Grand Jury Probing McDonnell Douglas Deal With China
A federal grand jury is investigating whether McDonnell Douglas violated U.S. laws in exporting industrial equipment to China under an agreement it signed in February 1994.
The agreement involved the sale of McDonnell Douglas equipment from its Columbus, Ohio, manufacturing plant to two companies that would then export it to Beijing, where it would make parts for the production of McDonnell Douglas aircraft to be assembled in Shanghai.
At issue in the grand jury probe is whether any of the $5.4 million worth of equipment was diverted from its intended use, which would be a violation of the U.S. export license McDonnell obtained for the deal.
The probe--the latest dilemma at a company whose very future as a producer of commercial aircraft appeared uncertain this week--stemmed from a $1.6-billion joint venture with China that called for the production of 40 McDonnell Douglas aircraft in California and Shanghai.
News of the Justice Department investigation surfaced along with circulation in recent days of a General Accounting Office draft report examining some of the same questions. McDonnell was originally subpoenaed for documents last year.
“We believe we have not violated any laws,” company spokesman Larry McCracken said in St. Louis, McDonnell Douglas’ headquarters. “We followed proper export procedures. There was no unauthorized use of the quipment.”
One piece of the equipment in question--a stretch press used in forming sheet metal--turned up in storage at a facility in Nanchang that has been alleged to be a defense installation. McDonnell Douglas contends that it is not.
The company says it learned several months after exporting the equipment in November 1994 that the two companies which bought it--CATIC of China and Monitor Aerospace of Long Island, N.Y.--had canceled their project. Four months later, McDonnell Douglas tracked the equipment down in Nanchang as part of a required follow-up to meet terms of the export license.
It notified the Commerce Department that the equipment wasn’t where it was supposed to be, and Commerce asked Justice to investigate.
McDonnell Douglas describes the equipment as of older design and available on the open market.
Disclosure comes just a day after McDonnell Douglas’ chief executive, Harry C. Stonecipher, announced plans to stop pouring cash into its withering commercial jetliner group.
Stonecipher has plenty of other problems as well, including the company’s defense side--80% of its business--where crucial Pentagon decisions, executive turmoil, fiercely competitive foreign sales and McDonnell’s search for a big acquisition are testing his mettle.
“They have the greatest range of issues facing them of any company in the business,” said Byron Callan, an analyst with Merrill Lynch & Co.
Meanwhile, the city of Long Beach was sorting out the stunning announcement that McDonnell will abandon hope of reestablishing its Douglas Aircraft Co. division as a major manufacturer of jetliners.
With about 10,000 people building its airliners in Long Beach, Douglas is the city’s biggest industrial employer. Yet Stonecipher decided that Douglas won’t spend the billions necessary to develop new families of jetliners that would make Douglas a serious rival of industry leaders Boeing Co. and Europe’s Airbus Industrie. So Douglas is left selling its existing models.
City officials kept their chins high, noting that Douglas still has 200 airplanes on back order.
“I am always concerned when a decision like that is made,” said Mayor Beverly O’Neill, who was told of Stonecipher’s decision Monday in a letter from Douglas President Michael Sears. “But I can’t say that I am alarmed by it.
“Some of the analysts say it’s the demise [of Douglas], but I don’t agree with them at all,” O’Neill said.
McDonnell manufactures for the military F/A-18 and F-15 fighter jets, C-17 cargo planes, AH-64 Apache attack helicopters, and Harpoon and Tomahawk cruise missiles. It also makes space equipment, including Delta launch rockets.
Financially, the company is thriving. After flirting with bankruptcy in the early 1990s, McDonnell is on pace to post record profits again this year. In the first nine months of 1996 it earned $581 million on sales of $9.7 billion. The company’s stock--which closed at $53 a share Tuesday, up $1, on the New York Stock Exchange--has rocketed from $6 a share in 1992 after adjusting for splits.
But there is management turmoil, too. Last weekend, Stonecipher fired Herbert Lanese, head of McDonnell’s powerful military aircraft and space group, because the two clashed repeatedly over the company’s direction. “I was a little tired of having arguments about many of these items,” Stonecipher told analysts in a conference call Monday.
“Stonecipher needs to move quickly to replace Lanese,” said Jon Kutler, president of Quarterdeck Investment Partners, a Los Angeles investment firm specializing in aerospace. “Lanese’s departure is a big hole.”
