Flying Into Uncharted Territory : McDonnell Douglas/Taiwan deal raises questions about U.S. industrial strategy

It’s a sign of the times when McDonnell Douglas Corp., the nation’s largest defense contractor and second-biggest commercial aircraft manufacturer, has to take in a foreign partner. With money tight and competition tough, the St. Louis company is reaching across the Pacific for help. It has signed a preliminary agreement with Taiwan Aerospace Corp. to pump $2 billion in exchange for a 40% interest in the company’s commercial aircraft business.

The deal, which must be approved by the U.S. and Taiwanese governments, raises disconcerting issues about American competitiveness in globalization of the aerospace business. Foreign content in U.S. commercial aircraft has been rising but the agreement with Taiwan Aerospace marks the first time a foreign investor will take a sizeable stake in a major American aerospace firm--to be newly formed under joint ownership and separate from the McDonnell Douglas military operations.

Fears are rising that the United States is losing its competitive edge. American aerospace manufacturers still dominate the business but their world market share has been declining. Rep. Richard A. Gephardt (D.-Mo.) has criticized the agreement as a giveaway of technology to Taiwan, which wants to fire up its own aviation and aerospace industry.

But global alliances have become necessary and commonplace in the increasingly competitive aerospace business. Going offshore for capital is McDonnell Douglas’ way of fighting back. Airbus Industrie, the government-subsidized European consortium, has surpassed McDonnell Douglas as the world’s second-largest supplier of commercial aircraft. Boeing Co. of Seattle still reigns No. 1.

McDonnell Douglas searched in vain for domestic investors willing to back the $4-billion development effort needed for a new generation of aircraft: The MD-12, a 375-seat jet with range of 9,000 miles. The aircraft is expected to be particularly popular with the fast-growing Asian carriers. Taiwan Aerospace is a newly formed public/private company backed by the Taiwanese government. Other Asian investors, including Japan, may join in McDonnell Douglas’ restructured commercial aircraft operations.

Competition is forcing these alliances. Airbus, for example, has been talking to leading Japanese aircraft firms about doing a super-jumbo jet. Many of these international efforts are government-backed, raising the question of whether U.S. aerospace-makers face an uneven playing field because this country lacks a strategy to foster a strong industrial/technology base. That’s a question beyond the McDonnell Douglas deal. It goes to the heart of U.S. competitiveness.