Defence sector prepares for major change

Date: 26/02/1998

By Chris Johnstone

MOVES to pave the way for the restructuring of Europe's 45-billion-ecu-a-year defence sector are gathering pace, with governments and the European Commission preparing to unveil major proposals.

The British, French and German governments are close to concluding a memorandum of understanding which would lay the groundwork for national defence companies to cooperate more closely or even merge, according to industry sources. "There is no doubt at all this will be delivered by the end of March," said one company insider.

The three-way government memorandum is being drawn up with Europe's biggest defence firms: British Aerospace, France's Aerospatiale and Germany's Daimler-Benz Aerospace (DASA). It will cover issues such as the security of equipment supply, treatment of defence exports, classified information, research and development.

A suggestion that a working group of defence procurement officials from the three countries be set up is likely to be included in the memorandum.

In a parallel development, the Commission is seeking support from governments for legislation to open up competition in the sector. It will put forward plans within the next two months for a shake-up of national procurement rules, which it believes is needed to create a Europe-wide market in the defence sector.

The aim would be to broaden public procurement rules to non-sensitive defence purchases, thereby introducing competition into one area where it has not hitherto existed. "We would like to put this on the agenda for foreign ministers and industry ministers next month," said a spokesman for Industry Commissioner Martin Bangemann.

Many defence contracts are still reserved for national bidders, although they do not involve strategic interests and there is no reason why they should not be thrown open to non-domestic companies, says the Commission.

Firms are also pressing for easier access to EU research and technology funds.

These initiatives come at a time when defence has become a high-priority issue for Europe as its fragmented industry has fallen further behind its US rivals. The risk is that it will lose market share and some of the 700,000 jobs in the sector. This has broader implications, as many of these are in high technology areas where research has spin-offs for the civil sector.

However, restructuring the arms industry and trade is more complicated than in other sectors, analysts say. Each government is intimately involved as the biggest buyer of goods, the sponsor of major research programmes, and the judge of what can or cannot be permitted in the light of security and national interest considerations.

France has traditionally been reluctant to see its arms companies compromised by wider alliances or mergers. But such a stand-alone approach is becoming increasingly untenable as the cost of developing new military hardware soars.

A Commission report last year sounded the alarm on how Europe's defence industry was being outgunned in the competition with the US, especially following the take-over of McDonnell Douglas by Boeing.

It said that a single European defence market was a must for the sector's survival, and Bangemann warned that the industry "could not survive in its present form".

The EU imports six times more defence-related goods from the US than it exports, up from four times as much in 1985. The trade gap is widening every year, according to figures from the International Institute for Strategic Studies.

The three biggest US defence companies together have a yearly turnover of around 80 billion ecu, more than the combined sales of their eight biggest European rivals.

Concerns about the future of Europe's arms industry extend to the space industry, as many firms are involved in both sectors. A delegation from Aerospatiale, Dasa, Alcatel, Spain's CASA and Saab visited Bangemann last week to promote the industry.