EUROPEAN CONSOLIDATION PERCEPTIONS FROM ACROSS THE CHANNEL
by Jocelyn REES
LONDON -- While Europe's major aerospace manufacturers have reached what they describe as a wide measure of agreement" on formation of an integrated European Aerospace and Defence Company (EADC), concerns over retention of shareholdings by governments - particularly that of France - continue to dog the consolidation process.

That the companies concerned have reached broad agreement was confirmed in a November 16 joint statement issued by Aerospatiale (France), CASA (Spain), Daimler Benz Aerospace (Germany), Finmeccanica-Alenia (Italy) and Saab (Sweden). The public statement was a visible manifestation of a joint confidential report submitted to the six governments in response to a common position paper issued by the administrations to the companies in early July.

The statement noted that governments had requested "further clarification on topics such as government rights in EADC," among other issues. The companies had already agreed that the EADC's target structure should be as proposed by the partners in Airbus Industrie and, although contents of all governmental and industry reports to date remain confidential, it was stated that the matter of government rights and safeguards in the proposed EADC is among issues to be addressed.

Progress towards formation of an EADC is necessarily slow in a climate in which France, particularly, proceeds from what is perceived in Britain as a fundamentally different ethos towards business compared to that of the UK, where privatisation of formerly state-owned industry is virtually complete following 17 years of Conservative government until May 1997. Even now, with a government ostensibly to the left of its predecessor privatisation has continued, government taking less responsibility for what it sees as basically commercial interests.

The British Aerospace view is that its shareholders are unwilling to place their company's assets into a pan-European company in which there are significant state shareholdings. "This would give an unacceptable state sway over a private company," says a BAe spokesman. BAe notes that in July the governments concerned agreed that the projected EADC should be a unified company, run by a single management, with a wide shareholder base similar to that of any British public limited company. "All governments have signed up to this," says one BAe source.

Company insiders say that while on the surface little progress has apparently been made France is, in fact, indicating a preparedness to move towards the same ownership structure for its industry as BAe and Britain's Rolls-Royce. In these, government retains a so-called "golden share" which enables it to veto decisions thought to compromise national strategic interests. It is also thought likely that France, again like BAe and Rolls-Royce, would safeguard national interests by limiting non-French ownership of privatised industry to 49.5 per cent of the total equity.

The notion that France, albeit slowly, is moving towards a structure for its industry akin to those of Britain and Germany appears borne out by Nov. 10 announcements that Dassault Aviation is to be merged with Aerospatiale and that the state stake in the combined entity would not exceed 48 per cent, this perhaps eventually reducing to around 15 per cent.

But not all sources regard an Aerospatiale/Dassault merger as being necessarily aimed solely towards European industry consolidation, regarding it as a means of improving France's internal industrial effectiveness. Dassault's Rafale fighter is seen by a London financial sector analyst as unlikely to win export orders. This, he believes, is among the most pressing spurs for domestic industrial integration. "They've seen the light," says this source, who regards French government as "brilliant" in forcing the merger on Dassault by not placing bulk orders for Rafale.

"An essential problem with any joint venture with British, French or German involvement is that shareholders must have identical aims - or agreement on each others' aims," says this analyst. "An agreement must cover market shares, profits and employment objectives. But in any European JV you have stakeholders, not conventional shareholders, and French government objectives are not the same as those of commercial shareholders."

CAPITAL CONCERNS

The analyst says also that French government has little interest in return on capital, which it regards as cheaply-priced. He quotes the case of the Messier-Dowty aircraft undercarriage joint venture between France's SNECMA and the UK's TI Group. "TI chairman, Sir Christopher Lewinton, said that TI's capital cost 11 percent while French government's cost was 4 per cent, and that France doesn't require cash up front," says this analyst. "So there was less commercial pressure to get return on that capital, and French government had no requirement to improve that return."

But the analyst added that attitude differences had by no means been detrimental to French aerospace industry, which had become the core of Airbus. "French aerospace is run on better lines than it is given credit for," he concluded.

While differing financial attitudes views may account for dichotomies in approach between the UK and French industry, British observers are acutely aware of what may be termed as cultural differences between UK industrialists and their French counterparts. Some believe is attributable to moral arguments over whether governments should relinquish control over their defence industries. "This is fundamentally the French view," says one source. "It is part of the French psyche. There is a long-term, almost indissoluble, link between the French state, the military and its defence industry."

Yvonne Headington of the London-based consultancy Defence Research & Analysis says that arguments between the different approaches are well-balanced. "It depends on which side of the Channel you sit and to which philosophical tradition you belong," Headington says. "But economic elements are now forcing France to adopt a new viewpoint."

 

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