Entente not so cordiale

Britain is not impressed with French attempts to control joint defence alliances

Until Thomson-CSF is privatised, as far as I’m concerned every time we speak I’m talking to the French government.’

The blunt words were Sir Robert Walmsley’s, the Ministry of Defence chief of defence procurement, talking to a British defence company in which France’s state-owned Thomson-CSF has equity.

As Walmsley’s disenchantment with the management of the pan-European Project Horizon frigate became embarrassingly public last week, it also emerged there are definite limits to his trust in UK defence firms in which French companies have a stake.

The seeping away of trust is the result of bitter experience, City and defence sources say. One explanation of Walmsley’s tough stance bears quoting in full.

`Recently there has been a marked cooling in attitudes towards the French, both by MoD and by the major UK companies. There is a realisation that collaboration is very much a one-way street. UK companies can be bought outright by French state-owned companies, but it’s inconceivable that major French defence firms could ever be controlled by UK companies. All the defence joint ventures between Britain and France have appeared very unequal. The French have never ceded control and in many cases have demanded control.’

A partnership which has provoked bad blood is the Matra BAe Dynamics missile joint venture. `There are Chinese whispers that the MoD is less than ecstatic about Matra BAe Dynamics, in that the MoD has less control than it ever did over BAe Dynamics,’ says one executive.

And `the MoD is less than happy with Thomson Marconi Sonar and Matra Marconi Space,’ where the French are in the driving seat. It is no surprise to him that British Aerospace insisted on equity parity in Matra BAe Dynamics.

As for the half Thomson-owned joint ventures, Shorts Missile Systems and Pilkington Optronics, analysts find it interesting their 50/50 equity arrangements have remained unchanged. `The impression I get is that the UK Government is not prepared to see a full sale of either of those businesses to Thomson-CSF,’ says one.

Thomson-CSF’s stop-start privatisation will not lead to a cross-border defence alliance to create a critical mass to compete with US defence giants Boeing and Lockheed Martin.

Instead, two French groups are chasing Thomson-CSF, one led by Matra’s owner LagardAre, and the other by Alcatel Alsthom together with Aerospatiale and Dassault. These last two are also merging at the French government’s insistence. Paris now thinks domestic horizontal integration is better than European defence giants.

This is a major disappointment to BAe, which until last autumn felt confident it would join Matra in bidding for Thomson-CSF. Also excluded was GEC-Marconi, which last week sought joint ventures with Italian engineering company Finmeccanica instead.

Clive Forestier-Walker, analyst at Charterhouse Tilney, described GEC-Marconi’s move as `inspired’. But the only foreign involvement in a privatised Thomson-CSF `will be at the minority level,’ he says.

Even if a French company is in the private sector, `it’s effectively controlled by the government. They may not have a holding in it, but they control who does what, whereas we’ve tended to leave management more to market forces.’

Why is the trust melting away?

One British managing director says: `The differences between British and French defence companies are cultural. Not only are there different reporting procedures, but the two countries don’t even have the same concept of what a business meeting is for. The French interpretation of a business meeting is totally different from the British, whose intention is to draw up an agenda, draw some conclusions and make decisions.

`The French view is that you make decisions before the meeting, discuss pros and cons during it, or maybe a select few decide after the meeting. It’s Cartesian logic.’

Forestier-Walker agrees about the cultural gap. `The French senior manager and worker has a view that state intervention is good, the more the state does is a good thing. We have exactly the opposite view of life. So do the Americans.’

But he warns that British defence companies have other options if the European consolidation process `appears to become too difficult. You should not ignore the fact that UK companies will want to go and play in the US instead. The UK already has 40% of the US defence import market.’

Only last week Boeing chairman Philip Condit said he was anxious to expand joint ventures with BAe.

Germany is ahead of France in preparing for cross-border consolidation. `There is a scenario that BAe can see some sort of merger or agreement with Dasa, given their Eurofighter and Airbus cooperation,’ says UBS analyst Sash Tusa. But he observes that the MoD will not be happy about a Dasa offer for defence electronics firm Siemens-Plessey.

`I find it very hard to see Britain accepting the sale of Siemens-Plessey to anyone other than a UK firm when similar strategic assets are not for sale to British companies elsewhere,’ Tusa says.

True cross-border mergers between large European defence firms are not going to happen `for a long time’, Forestier-Walker believes.

But the future creation of a single management structure for the Airbus civil airliner consortium may become a catalyst for military aerospace cooperation.

In January Merrill Lynch’s aerospace survey said: `Attention could shift to transnational combinations that could accompany restructuring of Airbus and aim to build a stronger European military and commercial aerospace industry better able to match Boeing’s strengths.’

Robin Ashby, director of security think-tank the UK Defence Forum, told a House of Commons meeting last week: `The major US companies have come together typically in 60 days. Even relatively minor amalgamations in Europe can take 60 months, with consequent loss of opportunities. The only certainty is that the defence industry in the UK must restructure to meet the challenges from our competitors.

`Collaboration with firms in the EU is the most obvious foundation, but differences in language, culture and two centuries of European civil wars may mean that, for some parts of industry at least, the American corporate alliance becomes essential.’