Europe’s defence industry

Lifting Europe's embargo on arms sales to China could hurt its defence industry

YOU cannot get much more patriotic than the American president's taxi. Pretty soon George Bush will be ferried around not in an all-American Sikorsky helicopter, but in a new Agusta US 101. The new presidential choppers will be assembled in America by Lockheed Martin, but they are basically a product developed by an arm of Finmeccanica, a state-owned Italian defence conglomerate. Given Italy's support for the Iraq invasion, the country is evidently being forgiven for being European. The contract, worth just over $6 billion, was announced by the US Navy at the end of last week.

The deal caused a predictable flurry of protest in Congress, long used to pork being dealt out to purely domestic defence contractors. Europeans should have been cock-a-hoop, given that EADS (European Aeronautic Defence and Space company) is in the running to supply some of the 500 or so air-refuelling tankers that the Americans will soon need. The Europeans have an advantage because of the too-cosy relationship between Boeing's then finance director and a Pentagon official, both of whom have been convicted of improper dealings. The official was shown to have done Boeing favours, including leaking the price of a rival Airbus product.

But the real reason why Airbus, a subsidiary of EADS, in collaboration with either Lockheed Martin or Northrop Grumman (talks are under way with both), will get a slice of the lucrative tanker contracts once they eventually come along is that the US Air Force cannot risk having its entire fleet of tankers of one aircraft type. If a technical fault were to emerge, the world's policeman would be grounded. The existing fleet consists of converted civil jets made by Boeing, McDonnell Douglas and Lockheed. Lockheed is out of the civil-jet business and McDonnell has been absorbed into Boeing. The only alternative supplier is Airbus.

But all such logic is threatened by the political uproar that is sure to come when the European Union lifts its sanctions against selling arms to China. Congress will not want tax dollars spent on European products and will resist technology transfers that could help the Chinese if Europe sells them warplanes.

BAE Systems, a British defence contractor with a huge presence (24,000 employees and sales of over $5 billion) in America, is extremely worried about the side-effects of lifting the Chinese embargo. The French have led the effort to get the embargo lifted, in the hope of selling Dassault fighters and of persuading the Chinese government to allow Chinese airlines to buy Airbus passenger jets. With the embargo set to be removed by the end of June, the Chinese ended restrictions last week on orders for Airbus's big new A380 aircraft, which desperately needs business from Asian carriers.

So the French rush to get into the Chinese defence market could stymie European ambitions in America - roughly half the global market for advanced military equipment such as aircraft and missiles. But the impact could be far bigger, according to the boss of one leading American defence company: “It will push America and Europe in different directions, leading to a fortress US and a fortress Europe mentality.” The effect will be “chilling” for the co-operative transatlantic deals that Boeing and Lockheed have tried to forge with the likes of BAE and EADS.

BAE has renewed its efforts to expand further in America in the past year. But now it may be forced to turn back to Europe for partners - at an unfortunate moment. The incoming co-chief executive of EADS, Noel Forgeard (the man behind Airbus's recent success), is set on buying Thales, a French defence firm with a big presence in Britain, to turn EADS into a full-range defence contractor to rival BAE.

Mr Forgeard is a wily character who got the top job at EADS with the help of the French president (his former boss, when he was a civil servant) and without the full board being consulted, according to company sources. Having run rings round Boeing, he is perfectly capable of stitching up BAE by limiting its American ambitions, even if EADS itself suffers some collateral damage. If lifting the Chinese embargo stops BAE continuing as an Atlantic bridge, will it opt to join Fortress Europe, or instead become 100% American?

Article suggests that lifting Europe's embargo on arms sales to China could hurt its defence industry.