Nuclear frisson

Klaus Umminger's job is to cause havoc. At Europe's only nuclear power plant simulator, in the Bavarian township of Erlangen, the project manager is preparing a catastrophe: the simulation of a huge leak.

The experiment in the grey building near the German headquarters of Areva NP, the Franco-German reactor engineering business, demonstrates that the nuclear chain reaction can be kept under control. "The leakage could cause the water . . . to cool down too rapidly, but our safety technique will prevent that," Mr Umminger says.

But Areva NP's safety techniques have been unable to stop another experiment spinning out of control. In mere months, a chill has entered the relationship between the company's shareholders: France's state-controlled Areva and Siemens of Germany.

This January Peter Löscher, Siemens chief executive, sent a terse e-mail to Anne Lauvergeon, his counterpart at Areva, informing her that Europe's largest engineering group planned to exercise its option to sell its 34 per cent stake in the joint venture to the French. The move caught Ms Lauvergeon by surprise, stunned politicians in Berlin and Paris and puzzled Europe's energy industry. Why, after half a century in the nuclear sector, was Munich-based Siemens preparing to walk away, leaving its accumulated expertise in the hands of its former partner?

The split was at first seen as another example of the volatile nature of politically inspired Franco-German business ventures, which - from aircraft manufacturing to pharmaceuticals - have often been riven by cultural misunderstandings, government interference and national egotism.

But there was a further shock. As it quit Areva NP, Siemens said it was talking to Rosatom, an atomic energy group owned by the Russian state, about establishing a new nuclear joint venture. This move added fuel to the debate about energy security in Europe and, in particular, the issue of dependence on Russia.

At a time when there are concerns about the "downstream" activities of Gazprom - the Kremlin-directed energy group that is seeking alliances and assets in central Europe - a possible tie-up between Germany's biggest industrial group and another Russian state-owned body in the sensitive area of nuclear power has raised eyebrows.

This outcome is the result of mutual misunderstanding and a remarkable strategic U-turn by Siemens.

Upon receiving the e-mail from Mr Löscher, Ms Lauvergeon picked up the phone to a man who has become an establishment figure in France by virtue of his many French board memberships - Gerhard Cromme, a senior German industrialist who heads the Siemens supervisory board. "We didn't want you to find out like this," he told her, deeply embarrassed.

In the Elysée Palace, President Nicolas Sarkozy was furious. The timing for another crack in Franco-German relations could not have been worse - they had already been strained to the limit in the attempt to co-ordinate a response to the global economic crisis.

But Mr Sarkozy also saw this as a failure of the tough-minded chief executive - nicknamed "Atomic Anne" - who had resisted his attempts to build a new French nuclear champion with Areva as the cornerstone. Officials rushed to blame Ms Lauvergeon for the departure of Siemens, threatening her own position at the group, which she has headed for almost a decade.

The truth is more complex, with all participants liable for a share of the blame - not least the president. Mr Sarkozy's hasty comments to Angela Merkel, German chancellor, in 2007 - that France could not accept the presence of Siemens in the joint venture while Berlin stuck to its commitment to exit nuclear power - had left their mark. "The Germans and Siemens felt challenged by the French president on their own terrain," one Areva insider says.

In response Mr Löscher began lobbying Berlin in early 2008 to put pressure on the French not to use an option it had to force Siemens to sell its stake. Ms Merkel subsequently told Mr Sarkozy that she objected to any attempt to force Siemens out.

Siemens was keen to avoid any quick decisions. The company's new executive team, brought in with Mr Löscher after 2007, was in the process of revising its nuclear strategy,forged in the aftermath of the government's decision in 2001 to phase out the industry. With a lack of public backing, domestic orders and state support for export licences, Siemens had decided in 2001 to put its nuclear assets into a joint venture with Areva.

"When a baker stops eating his own bread, nobody will buy it," a senior manager involved in the decision at the time says.

Back then, Siemens' aims were clear: it was preparing to exit nuclear power, negotiating, from the start, a series of options to quit the joint venture. The French side was given a right-to-buy option for the stake, now valued at about €2bn.

