The PRC╠s Diversion of the Machine Tools
CATIC Letter Suggests Trunkliner Program at Risk
In a September 30, 1993 letter to McDonnell Douglas Aircraft Company President Robert Hood, CATIC Vice President Tang Xiaoping expressed concerns that negotiations were at an impasse for CATIC╠s purchase of the machine tools and other equipment.51 The letter seemed to suggest that the Trunkliner Program would be at risk if a deal could not be worked out. According to the letter:
. . . I think for sure, whether or not this procurement project will be successful shall have a big influence on the trunk liner programme [sic] and long term cooperation between [Aviation Industries Corporation of China] and [McDonnell Douglas]. . .
McDonnell Douglas characterized Tang Xiaoping╠s letter as nothing more than a negotiating ploy to try to get McDonnell Douglas to lower the price that it was asking for the machine tools. McDonnell Douglas officials said they did not consider the letter to be a veiled threat by CATIC to cancel or alter the Trunkliner Program if a deal for the machine tool equipment could not be worked out.
According to the Defense Department, however, CATIC had a longstanding, productive relationship with McDonnell Douglas, had made major investments in the Trunkliner Program, and was not going to jeopardize those investments and the Trunkliner Program in a dispute over the price of used machine tools.
Indeed, the purchase price that was eventually agreed to between McDonnell Douglas and CATIC was acceptable to both parties. The value of the machine tools was based upon an appraisal provided by a commercial auctioneer. McDonnell Douglas added a 20-30 percent markup. CATIC acquired all of the machine tools it had originally sought, as well as various other tools, equipment, furniture and other items as part of the $5.4 million purchase agreement.
The machine tools and other equipment purchased by CATIC were excess to McDonnell Douglas╠s needs. According to McDonnell Douglas, the more modern machine tools and equipment from the Columbus, Ohio plant were not sold to CATIC but were redistributed to other McDonnell Douglas facilities.
According to the March 1, 1994 appraisal, the value of 31 machine tools sold to CATIC █ including the 19 machine tools that required export licenses █ was $3.5 million.52 This appraisal did not assess the value of other tools, equipment, and furnishings that were included as part of the purchase agreement.
CATIC╠s Efforts to Create The Beijing Machining Center with Monitor Aerospace
Doug Monitto was the President of Monitor Aerospace Corporation, an Amityville, New York-based company that manufactured aircraft components. In the fall of 1993, Monitto met with CATIC representatives in the PRC to discuss joint venture opportunities.
During those discussions, CATIC expressed an interest in subcontracting with Monitor Aerospace for the production of aircraft parts. Specifically, Monitor would assist the PRC in the production of certain aircraft parts that CATIC was to manufacture for Boeing as part of an offset contract.
Monitto says he proposed that CATIC convince Boeing to transfer $10 million of the offset work directly to Monitor for one year. During that year, Monitor Aerospace would assist CATIC in designing and laying out a new machining center.53
Thereafter, CATIC itself, with Monitor╠s assistance, coud provide all subsequent manufacturing for the Boeing parts.
Representatives of CATIC, Aviation Industries of China, and Monitto signed a Memorandum of Understanding (MOU) regarding the machining center joint venture on January 24, 1994.54 CATIC officials took Monitto to an industrial park in Beijing where the machining center was to be built.
In a letter dated January 27, 1994, CATIC informed Boeing that it had signed the joint venture MOU, and asked if Boeing would consider providing Monitor Aerospace with the offset work.55 However, Boeing, in an April 1994 letter, declined CATIC╠s offer.56
In the spring of 1994, Monitto says CATIC officials again approached him about a machining center joint venture.
Although negotiations were intermittent, Monitto says CATIC informed him in the summer of 1994 that it had purchased machine tools from McDonnell Douglas. As Monitto recalls, CATIC officials asked for his assistance in reassembling the machine tools, and placing them in a machining center. However, he says the precise location of the machining center had not been determined at that time.57
A July 29, 1994 letter from Monitto to Sun Deqing, CATIC╠s Deputy Director, states:
As a result of your visit we have prepared an alternative approach that will help us achieve our mutually desired goal of building a "State of the Art" profile milling machine shop in China.
Monitor Aerospace would like to offer its assistance to CATIC in entering this new marketplace as both a partner and as a technical expert in the field.
