Douglas Sale to Taiwanese Firm Isn’t a Done Deal : Aerospace: As an investor group mulls its potential role, the Pentagon increases McDonnell Douglas’ estimated loss on the C-17 jet to $850 million from $700 million.

Fundamental issues in McDonnell Douglas’ deal to sell 40% of its commercial airplane business to Taiwan Aerospace remain unresolved, and the agreement may need to be revised, according to the head of the Taiwan group.

The agreement “may need to add on more items” and still must clarify the basic role that the Taiwan firm will play in future McDonnell aircraft programs, David Huang, chairman of Taiwan Aerospace, said in an interview.

Earlier this week, McDonnell said it will not complete the deal this month, as it had originally announced, but denied that the sale had encountered obstacles or setbacks that would jeopardize it.

“Naturally, there are still several issues that we need to discuss and resolve,” Douglas spokeswoman Renee Handler said. “That is part of this evaluation process. The purpose of the evaluation process is to achieve consensus. We think all the issues are resolvable.”

Meanwhile, the Pentagon has again increased the estimated loss facing McDonnell Douglas on the C-17 cargo jet program to $850 million from its earlier projection of $700 million, The Times has learned.

In a related action, the Defense Department declined to pay the firm for its December billings. The actual amount that went unpaid was not made available, but McDonnell in past one-month periods has billed for well in excess of $100 million on the C-17 contracts at issue.

McDonnell has long insisted that the C-17 program will break even--including $200 million in additional payments that the St. Louis-based company expects the government to pay on contested claims, and excluding certain overhead costs that the firm is writing off quarter-to-quarter.

The latest increase in McDonnell’s estimated loss has been hinted at by government officials in recent months, but the Pentagon’s formal action appears to confirm the assessment of top military officials that McDonnell has yet to solve all of its problems on the C-17 program.

The disclosure comes at an inopportune time for the firm, just as its proposed Taiwanese partners have arrived in Long Beach to perform a due-diligence inspection at Douglas Aircraft Co. Douglas also builds the C-17, but that program will be spun off into a separate unit.

When the Taiwan Aerospace deal was announced Nov. 19, McDonnell said it would sign a definitive sales agreement by Jan. 31 and indicated that a launch of its new MD-12 jetliner, to be jointly built with the Taiwan partners, would follow in 1992.

Earlier this week, however, McDonnell said it would not meet the Jan. 31 deadline because the inspection team from Taiwan Aerospace would take longer than expected to complete its due-diligence review.

Taiwan Aerospace is a consortium of industrial firms from the Republic of China formed for the McDonnell deal and run by Huang and company President Denny Ko--two executives with long careers in American business.

McDonnell insists that the deal will be concluded. Yet objections have been raised in Taiwan about the risk of the huge investment, and Huang suggested that the deal is not quite as settled as it might have initially appeared.

Taiwan Aerospace, for example, is supposed to build the wing and fuselage for the MD-12, but Huang raised new questions about that role.

“We would like to participate, but whether we will depends on our qualifications,” he said. “In the future, there will be many, many different programs. Don’t just keep the MD-12 in mind.”

Huang said whether Taiwan Aerospace builds the wing and fuselage would depend on an analysis of the company’s ability to meet an ambitious cost target for production--what he termed a “must-cost” analysis.

Huang also disclosed that officials of China Steel, a government-owned industrial corporation, have taken a central role in talks with McDonnell and that the firm may become a party to the Taiwan Aerospace agreement. He suggested that China Steel may join the agreement in a “second phase,” which has not been previously discussed.

According to Huang, Taiwan Aerospace’s investment in McDonnell’s commercial business will be 29% financed by the Republic of China, with 5% coming from the Bank of Communication and 24% from the Government Development Fund. But initially, the government may take a bigger role in financing the venture.

Aerospace analyst Howard Rubel of C. J. Lawrence, Morgan Grenfell said McDonnell’s disclosure about the delay in the deal shows a measure of caution.

“Prudence walked into the picture,” he said. “If this deal fails, it is better that it fails now than when all of the money has been put into it. Then, everybody can say, ‘It has been a good try; it just didn’t work out.’ ”

Although securities analysts are bullish on the Taiwan deal--because it will give McDonnell a badly needed injection of cash--they are circumspect about the prospects for it to go forward. A number of analysts say privately that there exists a reasonable chance the transaction will not materialize.

Pentagon auditors are watching the situation closely, especially as contract administrators continue to tighten the screws on the C-17 program.

The firm’s Douglas Aircraft unit is under contract to develop the C-17 and build the first six aircraft for a maximum of $6.6 billion. The new Pentagon estimate is $7.45 billion. McDonnell would bear the $850-million overrun under its fixed-price agreement with the Air Force.

Although there are several government estimates of the C-17’s costs, the $7.45-billion projection is considered the most authoritative, because it is the one on which the Pentagon bases its payments to McDonnell.

The estimate, which became official last month, was made by the Defense Contract Management Command; other Pentagon estimates of the overrun are much higher--as much as $2.6 billion--though a Douglas spokesman noted that the highest recently have been reduced.

“I would like to point out that there are a number of estimates out there,” the spokesman added.

If McDonnell actually incurs the loss--which won’t be known definitively until the contract is completed--the firm would have to take a write-off of huge proportions against its profits.

Another unknown is when the firm will have to pay about $400 million it owes its subcontractors on the MD-11 jetliner program--funds withheld because McDonnell said the subcontractors failed to meet contract or quality control requirements.

A Douglas spokesman said he would “not contest” that the government estimate was raised. He said he could not confirm or deny that the December billings were not paid.