Mc Donnell Douglas' Far East Hopes Are Dimming

It seemed like a strategic alliance made in heaven. Bulging with cash, Taiwan was eager to buy into the civilian aerospace industry. And financially strapped McDonnell Douglas Corp. was looking for partners in Asia to help build its new jetliners. So it made perfect sense last fall when McDonnell announced that it would sell up to 40% of its airliner business for $2 billion to fledgling Taiwan Aerospace Corp.

But suddenly, McDonnell's entire Asian strategy is starting to sputter. That's particularly bad news, since the fast-growing region is key to the company's future. The main holdup is in Taiwan. Its legislators are firing a barrage of criticism over what the country is getting for its billions. This has forced the government to delay closing the deal until completion of an outside review. Those findings may not be out by the end of March, when McDonnell had hoped to receive a $1.2 billion downpayment. Beyond that, Singapore has scrapped plans to buy McDonnell aircraft, and in China, where the company has been co-producing narrowbody jets, sales are falling short of expectations.

NEW JET. Both McDonnell and Taiwan Aerospace insist the deal will go through. As jet fighters roared overhead at the Singapore Air Show on Feb. 25, Robert H. Hood, president of McDonnell's Douglas Aircraft unit, dismissed the probe as normal "due diligence." He predicts the company will get the full $2 billion by yearend, in time to start building production facilities for the MD-12. A long-range widebody that can carry up to 520 passengers, the plane would be McDonnell's first challenger to Boeing Co.'s lucrative 747-400.

But his assessment may be too rosy. Taiwan is under pressure from its legislature to reduce its proposed investment. The government may have to rope in the private sector, which has been lukewarm to government schemes to develop a civilian aircraft industry. Even for Taiwan Aerospace, the terms of the deal are far from set. "Everything needs to be evaluated," says Senior Vice-President George K. C. Liu. Taiwan may invest "$2 billion, or $1.5 billion, or $1 billion--nobody knows." As for buying a 40% stake, "that was just a recommendation," he says. "It could be 25%."

Taiwanese critics say the country deserves more for its money, particularly technology transfers. After all, they argue, it already assembles its own jet fighters and engines. As it stands now, Taiwan gets its 40% stake, a role in designing the MD-12, and will put together wings and fuselages. And if the government goes ahead with the deal, the $2 billion is just for starters. Taiwan would probably have to dole out an additional $2 billion for production facilities and development costs.

McDonnell's venture in China is also in trouble. Since 1986, the company has been co-producing MD-82 jets in Shanghai. By having a Chinese plant, McDonnell hoped to get the inside track in the competition to supply 150 planes for China's domestic routes. It planned to sell the Chinese its MD-95 jetliner, with production to start in Shanghai by 1996. But the Civil Aviation Administration of China (CAAC), the country's flag carrier, wants to buy from Boeing. China now says it's committed to make only 40 planes in Shanghai. And that may be all that McDonnell gets.

In these hard times, McDonnell needs as many orders as it can land. Overall, its commercial aircraft backlog was $17.9 billion at yearend, down 26% from the year before. It didn't help when Singapore Airlines Ltd. decided against buying 20 MD-11s last year, and switched to the Airbus 340, which can fly greater distances.

`SOMETHING FISHY.' But nothing is more critical to McDonnell's survival in commercial aircraft than the Taiwanese link. The plan is to form an Asian consortium, including Singapore and South Korea, that will buy up to 49% of McDonnell's commercial business. But first, McDonnell needs to nail down the Taiwan Aerospace deal.

Given the growing clout of Taiwan's legislature, that won't be easy. It already has shown its might: In January, it vetoed a $2.6 billion investment in Malaysia by state-owned China Steel. Lawmakers are now outraged over the deal's secrecy. "If it's such a good deal, why are they keeping us in the dark?" asks Tsay Fun-dow, an opposition legislator. "There must be something fishy about it." If legislators nix the McDonnell proposal, the government may still try to pressure the private sector into taking the leading role. Until Taiwan's problems are sorted out, McDonnell's survival plans will be stalled on the runway.

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