination and communication problems, and poorly aligned incentives. Add to that the disaggregation of the American development system, through the globalization of the supply chain, and it’s clear that U.S. growth and innovation activities are diffusing rather than cohering, drifting rather concentrating.

    All of which suggests the need for the industry cluster program now embedded in America COMPETES. Clusters—geographic concentrations of interconnected firms and supporting organizations—are one important way that networks of companies, suppliers, and related institutions put the pieces of a fragmented development system back together. Through clustering, firms and other enterprises seek to cooperate or share resources—whether technology, workers, or suppliers--on certain matters even as they compete nationally and globally. Through such clustering firms benefit from valuable local knowledge, specialized local labor forces, technology diffusion, or strategic partners. Hence the need for efforts to foster these vital networks. However, due to lack of trust, talent, and resources, many clusters are less competitive than they could be. Consequently, it often falls to government to promote local initiatives that enhance intracluster collaboration.

    Sound economic policy that's sure to ignite innovation, right?

    Now to be sure, the new draft language isn’t perfect. Because the bill would have the Commerce Department fund one-off cluster initiatives rather than regional programs that promote cluster initiatives more generally, it increases the likelihood of misfires, hinders regional flexibility and capacity to respond to economic change, and could reduce—rather than increase—cooperation among regional actors.
    America COMPETES Act May Include Proviion for Innovation Clusters

    Nope, just more ham-fisted tax-dollar flinging by folks with nothing at risk...

  10. I wrote: Why not coordinate manufacturing in a (relatively) low-wage cluster in Dayton’s hollow core? Wages couldn’t be as low as developing nations, but there is significant value in locating the engineers and the assembly lines in close proximity...
    Brookings seems to agree:
    We used to think that we could divorce innovation entirely from production, keeping the former here as we sent most of the latter abroad [this is the consensus cluster approach]. But important innovations also emerge from the factory floor. Innovating more means producing more, and that production can take place in Ohio.
    How Ohio Can Transition to the Next Economy

  11. The Machinists union has filed a complaint against Boeing with the National Labor Relations Board (NLRB), charging that the company was retaliating for a 2008 union strike when it decided last fall to put a second Dreamliner assembly line in Charleston, S.C., rather than Everett.
    Machinists file unfair labor charge against Boeing over Charleston

  12. Deconstructing clusters: chaotic concept or policy panacea?, from the abstract:
    Our aim is to deconstruct the cluster concept in order to reveal and highlight these issues. Our concerns relate to the definition of the cluster con- cept, its theorization, its empirics, the claims made for its benefits and advantages, and its use in policy-making. Whilst we do not wish to debunk the cluster idea outright, we do argue for a much more cautious and circumspect use of the notion, especially within a policy context: the cluster concept should carry a public policy health warning.

    A painful lesson that Dayton learned through its auto-industry-supporting tool and die cluster:
    The competitive strategies of firms in clusters, which are initially highly innovative compared to firms outside clusters, tend to converge (for example through mimetic and normative isomorphism) and to be less innovative over time because cluster firms define their field of competition as the cluster to which they belong, rather than as the wider external industry. This restricted collective perspective gives rise to competitive ‘blind spots’ which limit cluster firms’ innovative potential, strategic positioning, and ability to anticipate and react to industry-wide shocks. Non-clustered firms tend to be less constrained and potentially remain more adaptable to sudden system-wide changes.

    What will keep us from making the same mistakes as the faddish elite focus on a Dayton Aerospace Cluster rather than a Precision Tooling Cluster?

    Why is Dayton an Aerospace Innovation Hub?
    The extensive methodologies of top-down mapping exercises can at best only suggest the existence and location of possible clusters: they provide a shallow, indirect view of clusters. They can not provide much if any insight into the nature and strength of local inter-firm linkages (traded and untraded), knowledge spillovers, social networks and institutional support structures argued to be the defining and distinctive features of clusters.
    In view of these difficulties, it is perhaps not surprising that many studies give up on the idea of identifying clusters directly. Instead, they tend to rely on loose ad hoc, ‘bottom up’ means of identification (Doeringer and Terkla, 1995). Some analysts simply ask local economic agencies to supply lists of ‘local clusters’ in their area which are then studied in more detail (for example see Van Den Berg et al., 2000). In many of these instances, however, what are claimed to be clusters often turn out, on closer empirical inspection, to be small and only loosely connected collections of similar or related firms, and sometimes have more to do with local policy aspirations than with realities on the ground.

    Because the Governor/Chamber of Commerce/Local Pol say we are...

  13. Lessons for the future of US manufacturing:
    Musk offered several reasons for how SpaceX, whose Falcon vehicles he said are nearly 100 percent U.S.-built, has been able to offer such low prices. Several of the reasons revolved around the company’s decision to make and assemble most Falcon parts on its own.

    At some other U.S. rocket builders, he said, “you need to go to the third level down on the subcontracting chain before you see anybody actually cutting metal.”

