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  •   Sale of Aircraft Machinery to China
    Shows Perils of Exporting Technology

    By John Mintz
    Washington Post Staff Writer
    Sunday, June 7, 1998; Page A08

    Angry already that their factory was closing, some employees at the McDonnell Douglas Corp. aircraft plant in Columbus, Ohio, lost their tempers one day in August 1993 when dark-suited Chinese officials arrived to inspect the surplus machinery put up for sale. Some workers yelled epithets, blocked the Chinese visitors' video cameras or moved filing cabinets in their path.

    The visitors, from a Chinese government aircraft company, were eager to buy the plant's colossal computer-controlled machines, which had made parts for the B-1 bomber and the C-17 transport. Soon they struck a deal for $5.4 million and, after the U.S. Commerce Department secured a promise that the machines would be used only to build jetliners, the Chinese trundled the equipment into trucks and shipped it to China.

    But some of the sensitive U.S. equipment turned up at a Chinese factory that makes Silkworm missiles, and in 1996 the Justice Department launched a criminal investigation into whether Chinese officials lied by pledging they would not use the machinery to make weapons, and whether McDonnell Douglas knew or should have known that the Chinese commitment was bogus. The investigation, which is ongoing, could result in charges against both parties of violating the terms of their export license.

    As several congressional committees probe the relationship between technology exports to China and national security, the story of how these machine tools the size of a football field were improperly transported to a missile plant serves as a case study in the pressures to export technology and the hazards of trying to control its ultimate uses.

    Critics of the Clinton administration's export policy say the criminal investigation shows how administration officials and McDonnell Douglas were so eager to close a big business deal in China that they discounted warnings about the Chinese government's record of misusing sophisticated U.S. technology.

    Officials of the Boeing Co., which bought McDonnell Douglas last year, deny any impropriety. They point out that China never used any of the equipment to build weapons. The machinery, between nine and 26 years old, was not particularly sophisticated and could have been bought by the Chinese in Japan or Europe, the firm says. The company points out that McDonnell Douglas itself discovered the improper diversion of the equipment and notified the U.S. government. The machinery was soon transferred to a commercial plant.

    "We reported that the machinery was in a place not intended in the license as soon as we knew about it, as we were expected to do," said Larry McCracken, a Boeing spokesman.

    "This is a case when the export control rules worked," said Commerce Department spokeswoman Susan Hofer.

    At the time of the sale, McDonnell Douglas had a huge incentive to increase its commercial ties to China. The company had just emerged from near-bankruptcy, and its almost moribund commercial jetliner division in Long Beach, Calif., was relying on sales to China as a last hope for survival. For several years, the company had been training Chinese engineers and shifting large blocs of work to China in response to assurances that China would sign a $5 billion contract to buy 150 planes.

    In 1992, the Chinese agreed to a so-called "Trunkliner" contract, but for many fewer aircraft than originally expected, 40 160-seat MD-90 jets for $1.5 billion.

    The following year, the China National Aero-Technology Import and Export Corp., or CATIC -- a Chinese government-run defense firm that is the Chinese military's main purchasing arm -- expressed interest in the machinery at the Columbus plant, which had bent and sculpted huge pieces of metal for the wings and fuselages of Air Force jets since World War II.

    McDonnell Douglas officials resisted selling at China's price. In August 1993 a CATIC official in Los Angeles sent a letter to Beijing superiors saying McDonnell's negotiating posture was "bricklike . . . no give. . . . We have to turn over all our cards on the table."

    Weeks later, a CATIC vice president warned a top McDonnell executive in a letter that any hope for its huge jetliner deal could be dashed if the company didn't break the "stalemate" and sell the equipment. "I think for sure, whether or not this procurement project will be successful shall have a big influence on the Trunkliner program and long-term cooperation between AVIC [Aviation Industries Corp. of China, CATIC's parent] and MDC," the CATIC official wrote.

