McDonnell in Tentative Deal With Taiwanese

McDonnell Douglas announced late Tuesday that it signed a preliminary agreement to sell 40% of its Long Beach-based commercial aircraft business to investors in Taiwan and create a new international aerospace company that would be jointly owned with the Taiwanese.

The historic deal, if approved by the U.S. and Taiwan governments, would be the first time that a foreign nation has taken a substantial ownership position in a major U.S. aircraft company.

The prospective deal also would culminate McDonnell’s yearlong search for an international partner to help finance the estimated $4-billion cost of its next-generation jetliner, the MD-12, a project that the company has bluntly said it cannot afford without help. The Taiwanese would invest $2 billion to acquire their stake.

The company has asserted that the Taiwan deal would preserve U.S. jobs by ensuring its ability to build a new airliner, even though the craft’s increased foreign content would reduce the U.S. share of total production.

But the deal, outlined in a memorandum of understanding signed with Taiwan Aerospace on Tuesday, has already sparked controversy among lawmakers and others concerned about possible transfer of key technologies into foreign hands and the decline of one of the few remaining dominant U.S. export industries.

Prior to McDonnell’s announcement, 30 senators on Tuesday signed a letter to President Bush asking him to intercede in the possible sale and find an alternative that would keep the McDonnell operation under U.S. ownership. The senators said the deal would harm U.S. national interests and result in the transfer of large amounts of technology paid for by U.S. taxpayers, an assertion that the company denied.

McDonnell’s statement indicated that investors in Taiwan could acquire up to a 40% share of the company’s commercial transport business. Taiwan Aerospace is majority-owned by the government of the island nation, formally known as the Republic of China. That appeared to leave unclear whether the Taiwan government would directly own part of the new aerospace venture. McDonnell said it intends to conclude a definitive agreement by Jan. 31, 1992.

In a statement to employees entitled “A New Beginning,� McDonnell Chairman John McDonnell said that questions affecting its Douglas Aircraft employees in Long Beach will be resolved in coming weeks, including determining who will work for the new international company.

He added, “The intent is to keep current pay, benefits, seniority and retirement programs. . . . The precise structure of the new company will be part of the negotiation process.�

Douglas Aircraft was founded in 1920 by Donald W. Douglas Sr. McDonnell acquired the troubled aircraft firm in 1967. It continued to lose money until the mid-1980s and has either lost money or had weak profits since then. The firm’s current employment is 42,500, of which 38,000 are in Long Beach and Torrance.

The company statement indicated that its discussions with Taiwan, formally disclosed only last week, had progressed to where it was ready to enter “detailed negotiations for a definitive agreement.�

John McDonnell said that McDonnell’s key European competitor, Airbus Industrie, has “new and modern facilities, coupled with the crutch of government subsidies� that have taken market share away from McDonnell.

Indeed, by some measures, McDonnell has taken just 10% of worldwide orders for new jetliners this year, versus about 28% for Airbus. McDonnell has suffered by having only two basic aircraft to offer, both of which are derived from models introduced decades ago.

Under the agreement signed Tuesday, Taiwan Aerospace would build a substantial amount of the MD-12. Douglas President Robert Hood said last week that the MD-12 would have up to 70% foreign content. It will be assembled at a new plant in the United States. The company is considering nine cities across the country for the plant, none in California.

Dr. David H. Huang, chairman and chief executive of Taiwan Aerospace, said: “This combination recognizes the advantages of a global alliance in aerospace and is consistent with TAC’s role as the government-designated company to spearhead the further development of the commercial aviation industry in the Republic of China.�

In their letter protesting the proposed partnership, the 30 senators asked Bush to have the Committee on Foreign Investment in the United States, a U.S. Treasury Department group, review the deal.

Because the Taiwanese government owns a majority share of Taiwan Aerospace, the deal is a form of foreign government subsidy for McDonnell Douglas, the senators asserted. While they “understand� McDonnell’s decision to seek foreign subsidies for its aircraft business, they expressed “grave doubts that this transaction would be in our national interest.�

Moreover, the letter, originated by Sen. Jeff Bingaman (D-N.M.), attacks U.S. government trade policy in aerospace as “an utter failure,� in part because other nations assign a higher priority to the industry.

McDonnell spokesman Michael Burch, responding to the letter, said the proposed sale will allow the company to cut its debt, compete internationally with a broader lineup of products and ultimately strengthen the corporation to the nation’s benefit. He added that none of the technology involved in the sale was paid for by taxpayers and that he does not anticipate that the proposed deal will be blocked.

“It is good for the country in that it is a way to preserve American jobs,� Burch said.