Joining forces is the tactic for a successful year

Mergers and rationalisation are likely to continue to dominate thinking in Europe’s defence industry this year.

BAe chairman Sir Dick Evans has said he expects this consolidation to be largely complete soon after 2000, as firms merge asset bases while retaining national subsidiaries.

His own firm is likely to be in the thick of any activity. Last November, the MoD reportedly dropped its block on a defence equipment alliance between British Aerospace and GEC. Moves in this direction now seem likely.

One rationalisation was temporarily stalled with the December cancellation of the privatisation of French defence company Thomson-CSF, which would have merged with Matra Defense. This upset many UK defence firms’ plans, as Thomson has interests in Thomson Marconi Sonar, Pilkington Optronics and Shorts Missile Systems, among others.

But the privatisation is to go ahead early this year. Matra’s owner, the LagardAre Group, will bid again, while Alcatel Alsthom, the losing bidder last time, is still interested.

If Alcatel Alsthom wins, a UK beneficiary could be its ally GEC.

Beyond the international tie-ups, 78% of defence equipment spending is with UK firms, not including international ventures.

Defence procurement decisions due in 1997 include the £800 million future medium-range air-to-air missile which pits a BAe-led team against America’s Hughes.

A decision to build Eurofighter is overdue. Other pending orders include two Royal Fleet Auxiliary oil tankers, at least one more rebuild of an RFA landing ship, production approval for the army’s Cobra weapon-locating radar, while `no acceptable price, no contract’ talks continue with GEC Marine over the £2.5 billion-plus Batch 2 Trafalgar-class submarine contract, and with BAe over the £1.5 billion Nimrod 2000 maritime patrol aircraft and the £500 million Storm Shadow cruise missile.

With an election looming, big changes to UK defence policy are possible as Labour is promising a strategic defence review.

The Conservatives say defence spending will remain level in real terms in 1998-99 and rise slightly in 1999-2000.

George Paloczi-Horvath