But eight years later, nuclear energy is making a comeback. An estimated 51 plants are under construction; a further 171 are in the planning process.

In a world where oil prices have soared and the problem of security of energy supply is more acute than a decade ago, and with climate change higher up the international agenda, the case for emissions-free nuclear power is stronger while memories of Chernobyl have dimmed.

At the palatial Siemens headquarters on one of Munich's finest squares, the landscape has also changed. Many of the executive team that crafted the deal with Areva quit in 2006-07 after a corruption scandal. Their successors - led by Mr Löscher, whose background is in the healthcare sector in Europe and the US and who is the first outsider to head Siemens - launched the largest organisational overhaul in the conglomerate's 161 years. Traditions such as slow decision-making and lack of debate were challenged.

When Wolfgang Dehen, previously an executive in the automotive industry, arrived in 2008 to take charge of Siemens' energy business, he made clear there were no strategic taboos. Together with Mr Löscher, he quickly concluded that it had been a mistake to cede control over nuclear expertise. "This market has a fantastic potential and in the long run we want to benefit from that. This is a strategic decision independent from the moratorium in Germany," he told the Financial Times in an interview.

Initially he hoped to strengthen Siemens' influence within Areva NP. At that time, both sides were still very committed, says a Siemens insider. Areva's French management seemed keen to keep the Germans on board, if only to shield its own independence in any government inspired restructuring of strategic industries.

The Germans also believed they offered other advantages. "It was not in Areva's interest to lose a partner who opened doors in the UK or the US where French companies are not exactly the most loved ones," the insider says.

But it appears that perceptions on either side of the Rhine were markedly different. While the Germans made clear they had altered their position, the French believed nothing would change before Germany's general election this autumn, executives from both sides have told the FT.

But the new management at Siemens had decided to accelerate things, spurred on by the French government's overarching review of its country's nuclear industry, and of the role of Areva itself. The Germans lobbied for more influence, which did not go down well in Paris.

French executives were suspicious of reports that Mr Dehen professed to be motivated by commercial considerations alone and that he was not out to play politics. In a sector as sensitive in strategic and security terms as nuclear, the French thought such a claim was nonsensical.

A former Siemens manager says the new management lacked political skill. Nor did they understand that in France support is won through repeated meetings and lots of explanation. "You have to have a lot of patience," he says.

The new management's blunter approach alienated its partners. French nuclear executives point out that "we had new interlocutors who knew nothing about energy and even less about nuclear", pointing at Mr Dehen.Mr Dehen counters that Siemens talked openly with its partners and informed French politicians about its intentions. When Siemens thought it could not get what it wanted, it decided to pull out.

One French presidential adviser admits: "France made a mistake with Siemens. The government and Anne Lauvergeon thought they could treat Siemens like a junior partner for ever."

But sensing that there would be no quick decision, Siemens began talks with the Russians late last year. If it happens, the future joint venture, in which the Russians will hold just over 50 per cent, will give Siemens access to the whole range of civilian nuclear technology. For Rosatom hopes to benefit from Siemens' extensive technical expertise, expertise in managing large and complex projects, and - not least - its powerful brand and reputation.

The talks between Siemens and Rosatom are taking place at a time of growing demand for civilian nuclear facilities, particularly in Asia, which the two hope to tap. But they are also taking place against a backdrop of scepticism and concern about safety standards, geopolitics and market capacity.

The public still has questions about the safety of Russian nuclear technology 23 years after the Chernobyl disaster. Independent experts are less damning. "The new Russian light water reactors are as safe as the German ones," says Joachim Knebel, head of nuclear safety research at the Karlsruhe Institute of Technology.

There are also concerns about the quality of Rosatom's management. The group is the result of a ragbag merger of companies that have yet to be integrated. Areva executives who experienced their own difficult merger of France's Cogema, the fuel cycle business, with Framatome, the reactors division, say integration is likely to occupy Rosatom - and its partners - for some time.

Geopolitics also presents obstacles. "Would the UK, the US or even Poland buy a Russian nuclear power station? I highly doubt that," a high-ranking former Siemens manager says.

