An American Eagle Talks Turkey With The TaiwaneseDinah Lee and Chris Brown and James E. Ellis
Gareth Chang has been flying high on Asia. An 18-year veteran at McDonnell Douglas Corp., the Chinese-born Chang is best known for engineering a breakthrough deal in 1979 to assemble MD-82 twin-engine jets in China. So why in recent months was Chang showing up in Taipei at swank restaurants with Taiwanese officials? Behind the scenes, the McDonnell Douglas vice-president was working on a bigger deal: The company confirmed on Nov. 19 that it is selling up to 40% of its airliner business for $2 billion to Taiwan Aerospace Corp., a new government-backed group.
The buy-in would be the biggest move so far by Asians into the U. S. commercial jet business. Cash-rich, they are eager to bite off a big piece of the industry, long a U. S. export stronghold. "What the talks with Taiwan Aerospace represent is the recognition that the Asia Pacific is coming into its own," says the 48-year-old Chang.
For McDonnell Douglas, a distant third in its industry, the sale is a matter of survival. The company's debt is now $4.8 billion, up from $2 billion in 1986, and it announced plans last year to reduce its head count by up to 17,000 workers. "We are talking to potential partners who can offer low-cost, high-quality production and access to their markets in the region," explains CEO John F. McDonnell.
FLIGHT BOOM. McDonnell Douglas is hardly alone in turning to Asia. In May, top dog Boeing signed a contract with three Japanese powerhouses -- Mitsubishi Heavy Industries, Kawasaki Heavy Industries, and Fuji Heavy Industries -- making them "super subcontractors" for the Boeing 777. Even No. 2 Airbus Industrie is making overtures, a big switch because its four European partner companies have so far kept all the work for themselves. Airbus hopes the Japanese will help develop the Super Airbus, a plane with 600 to 700 seats proposed for production later in the decade.
Air travel in Asia is booming. A McDonnell Douglas study predicts that passenger traffic within the Far East and across the Pacific will grow 10% to 12% annually for the next 20 years. Malaysia, Thailand, and Indonesia are beefing up their airlines. "By 2010, passenger traffic in this region will roughly equal that of the U. S.," says Adam M. Pilarski, McDonnell's chief economist. The Asians want a big role in that market. Taiwan's government, in particular, has a grand vision to become a world player in avionics, airframe construction, and aircraft design through Taiwan Aerospace. As they did successfully in the computer industry, the Taiwanese hope to wed public and private sectors to provide capital while counting on partnerships with foreign companies such as McDonnell Douglas for advanced technology. Taiwan can also provide plenty of U.S.-trained engineers. "It's hard to find a guy there without a PhD," says Chang, who holds an MBA from Pepperdine University.
Until now, Taiwan Aerospace has been a fledgling player. It has a mere 40 employees and only recently bought a factory in the city of Taichung, home of Taiwan's defense industry. Once the McDonnell Douglas deal is signed in January, Taiwan Aerospace expects a rush of investment from Taiwanese corporate shareholders, who "all have deep pockets," says Denny Ko, the company's president. To create an Asian consortium, McDonnell Douglas is hoping to sell an additional 9% interest to other players, possibly Japan's Mitsui & Co. and Singapore's Aerospace Ltd. The new team will help build the MD-12 jumbo jetliner. This widebodied trijet would rank as the world's farthest-flying aircraft. With a range of 9,200 miles, it would be ideal for globe-trotting Asian executives.
CREATING RIVALS? The proposed sale has its critics, however. Some argue that McDonnell Douglas is creating what will ultimately be a flock of competitors. "We need to look at the costs of losing critical industries," says Kevin L. Kearns, a fellow at the Economic Strategy Institute in Washington. The deal is already raising alarm bells in the U. S. because it involves the sale of assets in a key industry to a foreign government.
The U. S. government can block a deal if it threatens national security. To blunt criticism, McDonnell Douglas announced earlier this month that it is splitting apart its commercial and military aircraft activities. Also, final assembly of the MD-12 will take place at a plant to be built in the U. S. The company is looking at nine possible sites.
There's a risk that even by throwing production Taiwan's way, McDonnell Douglas still won't pick up major orders from the region. But the smooth-talking Gareth Chang is ready to meet that challenge. Despite the longstanding tension between Taiwan and China, he somehow managed to line up the deal with Taiwan Aerospace without as much as a peep from Beijing. With those negotiating skills, the rest may come easy.