McDonnell, Taiwan Deal Is in Limbo : Aerospace: A report by the Taiwanese government endorses the trans-Pacific plan to build commercial jets, but private investors are urged to try to renegotiate terms.

TAIPEI, Taiwan —  A long-anticipated Taiwanese government report endorses a proposed linkup with McDonnell Douglas to build commercial aircraft but suggests that private investors in Taiwan form a group to renegotiate the terms of the deal.

The report--obtained by The Times in advance of its official presentation to Taiwan’s legislature Wednesday--appears to presage additional lengthy delays in moving the deal forward. It is already four months past the original deadline for completion.

Issued by Taiwan’s Ministry of Economic Affairs, the report calls for private companies to take the lead in the investment, a sharp turnaround from the original plan for heavy government subsidies.

“The ministry believes that without government participation and guidance to combine the energy of private sector investors, the possibility of success in the negotiations for this joint venture is extremely small,” the report says.

Although the report is favorable to the proposed linkup--saying the deal is “high risk but great opportunity”--it avoids specifics about how the investment might be structured. McDonnell Douglas officials declined comment on the report.

Originally, Taiwan Aerospace Corp., backed by industrial firms and the Taiwan government, intended to buy up to 40% of McDonnell’s Long Beach-based commercial aircraft business for $2 billion. A memorandum of understanding was signed last November, after several months of negotiations.

It was anticipated that the government report, part of a due-diligence effort, would be one of the final stages in the consummation of the deal. Now, it is not even clear what role Taiwan Aerospace will have in the venture.

The government report does not say which private companies will participate. It does say, however, that once the companies are rounded up, they will need to conduct more talks with McDonnell. Further, any final deal that includes government financing or tax incentives will require approval by the legislature.

“Originally everything was to be done by the government, but now the private companies will be doing the negotiating,” the source said. “The government will be more behind the scenes.”

Economics Minister Vincent Siew is scheduled to present the government’s report to Taiwan’s legislature Wednesday in Taipei, where civil unrest has slowed consideration of the McDonnell deal and other public business. Reporters obtained an abridged Chinese version Monday in Taipei.

It remains unclear whether a far more detailed financial analysis of McDonnell, conducted by officials from China Steel, will be made public. The public report was commissioned by the ministry after Taiwan Aerospace, in which the government has a 29% stake, struck its preliminary deal.

The report says little about McDonnell, although it finds the firm’s claims of market strength and viability exaggerated--and that the cost of Taiwan Aerospace’s participation has been understated.

By the year 2005, it says, McDonnell predicts that it will have 42% of the long-haul aviation market. Taiwanese officials, however, have concluded that McDonnell will have only a 30% market share, according to the report. Similarly, McDonnell’s claim that it will control 30% of the short-route market by 2005 is contradicted by the report, which predicts a 25% share.

Some legislators have expressed concern about the health of McDonnell and the prospects for the MD-12, the firm’s new generation jetliner that is designed to compete with the Boeing 747. And U.S. securities analysts have tied the delays in the Taiwan deal to McDonnell’s failure to win MD-12 orders.

After long trying to sell airlines on a design derived from its three-engine MD-11 jetliner, McDonnell in recent months has been shopping a design for a four-engine jet that would seat about 100 more passengers than the Boeing 747. The firm has scheduled key sales meetings this week with prospective MD-12 customers and is expected to unveil the design at a news conference Thursday.

According to the original memorandum of understanding, the wings and fuselage of the MD-12 are to be made in Taiwan.

Special correspondent Bruce Einhorn reported from Taipei. Staff writer Ralph Vartabedian reported from Los Angeles.