McDonnell Douglas and China National Aero-Technology Import and Export Corporation (CATIC) entered into an agreement in 1992 to co-produce 40 MD-80 and MD-90 aircraft in China for the country's domestic "trunk" routes. A contract revision signed in November 1994 reduced the number of aircraft to be built in China to 20 and called for the direct purchase of 20 US-built aircraft. This program failed after only three aircraft were produced, in part because McDonnell Douglas stopped supplying China with Trunkliner raw materials after its merger with Boeing.
On two prior occasions, China unsuccessfully attempted to produce a commercially viable Large Civil Aircraft [LCA]. The first attempt in the 1970s resulted in the "Yunshi" Y-10, a 707-style aircraft;20 however, the aircraft was not competitive with other LCA available at the time, and the program was halted after only two were produced. The next effort was a successful joint venture with McDonnell Douglas in 1985 that produced MD-80 series aircraft exclusively for China's domestic market. The maiden flight of the first Chinese-made MD-82 took place in 1987; 35 were produced.
The four Chinese factories involved in the Trunkliner program include the Shanghai Aviation Industrial Corporation, Xian Aircraft Company, Chengdu Aircraft Company, and Shenyang Aircraft Company. The Shanghai facility is responsible for final assembly of the aircraft. All of these factories are under the direction of Aviation Industries Corporation of China (AVIC) and CATIC. CATIC is the principal purchasing arm of China's military as well as many commercial aviation entities. The Shanghai Aircraft Manufacturing Factory (SAMF) would produce 20 of the so-called Trunkliner aircraft independently of McDonnell Douglas.
In May 1994, McDonnell Douglas submitted license applications for exporting machine tools to China. The machine tools were to be wholly dedicated to the production of 40 Trunkliner aircraft and related work. Under the Trunkliner program, the Chinese factories were responsible for fabricating and assembling about 75 percent of the airframe structure and the tools were required to produce parts to support the planned 10 aircraft per year production rate.
The machine tools were to be exported to the CATIC Machining Center. At the time the license applications were being considered, the Machining Center did not yet exist. McDonnell Douglas informed the U.S. government that the Machining Center would be located in Beijing and construction would begin in October 1994. Aircraft parts production would start 14 months later. McDonnell Douglas requested Commerce to approve these applications quickly so that it could export the machine tools to China, where they could be stored at CATIC's expense until the new facility in Beijing was ready.
The machine tools exported by McDonnell Douglas to China have military and commercial applications. These machine tools had been used in the United States to produce parts for military systems but were exported to manufacture parts for commercial passenger aircraft. The machine tools McDonnell Douglas exported to China had been used at a US government-owned plant to produce parts for the B-1 bomber, C-17 military transport aircraft, and the Peacekeeper missile. The more advanced machine tools manufactured such items as military aircraft wing structures, fuselage components, and landing gear and engine parts.
China needs machine tools to upgrade both its military and commercial aircraft production capabilities. A July 27, 1994 Defense Intelligence Agency response to a request from the Defense Technology Security Administration provided an assessment. It warned that, while similar machine tools were available from foreign sources, there was a significant risk of diversion. There was also the additional risk that the PRC could reverse-engineer the machine tools, and then use them in other commercial or military production. This would be consistent with the PRC's practice of reverse-engi-neering other Western technology for military purposes.
On August 9, 1994, the Defense Intelligence Agency provided a supplemental report explaining the results of its thorough assessment of the applicability of the McDonnell Douglas machine tools to three known PLA fighter aircraft programs, each of which incorporated stealth technologies. The report concluded: "The establishment of an advanced machine tool facility presentsa unique opportunity for Chinese military aerospace facilities toaccess advanced equipment which otherwise might be denied."
After a lengthy interagency review, the Department of Commerce approved the license applications with numerous conditions designed to mitigate the risk of diversion. During the review period, concerns were raised about the need for the equipment to support Chinese aircraft production, the reliability of the end user, and the capabilities of the equipment being exported.
In July 1994 Flight International magazine announced that the Trunkliner Program had been significantly changed. Instead of co-producing 20 MD-82 and 20 MD-90 aircraft in the PRC, only 20 MD-90 aircraft would be built there. Although the PRC would still acquire 20 additional aircraft, those would now be built at McDonnell Douglas's Long Beach,California plant - albeit with many parts that were to be fabricated in the PRC. The actual agreement that reduced the number of aircraft to be assembled in the PRC was signed on November 4, 1994.
Most of the machine tools located at Columbus, Ohio were shipped to China in November/December 1994, and the The remaining Columbus, Ohio machine tools were shipped to the PRC in February 1995. Four machine tools still remained at Monitor Aerospace in Amityville, New York.
Some of these US exported machine tools were diverted to a Chinese facility engaged in military production. This diversion was contrary to key conditions in the licenses that required equipment to be used for the Trunkliner program and be stored in one location until the CATIC Machining Center was built. In April 4, 1995 letters to the Commerce Department's Office of Export Enforcement, Washington Field Office, and to the Technical Information Support Division / Office of Exporter Services, McDonnell Douglas reported that the machine tools were located at four different places. An October 5, 1995 e-mail from Christiansen to a number of Commerce Department officials, including Office of Export Enforcement Acting Director Mark Menefee, reported that one of the six machine tools in storage at the Nanchang Aircraft Company had been uncrated, and was in the final stages of assembly. On February 5, 1996 U.S. News and World Report reported that the machine tools had been diverted, and that an investigation was underway.
Six weeks after the reported diversion, Commerce suspended licenses for four machine tools not yet shipped to China. Commerce subsequently denied McDonnell Douglas's request to allow the diverted machine tools to remain in the unauthorized location for use in civilian production. Commerce approved the transfer of the machine tools to the Shanghai aviation facility, which is responsible for final assembly of Trunkliner aircraft. The diverted equipment was relocated to Shanghai before it could be misused. Since early 1996, the McDonnell Douglas machine tools have been stored atShanghai Aviation Industrial Corporation (SAIC).
On June 7, 1998, the CBS program "60 Minutes" suggested that the Commerce Department or other U.S. Government entities were not necessarily interested in acomplete and thorough investigation of the machine tool diversion.
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