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European Defence Markets Set for Radical Competitive Shake Up |
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(Source: Frost & Sullivan; issued Sept. 20, 2004)
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by Ben Moores, Frost & Sullivan
There will be polarised reactions from the European defence industry when they receive the European Commission’s overhaul of competitive defence tendering in the EU next month. Under the proposed plans European defence ministries would have to award the contract for a tender to the lowest bidder regardless of their European location and whether or not they are internationally owned.
For UK-based defence companies, this will be greeted with a sense of disbelief and then jubilation, whilst for many in Europe it signals impending doom. The UK market became a competitive, open market when GEC- Marconi divested its self of its Defence arm to what was British Aerospace, now BAE. GEC-Marconi had gone on a North American acquirement spree in the years preceding the British Aerospace deal and the MoD was faced with a monster of a company that dominated the market. The only option was to allow foreign-based companies to compete on the basis that they would develop/ acquire a domestic industrial base in areas of strategic capability.
The result was a massive restructuring of the UK market as foreign companies, lead by Thales, scrambled to establish themselves in the UK. The boat was further rocked when GD (effectively CDC) stole Thales’s thunder when it won the Bowman project from a fed-up MoD. BAE, with its raft of poor performing projects and loss of market share (especially in C4ISR) attracted considerable negative attention, although much of it was not warranted in the subsequent immature media frenzy. After all it is quite easy to attack BAE’s record when you don’t compare it to other European companies or forget to mention that the MoD changed its capability profiles half-way through production on these Cold War platform systems.
The European Commission plan will accelerate BAE’s plan to merge with a prime in North America as it will be an increasingly attractive partner due to its capability to act as a gateway into Europe. Northrop Grumman, Boeing and General Dynamics all have reason to examine BAE as a potential suitor as BAE’s current re-organisation is generating considerable interest.
The turmoil of events and the intensively competitive UK market place over the past ten years have left BAE as a strong, well placed and lean defence company. The same cannot be said of the many European companies who, removed of their nationalistic crutch of guaranteed contracts and government handouts, are set for varying degrees of misery.
For pure misery we have DCN and Giat (Dassault is somewhat better); two monolithic disaster-prone companies who can only look forward to bad news and more bad news as their domestic markets are invaded, their unions rise up and their core markets decline.
Thales has a degree of competition with Sagem and the former Matra, but it is not terribly competitive by UK standards. Thales’ advantage is that is has numerous overseas interests that allow it to be a global competitor. Sagem on the other hand does not, and will need an international partnership to sustain any form of growth. Whilst Sagem may have some cutting edge technology, and solutions, it does need to spread its industrial base in order to compete effectively throughout Europe.
In Italy, Finmeccanica has been streamlining its business for a number of years, trying to focus on key technologies whilst divesting others. The practice of buying out other Italian Defence companies in the years preceding this latest strategy shift only left it flabby and uncompetitive in the face of real competition. Whilst it would be hard for foreign companies to invade the Italian market, there may be some routes to market through Datamat or Fincantieri.
In Germany, competition remained strong in most areas despite government bureaucracy. Diehl, Rheinmetall, KMW and HDW all need international partners as their domestic market looks set for long-term decline. The real problem for German companies is that the best political match-ups are generally uncompetitive and the realignment process will be too painful for either side to bear currently. For EADS this is a clear opportunity, with a foothold in France and the UK it might finally be in a position to meet its much heralded and overly ambitious Defence market growth targets.
What will occur in Spain in unclear, Izar is in deep trouble: with mounting debts, and a restless work force, with no end in sight. Indra and Amper are both very interesting companies that would benefit from consolidation in a cross national merger of sorts. Both companies are currently spread over too many areas and need to develop core lines of business in order to compete effectively outside of South America and the Iberian peninsula. However, both companies need to rationalise their business and expertise, options for NA growth were strong until Prime Minister Zapatero alienated a well-tended ally. EID of Portugal also falls into this category, it needs to be part of a bigger communications company now that the military communications markets have started to consolidate internationally.
Eastern Europe is a structural mix up. There is an understanding within Eastern European governments that they need to divest themselves of their state-owned defence companies. The problem is that the strong companies are currently viewed as an asset by the state and the weaker companies are not particularly attractive options for the West and thus the status quo perseveres.
The Greek defence industry is very fragmented and needs consolidation. There is an acknowledgement that this consolidation needs to occur in order to bid realistically in the international market. There have been some efforts to form partnerships overseas, such as 3Sigma through EADS. A key problem in Greece is that there is very weak R&D base. To overcome this issue Greece needs to work out the key market verticals in which it needs to specialise, but with no clear long term plan coming from the MoD or the industrial sector the outlook is bleak.
Whilst Greece works mainly in peripheral systems, services and parts, the opposite is true in Turkey. Turkey has a much stronger R&D base and has a much stronger final assembly/ construction industrial base. In many respects this will make it much harder for Turkey to integrate in the world Defence market and with defence being cut back in both countries it will be a painful transition for the Turkish Defence industry. However, on the upside the Turkish government has begun an initiative to reform its industrial base and procurement for the long term.
Whilst much consolidation has already occurred in some sectors it will be a painful process for others unless they accelerate that process. As a priority it is the shipyards, vehicle manufacturers and nationally focused defence companies of Europe must re-organise themselves. Interestingly enough these are the two areas where BAE Systems now leads, although KMW is a realistic claimant to the vehicle throne. There are numerous combinations available as consolidation in these Europe markets remains in its infancy. However for now, the main barrier to consolidation will remain that of state owned industries and their private counterparts. Numerous scenarios are now in motion as European governments start to tackle these industrial drains on their hard pushed resources.
Thus the proposed European Commission legislation will likely dramatically accelerate the consolidation that is required. The door to further consolidation is widening and the European Defence market place will only become more intriguing.
-ends-
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