There is also the question of market capacity. Areva faces stiff competition from Westinghouse and GE of the US, as well as groups from Japan and South Korea. While prospects for the civilian nuclear industry look better than for a generation, the market promises to be highly competitive.

But Mr Dehen believes there is room for newcomers. "There are more planned projects than the actual players can probably cover," he argues. Mr Knebel agrees. "The companies will only have to split the markets elegantly."

Despite such optimism, questions remain. It not clear yet how much access Siemens will get to Russian nuclear technology or whether the German group will once again find itself playing second fiddle.

However, given that the main interest for Siemens appears to be in strengthening its existing involvement in components and operating systems, some industry executives speculate that the German group's strategy has been to quit the financially risky side of nuclear while guarding the access to turbines and other component orders.

But Mr Dehen insists Siemens' aim is to re-enter the nuclear market. "In the long run we want to cover the whole energy conversion chain from fuel supply to decommissioning," he says.

The challenge will be to rebuild the nuclear expertise given to the venture with Areva. "Siemens will have to start from scratch," Ms Lauvergeon has said.

Mr Dehen counters by pointing to the company's leading position in conventional techniques such as turbines, generators and operating systems.

In Erlangen, these Franco-German quarrels are not palpable. Along roads with names such as Curie Street and Einstein Way, Areva and Siemens employees eat in the same canteen and work in neighbouring buildings - and nobody there expects this to change. Pointing to the scooped earth besides Areva NP's new German headquarters, one employee jokes: "This is where the wall between Siemens and Areva will be erected." In reality, it will be a simple parking lot.

An unloved enterprise

Atomkraft? Nein danke

Nowhere has nuclear power been discussed so emotionally as in Germany. Since the late 1970s it became the target of mass demonstrations and subject of declining public support. The anti-nuclear movement was the breeding ground for the Green Party which broke Germany's party political mould in the 1980s, entering regional and national parliaments. A decade later the Greens entered into national government with the Social Democrats and, in 2001, they realised their long-held ambition of a statutory phasing-out of nuclear.

For Germany the consequences of that decision mean finding other means of energy supply to the 30 per cent generated by nuclear at the turn of the century. It has also meant profound changes for a domestic industry which saw itself at the forefront of nuclear plant technology. Using licences from the US Siemens and AEG began developing their own nuclear technology in the late 1950s. In 1969 they merged their operations to form Kraftwerk Union which built all but one of Germany's 19 nuclear power plants. It also exported a large number.

KWU, which was integrated into Areva NP in 2001, was often seen as something of an unloved step-child within Siemens. Workers at other units resented the bad publicity KWU attracted.

The phasing-out of Germany's reactors is now under way with the last one due to be switched off around 2021. The industry still hopes for a last chance policy reversal should September's general election bring a change in government. But even then, getting the necessary public backing for nuclear would be very difficult.

Cross-border co-operation
A troubled union at the heart of Europe

Pooling French and German industrial might has been an enduring dream of Europe. But ever since the two countries pooled their coal and steel markets in the 1950s, forming the basis for today's European Union, many efforts at further co-operation have fallen foul of cultural misunderstandings.

EADS, the aerospace and defence group that owns Airbus and Eurocopter, is the best example of such co-operation. But its progress has been hindered by the mutual suspicion stitched into its structure, with a management that delicately balances national rather than business interests.

Despite the logic of combining forces, mistrust runs deep. Germans recall with bitterness the government intervention that ensured French control of the Franco-German pharmaceutical group Aventis, today known as Sanofi-Aventis. The French resent the efforts of Germany's Siemens to cherry-pick the best of their own turbine champion, Alstom, at a moment of weakness.

Essentially the two sides struggle to overcome differences in approach. In France protectionist rhetoric is accepted; in Germany the discourse is of a laisser faire state. In practice, neither side is what it claims to be, with French interventionism less powerful than it seems and, in Germany, influence often exercised by local rather than national government. Understanding these differences is the key to future success.

Copyright The Financial Times Limited 2009Major feature looks at the challenges facing Franco-German industrial co-operation ventures, focusing on the split between Siemens and Aveva in the area of nuclear power.

Website: Areva NP http://www.areva-np.com/

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