Douglas Aircraft expands ties with China; coproduction agreements may help tap huge Asian market.

Douglas Aircraft expands ties with China

Douglas Aircraft Co., which already boasts of more facilities in China than any other U.S. manufacturer, is expanding its ties to that country, a move potentially worth billions of dollars in new commercial airline business, company officials said.

Douglas, based in Long Beach, entered China in the 1970s and has since opened a manufacturing facility in Shanghai. Earlier this month the company unveiled another move to strengthen its position when its parent, McDonnell Douglas Inc., announced a proposal to produce a new commercial aircraft, the MD-95, in China.

Currently, Douglas Aircraft is competing with Boeing Co. of Seattle to sell the Chinese 150 MD-90 aircraft. If Douglas wins the contract, the aircraft will be built in Shanghai.

In addition, Douglas has so far produced 22 MD-82 aircraft in China with the Shanghai Aviation Industrial Corp. The original agreement called for Douglas and Shanghai Aviation to produce 25 of the MD-22s but that contract has been extended for the production of another 20 of the commercial aircraft.

"All this has been hard to assess because these are not normal jetliner sales," said William Deatherage, an industry analyst in New York with Dean Witter Reynolds. "There are not a lot of precedents for this type of coproduction of jet airlines, but I suspect that China represents such a large potential market that it's important for them to get their foot in the door."

Douglas Aircraft said the moves into China are not costing Long Beach workers their jobs. Douglas Aircraft officials have said that the Long Beach facility is operating at full capacity producing the MD-11, MD-80 and C-17 (a military cargo plane) aircraft.

Those three production projects should keep Long Beach working at full capacity through the end of the decade, the company has said. Douglas Aircraft is a final assembly plant for commercial aircraft and large military planes. Military fighter aircraft manufactured by McDonnell Douglas are produced in St. Louis.

The manufacturer employs about 35,000 people in Long Beach.

Douglas spokesman Don Hanson said the Orient and China in particular represent huge untapped markets. "We're doing this for many reasons but mainly because China is a very large market and all the forecasts say that the most rapid growth in air travel will be in the Pacific Basin," said Hanson.

Analysts said another reason is that Douglas, in third place behind Boeing and the European Airbus Industrie consortium among the world's large commercial airline manufacturers, has to cut costs.

"Being in third right now is forcing them to cut costs while trying to keep up and compete," said Anthony Ginsberg, an industry analyst with Fourteen Research in New York.

In a recent interview at the Paris Air Show where the MD-95 proposal was revealed, Robert Hood, president of Douglas Aircraft, said the company has set significant reductions in its production costs by 1995. He said the goal can be met by making big changes in the way commercial aircraft are produced through establishment of stronger ties with production partners and major subcontractors.

In addition to the proposed expansion of Douglas' operations in China, the company has acknowledged that it has talked to South Korean companies about possible partnership roles in the company's planned MD-12X commercial airline project.

The proposed MD-12X would be a widebody successor aircraft to the MD-11. The MD-80, MD-82, MD-90 and MD-95 are all narrowbody aircraft with capacities of between 100 and 150 passengers.

Hanson said the expanding ties with China represent hundreds of millions of dollars in potential revenues for the company. "We have already sold 40 airplanes (the MD-82) that we wouldn't have been able to sell without the agreements with China," Hanson said.

Hanson also said he did not know the potential worth of the MD-90 deal, but industry experts have estimated the 150-plane deal could produce at least $4.5 billion in revenues for the winning contractor.

Hanson said the ties do not represent a move by the Shanghai Corp., a state-run company, to gain an equity position in Douglas Aircraft. "What this is is that we are sharing in the costs," said Hanson.

He said "thousands" of Chinese are currently working on Douglas programs at the Shanghai Corp. but, he said, local subcontractors are still providing parts for the final assembly of MD-82 aircraft in China.

Analysts said there are risks involved in the expansion into China.

"The danger is...that the company can end up transferring a lot of their capability to the Chinese and then they can ultimately end up doing all the work themselves," said Deatherage. "Also, they have to be careful about going too far too fast. They have to make sure they can get follow-on business because in terms of China, it's not good for a client just to have one supplier."