    Gary Milhollin, a critic of high-tech sales to China, said Chinese officials often demand such "sweeteners" from U.S. companies that are eager to close deals with China. "The Chinese told McDonnell Douglas, you can either sell us this sensitive technology or risk losing this big aircraft contract," he said.

    Later in 1993, McDonnell Douglas rejected an offer from a delegation of the plant's 1,000 workers to buy the machines. Instead it struck a deal to sell 19 of the machines to China for $5.4 million, a sum a Pentagon report later compared with a "fire sale." Jump-suited Chinese workers crated the huge machines and loaded them in trucks in March 1994, and the plant shut.

    The Commerce Department then began an interagency review on whether to grant a license to export the machinery to the Chinese, who said it would be used exclusively in a planned new plant to make parts for McDonnell Douglas's 40 jets.

    Initially, officials of the Navy, Air Force, Joint Chiefs of Staff and Defense Intelligence Agency opposed the sale. They suspected the Chinese intended to use the machines to make military jets, in part because the machines represented more capacity than was needed for McDonnell's 40 planes.

    Some Pentagon officials also pointed out that China's military had specifically sought the same equipment to modernize its combat jets, Defense Department documents show. Officials of the Defense Technology Security Administration [DTSA], the Pentagon agency that opposes weapons proliferation, cited evidence for that assertion: letters to CATIC from a defense plant in Shenyang stating which of the McDonnell Douglas machines it could use.

    The United States "must assume that any advanced technology in CATIC's hands will be diverted for military production" if the Chinese so choose, DTSA analyst Peter Leitner said in a 1994 memo to Commerce. "This case represents a very dangerous transfer of a major part of a military aerospace production line" to China. He added that Commerce plans to place meters on the machines to gauge how the Chinese were using them was "meaningless."

    Meanwhile, some U.S. agencies received evidence the Chinese had no intention of building the commercial jet parts plant that they promised would be the machines' home. "It was a fantasy plant," said a government investigator who has worked on the case. "McDonnell knew the plant was behind schedule, and maybe wasn't going to be built." Boeing officials today deny this.

    Amid Commerce's review of the deal, then-Commerce Secretary Ronald H. Brown visited China to promote the sale of U.S. products, and helped persuade top Chinese officials finally to move forward on a renegotiated Trunkliner deal with McDonnell.

    Two weeks later, the Commerce Department approved sale of the machines with conditions -- for example, that they be outfitted with usage meters, and that McDonnell report quarterly to Commerce on their location. In the end, despite opposition to the sale by some military officials, the Pentagon itself did not oppose it.

    The mammoth crates were shipped from Long Beach in late 1994. Several months later, in March 1995, McDonnell Douglas officials made their discovery: Six of the machines had not been sent to the agreed-on commercial plant in Beijing, but 800 miles away to the Nanchang Aircraft Co., which makes cruise missiles as well as some civilian items.

    McDonnell reported the diversion immediately to the Commerce Department, which helped McDonnell persuade the Chinese to transfer the machines from Nanchang to a Shanghai plant that makes plane parts for McDonnell Douglas.

    Six months after McDonnell's discovery, Pentagon counter-proliferation officials who felt their warnings had been vindicated started pressuring Commerce to investigate the matter. Commerce and Customs Service investigators launched a probe of the Chinese diversion in 1995, and the Justice Department took over in 1996.

    Investigators have evidence that they believe suggests the machines were intended for military use all along. In 1993, while Chinese officials swore the machines would be used only for civilian purposes, U.S. spy satellite photos showed construction of the huge building at the Nanchang military plant where the six machines were later installed, government officials said.

    Today, all the machines are in the commercial jet plant in Shanghai, though most are not hooked up, McDonnell Douglas said. Industry executives said work on the company's MD-90 jets under the Trunkliner contract, after months of delays, has been scrapped indefinitely. One reason is that Boeing, McDonnell's successor company, is ending MD-90 production in this country.

    Export-control experts said now that the equipment is unlikely to be used for the reason U.S. officials intended, the possibility still exists that the Chinese will transfer it to a military assembly line.

    © Copyright 1998 The Washington Post Company

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