End of the Cold War has sent defence budgets into tailspin

Date: 02/11/1995

THE fall of the Berlin Wall and the end of communism in the former Soviet Union may have been welcomed by most Europeans but, for Europe's armaments industry, it has spelled crisis.

Along with the trend throughout the Union for cutting public-sector deficits, the reduced threat from the east has led EU governments to slash defence procurement budgets by at least one-third.

Spending in the UK has fallen from 14 billion ecu to about 9.5 billion ecu over the past five years, while the German defence budget has been halved. France, which is lagging behind by four years, is now going through a painful round of retrenchment.

French tank-maker Giat is expected to lose 198 million ecu this year on top of even bigger losses last year, but French Defence Minister Charles Millon has shunned calls for a bail-out without a genuine and tough restructuring plan.

The days of tailoring government defence policy to help industry are waning, if not over.

At the same time, the huge 75-billion-ecu US procurement market has been restructuring rapidly while the falling dollar, combined with aggressive marketing and pricing strategies by manufacturers like McDonnell Douglas and Lockheed Martin, are squeezing European companies.

Aerospace, which accounts for more than 50&percent; of national defence procurement, is feeling the heat from across the Atlantic equally in both civil and military production.

Director-General of France's Aérospatiale Yves Michot has complained that the dollar is being used as a trading tool and is languishing 30&percent; below its real value. In the civil market, it was Boeing and McDonnell Douglas that clinched one of the most sought-after deals of the decade and sold aircraft worth 4.5 billion ecu to Saudi Arabia.

Major European companies are getting together when and where they can to pool resources and develop joint projects like the European Fighter Aircraft. But the industry remains fragmented and subject to the whims of national government.

“If we compare ourselves with other industries in Europe then we can indeed be very satisfied because, in terms of integration, we are far ahead of any other branch, but in comparison to our main competitor, the American aerospace industry, we are far behind,” says Manfred Bischoff, president of Daimler-Benz Aerospace (DASA).

For Bischoff, the kind of reforms needed must be radical and put the EU on an equal footing with the US.

“The ideal would be that it should no longer make any difference politically, legally or administratively whether an aerospace company operates in France, Britain, Italy, Spain or Germany like it does not matter whether a company operates in Seattle, LA or St. Louis,” he says.

For industry specialists, this is simply not on the cards.

“The major problem with the idea of emulating American industry is that there they have total freedom to merge, demerge, close plants, lay people off and so on,” says Sash Tusa, a defence analyst at Union Bank of Switzerland in London. “They're not in the same game.”

For example, Lockheed announced a merger with Martin Marietta towards the end of last year, merged in early 1995, announced a major restructuring plan in June and looks set to close plant and shed 30,000 jobs by the end of 1996.

DASA, on the other hand, had planned redundancies of about 15,000 but cut them back to 8,000 under political pressure.

Similarly, plans by British Aerospace and France's Matra to pool their missile businesses were blocked by Paris after the UK government refused to award a 900-million-ecu missile contract to the venture without a competitor.

Although Matra is an independent company, it exposes the problems currently experienced by European manufacturers who rely on their national governments for contracts, export licences and subsidies.

One potential solution to this would be the creation of a European Arms Agency that will jointly carry out the procurement for some member states.

Without this, former Commission President Jacques Delors has warned that “competition and technological advances will be so stiff that the European industry will die within ten to 15 years”.

Industry is also trying to cope with the massive costs of developing fighter aircraft, military transporters and frigates through large-scale joint ventures backed by national governments, the most famous of which is the German, Spanish, Italian and British 'Eurofighter' project.

Despite its huge and escalating costs, Eurofighter is considered vital to politicians and industrialists alike in Germany, Italy, Spain and the UK. Development costs for a fighter are impossible to recoup without selling at least 600 aircraft, an order book no single country can afford.

Simply opting to buy French or US fighters would erode the innovative high-technology base of the industries in the rest of Europe.

Nevertheless, squabbling over which country should obtain the highest production of Eurofighter in return for placing the most orders has dogged the programme. “Everybody says European collaboration is the way to go,” says an official at British Aerospace, “but if we have more squabbles, the cost will go up and we're not going to be producing value-for-money equipment. It doesn't bode well.”