KNDS Holds Steady as Rheinmetall Looks to Join
(Source: Forecast International; issued Jan 25, 2019)
NEWTOWN, Conn. --- Despite the formation of the cross-border KNDS (KMW + Nexter Defense Systems) venture, not much has changed at Nexter or Krauss-Maffei Wegmann. But things are starting to accelerate in European land systems as Rheinmetall looks to maintain its leadership.

Nexter and KMW successfully merged into a new Franco-German consortium in 2016 following years of discussions. The merged firm is now based in Amsterdam, with each partner holding a 50 percent stake in the umbrella company. However, both Nexter and KMW have maintained their individual corporate identity, capabilities, and products.

KNDS's portfolio includes Germany's Leopard 2 and France's Leclerc main battle tanks, artillery systems, ammunition, and a range of wheeled vehicles. The operation is now the third-largest military land systems contractor in the world, behind General Dynamics and BAE Systems. KNDS employs around 7,300 workers and has a backlog of approximately EUR9.2 billion ($11 billion), with turnover of around EUR2.7 billion ($3.2 billion). As mentioned, both "subsidiaries" - KMW and Nexter - have been operating very independently of one another.

That may be about to change as KNDS gradually begins to combine its operations. Areas such as sales, communications, purchasing, finance, products, engineering, and production are being examined with the goal of boosting revenue and limiting costs. Still, the company said in a statement that the merger process does not involve any restructuring, as both firms are profitable, with strong order books.

Initially, KNDS will foster cooperation on export sales and joint development of new weapon systems. The goal of such an effort is to explore opportunities for providing systems to Nexter and KMW's home countries and abroad while not negatively impacting the partners' current programs. The present separate-but-together structure will likely run for several years as both firms deliver on current commitments to their customers. But as new systems are developed and produced by the shared organization, the ownership structure of KNDS will likely shift - probably in the form of a public offering.

While the impetus behind the KNDS merger is sound, execution will be critical to its success. Officials have talked of creating an "armored Airbus," but care must be taken to avoid the messy governance of earlier cross-border merger efforts such as EADS (now Airbus) and MBDA. So far, the management team has been taking measured steps that should provide a stable transition to a single entity in the years ahead.

An interesting development in the formation of a European land systems giant began to emerge in late 2018, when Rheinmetall announced its interest in taking a stake in KNDS. Rheinmetall has long been a rival of KMW in its home market of Germany. In fact, the formation of KNDS was pursued because KMW feared being diluted in a tie-up at home with Rheinmetall, a company almost twice as large as Krauss-Maffei Wegmann.

Now that the AFV (armored fighting vehicle) industry consolidation is shifting to a more international scale, Rheinmetall is looking to expand its coverage. While talks with KNDS are underway, Rheinmetall has already announced plans to expand its operations via a majority-owned joint venture with BAE Systems. The new U.K.-based military vehicle design, manufacturing, and support business would be known as Rheinmetall BAE Systems Land.

The goal of a potential Rheinmetall/KNDS venture would be similar in scope. The key to efforts such as these is to diversify offerings - especially in the growing services and support sector - in order to score wins. While all of the partners have been rivals at one time or another, the mantra now appears to be: It is better to share the pie rather than try to eat all of it.

One of the difficulties confronting these tie-ups is the potential for job losses. France reportedly faced significant pressure to protect Nexter's workforce in the lead-up to the KNDS formation. Likely as a result of this, the operation has adopted a dual-CEO management structure, with one CEO from France and the other from Germany. It is an odd structural choice considering that EADS/Airbus Group tried such a format in the past and ultimately eliminated the dual position, opting instead for a traditional lone CEO.

Regardless of the merger, both nations are, for the time being, interested in maintaining control over armored vehicle production. As such, operational integration will probably occur more at the management level than in the factories themselves. For now, each nation will keep its operations intact, acting as subsidiaries of the new KNDS. Going forward, the situation will likely change once everyone has had a chance to become accustomed to the nature of the cross-border firm.

With tensions in the world high, thanks to conflict in the Middle East and in Ukraine, the opportunity for armored vehicle sales has increased. In addition, both France and Germany are investigating updates of their current armored systems, which should put KNDS in a solid position to fulfill any new requirements

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