The most significant feature of this new approach would be the fact that Monitor would also be the launch customer of the new joint venture.58
Additional discussions between CATIC and Monitor Aerospace regarding establishing the machining center appear to have continued into the fall of 1994, after the export licenses for the McDonnell Douglas machine tools had been approved.
According to a September 23, 1994 letter to CATIC╠s Sun Deqing, Monitto proposed that, as part of a joint venture to manufacture aircraft parts in the PRC, CATIC would:
. . . supply an appropriate building located in the Beijing-Tianjin metropolitan area which permits growth. CATIC will provide other necessary infrastructure and planning support, including arranging for appropriate utility hook-ups, tax concessions, customs clearance, etc. 59
Sometime in the fall of 1994, Monitto recalls that CATIC informed him that it intended to place the McDonnell Douglas machine tools at a facility located in the city of Shijiazhuang. Monitto drove to the facility to check out the offer but decided the location was too far from his base of operations in Beijing to be viable. It was "not something I wanted to do," Monitto comments.60
According to Monitto, he has had no further substantive discussions with CATIC regarding the establishment of a machining facility, although he does remain in contact with CATIC on other business-related matters. According to Monitto, McDonnell Douglas was never a party to any of his negotiations with CATIC regarding the establishment of the machining center.61
According to McDonnell Douglas, the first indication it had that CATIC would not establish the machining center took place during a phone call with a CATIC official in May 1995. Subsequently, in a letter dated July 5, 1995, CATIC Supply Vice President Zhang Jianli formally advised McDonnell Douglas that an agreement could not be reached with Monitor Aerospace for a machining center, and that Nanchang Aircraft Factory was interested in purchasing the six machine tools that were stored at that factory.
According to the letter:
You were aware that we planned to set up a joint venture with Monitor Aerospace, which would be the enduser [sic] in applying [for] the license. Unfortunately both sides couldn╠t reach agreement. Without this agreement we muse [sic] find other uses or purchasers in China. 62
According to McDonnell Douglas, it believed that CATIC was serious in its plans to build a machining center in Beijing to produce airplane parts for the Trunkliner Program.
McDonnell Douglas acknowledges, however, that it never asked for, nor was it shown, architectural drawings, floor plans, or other information to indicate that plans for the facility were progressing.
Diversion of the Machine Tools to Nanchang Aircraft Company
When the machine tools arrived in the PRC, McDonnell Douglas personnel discovered that nine of the machines were stored at two different locations in the port city of Tianjin.63
Moreover, a March 27, 1995 letter from Zhang Jianli, the Vice President of CATIC Supply Company, to McDonnell Douglas╠s Beijing office explained that six more of the machine tools had been shipped to Nanchang for storage. These machine tools, CATIC represented, remained in their crates.64
Two McDonnell Douglas representatives visited Nanchang to inspect the tools on August 23, 1995 and learned that one of the machine tools █ a hydraulic stretch press █ had been uncrated and was situated inside a building. Moreover, the building had been built specifically to accommodate that piece of equipment.
Although electrical power had not yet been connected,65 the size of the building and the manner of its construction suggessted to them that this facility had been custom built to house McDonnell Douglas equipment and had been planned for several years:
- Possibly as early as December 23, 1993, when CATIC and McDonnell Douglas signed an agreement for the purchase of machine tools and other equipment from McDonnell Douglas╠s Columbus, Ohio plant
- Perhaps even as early as late 1992, when CATIC first expressed interest in the purchase
CATIC (USA) documents66 indicate that an official of "TAL Industries" was primarily responsible for supervising the PRC team that coordinated and supervised the packing and crating of the machine tools and other equipment at the Columbus, Ohio plant.67 According to its responses to a series of Select Committee interrogatories, TAL Industries is a subsidiary of CATIC Supply in the PRC. CATIC Supply, in turn, is a wholly- owned subsidiary of CATIC.68 According to TAL Industries, CATIC Supply owns 90 percent of its stock, and CATIC (USA) owns the remaining 10 percent.69 TAL Industries is located at the same El Monte, California address and has the same telephone number as CATIC (USA).70
Some of the McDonnell Douglas equipment had been sold or given by CATIC to the Nanchang Aircraft Company. At least some of these transfers of ownership must have occurred before any of the equipment was exported from the United States. In addition, the PRC team that coordinated the disassembly and packing of the equipment at the Columbus, Ohio plant included representatives from the Nanchang Aircraft Company who apparently were responsible for overseeing the packing of the equipment it was obtaining from CATIC.
