McDonnell Deal May Buy Stake in Asia’s Future
McDonnell Douglas’ agreement to sell 40% of its commercial aircraft business to Taiwan Aerospace is a real eye-opener. It puts you on notice about business prospects, business failure and possibly the future reunification of China--and it poses provocative questions.
First, it’s a wake-up call on how important the Asian market will be in the decades ahead. By the year 2000 the Asian market--some 2 billion people in 16 countries--will be buying $100 billion worth of commercial airliners every year, more planes than are sold annually in the entire world today.
But McDonnell’s move doesn’t mean a bonanza for aircraft makers. The St. Louis-based company assured itself of a future in commercial aircraft in the deal in which Taiwan investors and Taiwan’s Nationalist Chinese government are putting up $2 billion in cash. But it also assured continuing overcapacity in the business in which McDonnell trails Boeing and Europe’s Airbus Industrie, says analyst George Shapiro of Salomon Bros. Global competition is fierce, and profits can be skinny. That’s why Boeing stock has fallen almost 10% since news broke of McDonnell’s deal.
Taiwan’s cash will reduce McDonnell’s $2.7 billion of debt and allow the U.S. company to develop a new airliner, the MD-12, thus reassuring existing customers who have been questioning whether the McDonnell family would remain in the commercial business.
The civil operation has lost money more often than not in the 24 years since the McDonnells, principal owners and managers of McDonnell Douglas, bought struggling Douglas Aircraft--out of family friendship more than business judgment. The McDonnells have suffered bad breaks and made some bad moves. Chances have been missed, including a big one in 1980 when McDonnell might have forged an alliance with British Aerospace and forestalled the rise of Airbus.
In its venture with Taiwan Aerospace, McDonnell Douglas will keep majority ownership. But the Asian company will take over important manufacturing of aircraft parts and sections, with McDonnell keeping design and final assembly in the United States. Some engineers foresee a loss of technical mastery for the U.S. firm in the arrangement.
But, otherwise, enormous costs and national ambitions make cooperative ventures inevitable. Just last week Airbus officials were in Tokyo seeking ventures with Japanese companies on an envisioned 650-passenger airliner that could cost $9 billion to develop. Boeing, which also has a 650-seater on the drawing board, already has cooperative working relationships with Japanese suppliers.
And Asian countries want to do more than buy airplanes. They want to learn and develop.
Taiwan, to which China’s Nationalist government fled in 1949, is a country of 20 million people renowned for their ability to manufacture everything from shoes to Radio Shack’s computers. But with wages rising and labor short, Taiwan wants higher-class work, such as aerospace, in which employees learn about advanced materials and computer aided engineering. It’s a business that spawns thousands of suppliers, spreading skills throughout an economy.
Others are ambitious for such work. The People’s Republic of China and Taiwan’s Nationalist regime may be political enemies but they see eye-to-eye on industry. Both are dealing with McDonnell Douglas. China is close to signing a co-production deal for 150 MD-80 airliners. Beijing obviously is giving tacit approval to the negotiations with Taiwan.
Indeed, negotiations on both sides of the Formosa Strait are being carried out by the same American, Gareth Chang, the president of McDonnell Douglas Asia, who was born in China, came to the United States in 1959 and earned a degree in math and physics at Cal State Fullerton and an MBA at Pepperdine.
Some MD-12 work may be subcontracted to China. And doubtless there are powerful undercurrents to McDonnell’s deal with Taiwan, a country of military and political ties to the United States.
Still, a question could be raised about the price put on know-how in this deal. The $2 billion McDonnell is accepting for 40% of its Douglas division doesn’t begin to reflect the tremendous cost of building such a business. Europe’s governments have invested $26 billion in Airbus. Nor does the price reflect how much U.S. public money, paying for defense industry, has gone into creating the technological base of America’s aerospace leadership.
McDonnell’s management might have held out for more work done in the United States, which has skilled workers and aerospace suppliers needing business, too. And the U.S. government might be mindful of the taxpayers’ investment as the defense industry is transformed and wound down in the wake of the Cold War.
That doesn’t mean fortress thinking, which always proves futile. Britain tried it in the 18th Century, prohibiting export of models or drawings of its new textile machinery. But Samuel Slater, a textile worker in Derbyshire, memorized the workings of Arkwright’s spinning jenny, emigrated to Pawtucket, R.I., and began the U.S. textile industry that soon surpassed Britain’s.
The moral: If Britain had opened up, it might have secured a stake in the New World’s industry, as McDonnell Douglas, attempting to snatch victory from defeat, may be doing with its ventures in Taiwan and China.
