McDonnell Bid for New Backers May Fall Short : Aerospace: Taiwan is considering cutting its stake in a joint venture to build the MD-12. Japan is leery of a role for political reasons, and other Asian countries may not be interested or have the capital.
TOKYO — As hopes diminish that Taiwan Aerospace will be able to follow through on its original plans to buy a 40% share of McDonnell Douglas Corp. for $2 billion, the U.S. aircraft company has expressed confidence that it will find new Asian partners to cover any investment shortfall.
But most Asian analysts and industry observers are skeptical that McDonnell will succeed in cobbling together an Asian coalition.
“Taiwan is very aggressive in acquiring high technology (through equity investments),†said an executive at Orix Corp., a Japanese aircraft leasing firm. And the official, who asked not to be identified, added, “In many ways Taiwan is an exception.â€
Taiwan Aerospace, a small company created last fall with private and public Taiwanese capital, has found its crucial government support weakening in recent weeks, however, as a result of growing criticism from opposition leaders in Taiwan’s parliament.
Last week, opposition legislator Chen Shui Pie played tapes in parliament of speeches in America by Taiwan Aerospace Chairman David Huang. He demanded an explanation for Huang’s statement that the Taiwanese government would keep investing in McDonnell Douglas until it was successful.
Taiwan Prime Minister Hau Pei-tsun appeared to distance himself from the McDonnell deal by denying that the government had made such a commitment.
Taiwan Aerospace, more realistic about the difficulties it will face in winning government backing, has admitted that it might have to reduce its investment to a 25% stake pending results of an independent review of the McDonnell deal due this month.
Since McDonnell wants to sell 49% of its Douglas Aircraft unit in Long Beach to Asian investors, such a cutback would leave the St. Louis-based company searching for partners willing to put up an estimated $1.25 billion to buy another 24% of its commercial aircraft operations.
McDonnell officials declined comment for this story. But last month, Douglas Aircraft President Robert H. Hood Jr. expressed confidence at the Singapore Air Show that other Asian investors could make up any shortfall in Taiwan’s investment.
Analysts, though, said that while many Asian countries have policies to encourage investment in aerospace, few would be interested in or capable of investing the large sums McDonnell is looking for.
Although some of Japan’s biggest companies reportedly were interested in acquiring a large equity share in McDonnell, Japanese government officials quietly warned against the move, believing that such an investment would fan already inflamed anti-Japanese feelings in America.
A smaller deal would be less attractive to the companies and would risk alienating Boeing Co., Japan’s largest partner in aircraft development. Long-time McDonnell customer Mitsui & Co., however, has expressed interest in helping McDonnell knit together a network of Asian backers.
While Singapore, Indonesia and South Korea all have aggressive, government-supported efforts to develop aerospace businesses, none is as ambitious--or cash-rich--as Taiwan.
In any event, Taiwan--even if it cuts its investment--may be unwilling to accept the smaller manufacturing role commensurate with a smaller stake.
“We want to be a manufacturer and the promoter of local industry,†said George K. C. Liu, a senior vice president of Taiwan Aerospace.
Liu explained that he does not envision a situation in which Taiwan Aerospace would bring in other Asian investors and ship parts manufactured elsewhere in Asia to Taiwan for assembly--a scenario presented earlier by McDonnell executives.
Rather, Taiwan Aerospace--as it awaits the results of the independent due-diligence review--may be positioning itself to demand the full 40% stake it originally sought at a lower price.
Liu embraced as “comprehensive†a report by a group of Chinese engineers and accountants in California that maintains that the value of Douglas Aircraft is just one-fifth that agreed to by McDonnell and Taiwan Aerospace in November.
Another concern is that McDonnell’s $3 billion in debt and its sluggish military aircraft sales will drag the company down before it has a chance to launch its next-generation aircraft, the MD-12.
Asian observers, accustomed to seeing their own countries invest huge sums to develop high-technology industries, say they are looking for some hint of whether the American government--which rebuffed an appeal from McDonnell for financial assistance last year--ultimately would keep the firm from collapsing.