Internally, CATIC specifically referenced the cargo as Nanchang╠s equipment.
Separately, the Nanchang Aircraft Company╠s Technology Improvement Office submitted inquiries to CATIC concerning the location of various pieces of its█Nanchang╠s█equipment.
Since most of the Columbus, Ohio equipment that was purchased by CATIC did not require an export license,71 CATIC╠s subsequent sale of that equipment to Nanchang Aircraft Company would not violate U.S. export controls.72 But the CATIC (USA) documents pertaining to Nanchang Aircraft Company╠s equipment do not explicitly identify the equipment, including the six machine tools that were later found at the Nanchang Aircraft Factory in violation of the export licenses.73
Nanchang Accepts Responsibility
In a September 13, 1995 letter to McDonnell Douglas China Program Manager Hitt, the Vice President of the Nanchang Aircraft Company accepted full responsibility for uncrating and installing the hydraulic stretch press in a newly constructed building. According to the letter:
Now I would like to review the detail and apologize for the result caused by the action we made. The following is the reason why we put the [hydraulic stretch] press into the pit.
When we heard that the agreement had not been made between CATIC and Monitor [Aerospace] concerning the cooperation. [sic] We expressed our intention to CATIC that we would like to buy some of the machines and at that time CATIC also intended to sell to us.
But they mentioned to us for several times that the cases can not be unpacked until the amendment of enduser [sic] is gained from the Department of U.S. Commerce. We do not think that there is any problem to get the permission for the second hand press, which has not got new technology because we have the experience that when we import the press from [a foreign manufacturer of machine tools].
Under this guidance of the thought, we started to prepare the fundation [sic] in order to save time.74
The letter went on to argue that, because of its size, the hydraulic stretch press had to be uncrated in order to move it to Nanchang from its port of entry in Shanghai. Moreover, the stretch press had then been moved into the "pit" that it would occupy so the new building could be built around it. To do otherwise, the PRC letter said, would have disrupted the construction of the new building.75
The Nanchang Aircraft Company official also apologized for the events that had occurred, and provided assurances that no further installation of the hydraulic stretch press would take place at the Nanchang Aircraft Factory until permission to do so was given by the U.S. Government.76
A July 5, 1995 letter to McDonnell Douglas China Program Manager Hitt from CATIC Supply Vice President Zhang Jianli reflects CATIC╠s knowledge that prior U.S. Government approval for the transaction was required. According to the CATIC Supply letter:
Nanchang Aircraft Factory is very much interested in 6 sets of the equipment. We would like to sell to them if we are allowed to do so because we understand that the licenses are only good for the Beijing machining center as it was approved originally.
Is it possible to request the United States Commerce department [sic] to approve selling the machines to Nanchang Aircraft Company? The machines are being stored there now, and they are required not to be unpacked until we receive approval from the Department of Commerce of the U.S.A.
When Hitt and a colleague visited the Nanchang Aircraft Company on August 23, 1995, the Nanchang Aircraft Company officials informed them that one of the machine tools delivered to Nanchang had been placed inside a building "to protect it from the elements."
At the insistence of McDonnell Douglas╠s Hitt, the PRC officials took him to the building, where he found a hydraulic stretch press installed in a building that appeared to have been specifically built for it. The building had actually been built around the hydraulic stretch press, since Hitt observed no openings or doorways that were large enough to have allowed the machine tool to be moved into the building from elsewhere. Parts for the machine were strewn about the building in such a manner as to indicate that efforts were underway to reassemble the machine and restore it to operational condition. Although electrical power had not been connected to operate the stretch press, trenches for the power cables had been dug and other electrical work had been completed.
Hitt says the storage explanation he originally was given by Nanchang officials was, without question, disingenuous.
Concerned over Hitt╠s expressions of anger at seeing the partially installed stretch press, Hitt says Nanchang officials tried to reassure him that they only intended to use the stretch press for civilian production at the factory.
Since early 1996, the McDonnell Douglas machine tools have been stored at Shanghai Aviation Industrial Corporation (SAIC).
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