Is McDonnell Douglas Laying the Groundwork for a Public Bailout? : Aerospace: The aircraft company is desperate need of cash to go commercial in a big way. If taxpayers must help, they must attach some strings.

David Friedman is an attorney with Tuttle & Taylor and a research fellow in the MIT-Japan program

The election-year collapse of Taiwan Aerospace's $2-billion bid for 40% of McDonnell Douglas' commercial airplane business will force U.S. decision-makers to confront fundamen tal industrial-policy issues they would rather ignore. In many ways, the company's inability to find Asian investors for its new MD-12 aircraft has set the stage for a public bailout. While responding to McDonnell Douglas' travails will involve difficult choices, it will also be an opportunity to develop technology and regional strategies essential for the nation's--and California's--survival.

McDonnell Douglas desperately needs a huge cash infusion to develop aircraft to complete with Boeing, the industry leader, and Airbus Industrie, the heavily subsidized European consortium. Tapping into Taiwan's unsurpassed foreign reserves was probably McDonnell Douglas' last hope for securing private development funds. U.S. investors long ago lost confidence in the company.

Although the Taiwan Aerospace deal was touted as a way for McDonnell Douglas to obtain cash and cheap components, with Taiwan leapfrogging to the front rank of the global aircraft industry, it actually made little economic sense. Chronic labor shortages and rising wages would have impeded Taiwan's ability to mount a major aircraft manufacturing effort at a reasonable cost, as its problem-plagued jet-fighter development effort with General Dynamics amply demonstrates. It was also unclear why the Taiwanese would want to restructure their enormously successful domestic economy for the dubious opportunity to build components for a competitively crippled foreign aircraft firm.

McDonnell Douglas has few options to resuscitate its commercial aircraft program in the wake of the Taiwan aerospace deal. The firm has repeatedly asked the Japanese aircraft consortium for capital, but it has been rebuffed each time. It is highly unlikely that Japanese firms, which have built a growing, profitable business making components for the rest of the world through a long-term alliance with Boeing, will now change their minds. The most attractive assets McDonnell Douglas could offer them are access to systems-integration skills and a global marketing network. A move by the Japanese to buy these assets, especially in an election year, would almost certainly rekindle trade frictions.

Short of Boeing buying its competitor, an occasionally rumored but unlikely prospect, the most probable scenario is a publicly funded bailout of McDonnell Douglas. Indeed, most of the arguments for rescuing the company have already surfaced in the Taiwan Aerospace debate. Bailout proponents will argue that preserving McDonnell Douglas is crucial for the U.S. high-technology and defense base, that high-paying union jobs must be protected and that crucial U.S. supply networks depend on the firm. McDonnell Douglas also curried favor with influential congressional representatives to forestall opposition to the Taiwan Aerospace deal by pork-barrelling future MD-12 procurement into as many states as possible. It is thus well-positioned to advance a bailout effort.

Assuming that McDonnell Douglas' commercial operations are not allowed to fail, the United States and California should focus on the following priorities:

-- Forget about who ends up "owning" McDonnell Douglas. Despite the almost fanatical fixation of many politicians on an "American solution" during the Taiwan Aerospace debate, preserving American ownership by itself will not protect U.S. jobs or foster indigenous research and development and technology skills.

-- Obtain from McDonnell Douglas explicit, enforceable domestic subcontracting, manufacturing, design and R&D; commitments. The company is already primarily supported by its earnings on public defense contracts. If taxpayers are to have an even more explicit role in ensuing the company's survival, we must demand, in return, comprehensive, long-term commitments to enhance the U.S. industrial base.

-- Insist that McDonnell Douglas maintain and expand its overall presence in Southern California. Despite the fact that Douglas Aircraft is one of the mainstays of the local economy, California's congressional delegation and strangely docile local leadership have permitted the company, with hardly a protest, to transfer its operations throughout the country and overseas. There are reportedly nine potential sites for MD-12 production--none of them in California. Even the much-ballyhooed Los Angeles County Aerospace Task Force appears ready to concede that Southern California will inevitably be stripped of its aircraft production by more aggressive, politically savvy states.

In the post-riot, election-year environment, however, California will never have more leverage to insist that its aerospace manufacturing base be rebuilt and to prevent further losses, such as the still-active federal plan to move the Aerospace Corporation, in El Segundo, to New Mexico. Even now, roughly 80% of U.S. aerospace production is publicly funded. Rather than pour billions of dollars into enterprise zones, sell off public assets like the Los Angeles International Airport, or fund elaborate schemes for aerospace firms to make electric cars or railways, requiring McDonnell Douglas and American defense firms to focus their aerospace procurement in Southern California would provide an enormous boost for the region at practically no additional taxpayer expense.

The impending McDonnell Douglas bailout will challenge the strategic industrial thinking of our country and state. We can no longer afford to mount costly industrial rescues, however, without securing explicit regional guarantees in return. Our federal, state and local representatives should now be preparing to negotiate with McDonnell Douglas concrete, enforceable terms--with a particular focus on benefiting the Southern California economy--as conditions before any public involvement on behalf of the firm will go forward.

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