“One important question is what the U.S. government will do to support (McDonnell) if it has a financial problem,†said Hidem Mori, a spokesman for Mitsui & Co. “It is far from that point now, but people wonder whether America would let such an important company go bankrupt.â€
Asian observers say the strong card in McDonnell’s hand is the booming Asian market. While its new MD-12 jet, designed to compete with Boeing’s 747, faces daunting challenges--including development costs of up to $10 billion and continuing design uncertainties--many in aerospace believe that the plane will enjoy strong demand when it hits the market near the end of the century.
In a recent study, the International Air Transport Assn., an airline industry group, projected that the number of passengers on scheduled airlines in the Pacific region would climb to 375 million by the year 2010, up more than 400% from the 87 million of 1990.
“Asia is a big growth market,†says Mitsui’s Mori. Between them, he said, McDonnell, Boeing and Europe’s Airbus Industrie “will have trouble meeting that kind of demand.â€
Even if the Taiwan deal falls through, Mori argues, McDonnell Douglas could find ways to go ahead with the MD-12--and, indeed, the company may have no choice but to do so, if it wants to stay in commercial aviation for the long haul.
Mitsui, a $108 billion-a-year trading company that has long been a McDonnell customer and does a big business in plane leasing, says McDonnell’s continued growth is important to its business and it is prepared to help.
“If they don’t get back on their feet, it will be a problem for us,†Mori says.
Mitsui, he notes, is using its substantial Asian network to help line up suppliers, investors and advance orders for the MD-12. Some of its efforts:
* Mitsui is prepared to help finance Asian parts makers’ development efforts in exchange for a cut of the revenues from sales of the jet. (Mori declined to comment on a newspaper report suggesting that the company might be prepared to invest as much as $200 million in such ventures.)
* Mitsui might be willing to become McDonnell’s first launch customer on the MD-12, as it was for the MD-11. Mitsui helped launch the MD-11 by committing $500 million toward the purchase of five planes that it then leased to airline companies.
Still, it could be a decade before the MD-12 brought a return on investment, and Mori said Mitsui and other investors would naturally be wary of investing unless they are offered sufficient rewards.
Its unions, however, may keep McDonnell from moving too much manufacturing offshore. And concern about opposition in the U.S. Congress may prevent it from being too generous with its technology.
Most potential Asian investors aren’t commenting on any talks they may be having with McDonnell.
Singapore Aerospace--a conglomerate with $150 million in annual sales that builds landing gear for British Aerospace, engine mounts for Airbus and engine parts for Pratt & Whitney--has been mentioned as a possible partner.
Company officials said it was premature to discuss their talks with McDonnell, though a spokesman noted that the Singapore government has targeted aerospace as a strategic industry and offers tax incentives for investments in it.
Indonesia too has long been promoting its aerospace industry. But few believe that the country has either the technology or money to contribute to McDonnell on any significant scale.
South Korea is the only other country besides Taiwan with the capital to make a large investment, but companies there deny that significant talks are taking place with McDonnell.
Samsung Aerospace, Korea’s leading aerospace company, said it was approached by the U.S. firm two years ago and was considering an investment plan when the Taiwan agreement was announced. The company said it then dropped the study.
Korean Air denies press reports that it is putting together a consortium to buy a 1% stake in McDonnell’s commercial operations for $100 million. The company did confirm, however, that it is talking with both McDonnell and Boeing about becoming a parts supplier.
So Taiwan remains McDonnell’s best bet.
But if Taiwanese parliamentarians remain critical of the project, the next task of Taiwan Aerospace and McDonnell may be to persuade cash-rich Taiwanese investors that the project is worth putting their money into.
And it could prove a lot tougher snaring private investors who want a high return on their investments than a government whose primary interest is in acquiring technology and building an aerospace industry.
Times staff writer Ralph Vartabedian in Los Angeles contributed to this story.
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