The defence party hots up

The three big aerospace companies of Britain, France and Germany have now reported to their governments on options for restructuring the European defence and aerospace industry. For the past four months, British Aerospace, Aerospatiale and Daimler-Benz Aerospace (Dasa) have been trying to hammer out a common position. But French reluctance to privatise Aerospatiale, and thus […]

The three big aerospace companies of Britain, France and Germany have now reported to their governments on options for restructuring the European defence and aerospace industry.

For the past four months, British Aerospace, Aerospatiale and Daimler-Benz Aerospace (Dasa) have been trying to hammer out a common position.

But French reluctance to privatise Aerospatiale, and thus give up ultimate French state control of the company, leaves serious doubts over just how far this integration can go.

Last week’s report to governments is confidential, but it will highlight major disagreements over Aerospatiale that have obstructed any immediate merger deal.

According to Denis Ranque, new chairman of France’s Thomson CSF, Europe’s aerospace industry now resembles a patchwork of joint venture deals that have reached their limits. There need to be some mergers and changes of ownership, he said pointedly last month.

The first step will be to turn the four-nation Airbus consortium into a conventional company, which could act as an anchor for the rest of the aerospace and defence industry.

BAe remains resolutely positive, saying it would not wish to rule anything in or rule anything out. ‘Everybody is talking to everybody,’ said one insider.

Indeed they are, and BAe’s immediate focus is on acquiring a major stake in Sweden’s Saab, with which it has a deal on marketing and producing the Gripen fighter for export.

But this type of deal is not what the UK, French and German governments want.

In December, UK prime minister Tony Blair, president Jacques Chirac of France and German chancellor Helmut Kohl told their aerospace companies to set out a plan and timetable to restructure and integrate their firms by 31 March.

The goal was European aerospace integration based on what they call a ‘balanced partnership’. They added: ‘We would welcome the involvement of other companies and other European nations as appropriate.’

Thus it was no surprise that, in February, UK defence procurement minister Lord Gilbert invited the Dutch to join in the restructuring talks. Last week, the three companies said they would welcome the involvement of Spain’s Casa, Saab and others.

Despite French fears over losing state control of Aerospatiale, there is likely to be some eventual agreement on a shareholding swap between BAe, Aerospatiale, Dasa, Casa and Italy’s Alenia in the new European aerospace giant.

But whatever shape restructuring eventually takes, the industry is moving closer together. BAe and Dasa have been open about their close relationship and collaborated in last year’s carve-up of Siemens’ defence electronics businesses.

But BAe and Dasa pursued what were effectively national solutions, with BAe taking the British side of Siemens’ interests, and Dasa taking the German side.

Meanwhile, UK defence electronics group GEC has set its immediate sights just on Alenia.

GEC-Marconi says there is no fixed date for the next stage of the Alenia joint venture deal, announced in outline last July. But the whole deal should become a reality in the summer.

GEC indicated this week that it would be a straight 50:50 joint venture, rather than the more complex set-up described last year.

But there is a US dimension that could provide a serious setback. What if BAe or GEC merges with Northrop Grumman in the US? This could happen if Lockheed fails in its bid to take over Northrop. Last week, the US defence and justice departments blocked that proposed $9bn merger.

Any BAe or GEC merger in the US would remove a big chunk of the UK aerospace and defence industry from the European integration party.

But there are other players. GKN-Westland Helicopters may merge with Italy’s Agusta they already cooperate on the EH-101 Merlin helicopter.

CK Chow, GKN chief executive, said recently that GKN has talked about such a merger, but there had been no formal discussions.

Chow said it would be logical for the two to unite given current European defence restructuring efforts. It would also mean the combined Agusta-Westland would be a potent competitor to Europe’s biggest helicopter combine, the Franco-German Eurocopter joint venture.

Meanwhile, GKN’s armoured vehicles business is still hunting partners in Europe despite the recent breakdown of talks with tank maker Vickers.

Chow has said consolidation is inevitable, given the 20 different armoured vehicle makers in Europe ranged against just two in the US.

This industry’s shape will be determined by which consortium wins the contract to develop the multi-role armoured vehicle (MRAV) or battlefield taxi for the UK, Germany and France.

GKN and rival Vickers are partners in two consortiums battling for the £1bn contract on which a decision could be made very soon.

BAe and aero-engine maker Rolls-Royce could also welcome greater overseas involvement now the government has lifted the limit on foreign ownership from 29.5% to 49.5%.

There is no time to be lost, as competition heats up from the US for a bigger share of the world’s defence and aerospace industries. US aerospace and defence executives, for example, expect 31% of their revenues to be from products introduced in the next three years. This is a ‘phenomenal’ rise from last year’s level of almost 20%, says a recent study by Deloitte & Touche and Deloitte Consulting.