McDonnell-Taiwan Deal Criticized

THE historic decision by McDonnell Douglas to link up with a Taiwanese consortium to make a new generation aircraft is reviving the debate over United States competitiveness in a global era.The deal raises fundamental questions about the vitality of one of the nation's most important industries and what - if anything - should be done to keep firms at home. Does the US need a formal industrial policy to foster strategic industries? By linking up with foreign companies, are US firms giving away vital technologies? "A part of the national patrimony is having to be pawned," says Wolfgang Demisch, managing director and aerospace analyst for UBS Securities Inc. "This is more evidence that US leadership in aerospace has eroded and is on the road to even more drastic erosion." Under the preliminary agreement announced Nov. 20, McDonnell Douglas would sell 40 percent of its commercial aircraft business to Taiwan Aerospace Corporation in exchange for a $2 billion investment. If approved by both the US and Taiwanese governments, this would be one of the most significant international aerospace ventures ever. While global alliances have become a fact of doing business in the increasingly competitive industry, the Taiwan deal would mark the first time a foreign investor has taken substantial stake in a major US aircraft company. The agreement is intended to help finance the $4 billion cost of a new generation commercial jetliner, the MD-12. "This is our effort to make ourselves a stronger and more competitive company," says Don Hanson, spokesman for the company, which builds its jetliners in Long Beach, Calif. The deal is being criticized by some lawmakers and analysts as evidence of the decline of one of the country's few remaining vibrant export industries. American aerospace manufacturers dominate the business but their world market share has been shrinking. No sooner had the arrangement been announced than 30 senators fired off a letter to President Bush, urging him to intercede and find a way to keep McDonnell under US ownership. They followed up with a Senate resolution calling on the administration to investigate the implications of the deal. The resolution seeks a reexamination of US policy toward aerospace exports and ways to help domestic firms compete against subsidized foreign producers. Democrats are also using the issue to tweak the White House on trade. "The sale ... is the symptom of a much larger problem," says Sen. Jeff Bingaman (D) of New Mexico, who introduced the resolution. "It is the result of disastrous trade policies initiated by the past two administrations which effectively force American firms to take their business overseas." House Majority Leader Richard Gephardt (D) of Missouri says McDonnell wouldn't have needed the cash "if the Bush administration had decided to act long ago against the unfair competitive practices of Airbus and the European Community." Others say more creative things could be done to forge alliances at home. "Imagine what the Europeans and Japanese would do," says Clyde Prestowitz Jr., a former US trade negotiator and president of the Economic Strategy Institute. He says there might have been ways to make government-sponsored, joint deals with US companies - Boeing, Lockheed, Grumman. Some of the concern centers on whether the deal will result in the transfer of key technologies to Taiwan, which, like several other Asian countries, is trying to build its own aerospace industry. "Even though the contract is for commercial aircraft, it is a tricky question to sort out the differences in the technologies of military [and commercial] engines and airframes," notes William Keller, analyst with the US Office of Technology Assessment. Mr. Hanson counters that McDonnell will restructure into distinct operations by Jan. 1 to "insure that a knowledge cross-feed [between the two segments] is precluded." The nation's largest defense contractor and second-biggest commercial aircraft manufacturer, McDonnell has been blunt in saying it needed financial help to develop its next generation aircraft. The St. Louis-based company sought in vain to interest domestic investors. The linkup with Taiwan Aerospace, a newly formed public-private company backed by the Taiwanese government, is intended to lower McDonnell's manufacturing costs and open access to the fast-growing Asian market. This would help the company compete with booming Boeing and Europe's government-subsidized Airbus Industrie. "Going offshore with some of the production - if in fact it insures sales - might make sense," says Michael Beltramo, a Los Angeles-based aerospace analyst. Though many criticize the deal as a giveaway of American jobs, McDonnell says that without the alliance the MD-12 would remain on paper only. Thus there would be no domestic jobs. Seventy percent of the airframe will be manufactured overseas, but the craft will be assembled in the US. While this may be true, no one has any illusions about where a lot of the spinoff business will go. "The more obvious victim of this is likely to be the whole infrastructure of suppliers," Mr. Demisch says.