    SpaceX Undercut Competition To Clinch Head-turning Iridium Deal
    Tightly integrating the knowledge work with the metal work is where competitive advantage lies.

  14. GE Aviation Plans To Add 500 Jobs Next Year. The Business Courier of Cincinnati (10/15) reports, "GE Aviation expects to add about 500 jobs in Evendale and Dayton over the next year, officials said Thursday" in order to provide for the "increased jet engine production and spare parts and services, said spokeswoman Deb Case." The article notes this news "came as the Evendale headquarters complex hosted a rally Thursday afternoon in support of continued funding for its F136 engine program."

  15. Reuters has a pretty interesting article on Boeing's experience with outsourcing significant parts of 787 manufacturing.

  16. From the Daily Launch:
    The Cincinnati (OH) Enquirer (1/30, Boyer) reported the Ohio Aerospace and Business Aviation Advisory Council has been studying the aviation industry in the region, finding "Ohio needs a new coordinated, statewide focus to counter growing international competition, budget cuts and shifting priorities. That's the central conclusion of a year-long analysis by 75 industry leaders from across the state." The results are about to be presented to Gov. John Kasich. The article cited several of the state's resources, noting the "NASA Glenn Research Center has one-of-a kind testing and research capabilities in propulsion and space systems. It employs 1,600." Meanwhile, since budget cuts could affect the industry, the article notes, "The extent of proposed NASA budget cuts won't be known until next month, when the administration releases its proposed budget. [Panel member Gary] Conley says initial indications are that NASA Glenn, because of its focus on propulsion technologies, may not be significantly affected."

  17. From Parabolic Arc:
    BOULDER, Colo. – eSpace: The Center for Space Entrepreneurship, a non-profit business incubator and workforce development organization for aerospace start-up companies, today announced its third round call for new incubator candidates for the eSpace Incubator program.

  18. Cell Phones and Rockets, implications for the future of US manufacturing:
    It’s anybody’s guess what the lower limit of the OODA loop is. Not so long ago, 90-day product development cycles would have been considered an insane dream – but the rise of 3D printing and commodity SoCs might very well cut time to prototype much further. I can now easily imagine a handset designer with good CAD tools and a 3D printer producing a testable phone in a week.The Smartphone Wars: Tightening the OODA Loop
    Declining to speak for attribution, the Chinese officials say they find the published prices on the SpaceX website very low for the services offered, and concede they could not match them with the Long March series of launch vehicles even if it were possible for them to launch satellites with U.S. components in them.China Great Wall Confounded By SpaceX Prices

    The similarity between Android winning in the cell phone market and SpaceX beating "the China price" is putting the designer/engineer as close as possible to cutting metal. It is possible to do this because of highly automated design and production tools.

  19. "The Boeing case is unprecedented," he [Bill Gould] says. "I agree with much of what this board has done and is likely to do, but I don't agree with what the general counsel has done in the Boeing case. The general counsel is trying to equate an employer's concern with strikes that disrupt production and make it difficult to make deadlines—he's trying to equate that with hostility toward trade unionism. I don't think that makes sense."
    Air Rage: spat between Boeing and labor...

  20. At the same time, U.S. officials have sought to limit where others sell their drones. After Israel sold an anti-radar attack drone to China, the Pentagon temporarily shut Israel out of the F-35 Joint Strike Fighter program to register its disapproval.

    In 2009, the United States also objected to an Israeli sale of sophisticated drones to Russia, according to diplomatic cables released by the anti-secrecy group WikiLeaks. A smaller co-production deal was later brokered with the Russians, who bristled when Georgia deployed Israeli surveillance drones against its forces during the 2008 war between the two countries.

    Global race on to match U.S. drone capabilities

  21. More on Boeing and the Machinists:
    The law, to be sure, forbids a company from retaliating against a union. But the word “retaliation” suggests direct payback — a company shutting down a factory after a strike, for instance. Boeing did nothing like that. It not only hasn’t laid off a single worker in Washington State, it has added around 3,000 new ones. Seven out of every 10 Dreamliners will be assembled in Puget Sound.
    How Democrats Hurt Job Creation

  22. In the first comment I said, "Dayton's aerospace cluster is missing a significant airframer; doing UAV airframes would be a good way to start."

    Maybe the cluster will gain one soon: Fortune 100 firm eyes local UAV effort, Unmanned vehicles will be built here if region is OK’d for test-flying space.

  23. Reading up a bit on creative class stuff, this bit about clusters made me chuckle:
    There is a long tradition of charismatic economic--development troubadours. In the 1990s, it was Michael Porter, a Harvard Business School professor who swept into inner cities with his theories of industry clusters.
    The Ruse of the Creative Class

    Can the Dayton busybodies and twittering yuppies fall for every snake-oil salesman that deigns to touchdown in fly-over country on his way between the coasts?