Controlled ‘Europeanisation’? The KMW–Nexter Merger and the Germany’s New Strategy for the Arms Industry (excerpt)
(Source: Centre for Eastern Studies (OSW); issued Aug 27, 2015)

By Justyna Gotkowska
On 29 July a deal was signed in Paris concerning a merger between Krauss-Maffei Wegmann (KMW), Germany’s largest manufacturer of tanks, infantry fighting vehicles and artillery systems, and its French counterpart Nexter. The new holding formed as a result of the merger will be Europe’s largest producer of arms systems for land forces, comparable to the Airbus Group in the aerospace industry.

While work on finalising the merger was underway, the German government was developing a new strategy for Germany’s arms industry, which was published on 9 June 2015. The strategy’s provisions show that German politicians, despite holding negative opinions on previous mergers between German arms companies and foreign businesses, have concluded that consolidation at the European level is nonetheless the only way to go.

However, the strategy also states that the German government should exercise more influence than previously on the terms and conditions of any such consolidation. To this end, it identified key national technologies which will be supported and protected through various instruments, including also the conclusion of intergovernmental agreements on strategic defence co-operation.

Such agreements may regulate questions such as the ownership structures of the new companies, the locations for developing technologies and for manufacturing products, subcontractors and exports of jointly developed arms and military equipment. In relation to the KMW–Nexter merger, such a deal between France and Germany is expected to be signed this autumn.

The lie of the land

Germany has a strong, state-of-the-art arms sector: according to SIPRI figures, in the years 2010–2014 the country ranked as the third-largest exporter of arms and military equipment globally, along with France and China (and after the United States and Russia), which each have a five-percent market share).

Most defence contractors in Germany are private companies that are exclusively German-owned. They hold well-established positions as manufacturers and exporters of systems for land forces and navies. Duopolies of large companies operate in these two sectors. Krauss-Maffei Wegmann (KMW) and Rheinmetall Defence manufacture tanks, infantry fighting vehicles, armoured personnel carriers and artillery for land troops, while ThyssenKrupp Industrial Solutions (TKIS with the ThyssenKrupp Marine Systems/TKMS industry cluster) and Lürssen Defence manufacture boats and warships for the navy.

Germany’s medium-sized arms companies include Heckler&Koch (small arms), Diehl Defence (guided missiles and air defence systems), MTU Aero Engines and MTU Friedrichshafen (engines and propulsion systems), and there are also many small- and medium-sized subcontracting companies that occupy leading positions in their respective niche military technology fields, manufacturing subassemblies for the aerospace and shipbuilding sectors as well as land systems (OHB, Rhode-Schwarz, Plath, ESG, Atlas Elektronik).

So far, ’European’ mergers have taken place in Germany’s aerospace industry and, partly, in the missile systems sector. Opinions in Germany of the European consolidation projects undertaken so far are negative.

The wave of consolidations in the Western European arms industry in the beginning of the XXI century led to the creation of the EADS concern (2000), which manufactures aircraft and helicopters for the civilian and military markets (formed as a result of a merger of companies from France, Germany and Spain; the company was renamed Airbus Group in 2014) and the establishment of the MBDA group (through a merger of companies from France, the UK, Italy and Spain in 2001, joined by German LFK in 2005).

Both concerns are present in Germany through the manufacturing plants of the Airbus Group divisions (Airbus, Airbus Defence & Space, Airbus Helicopters) and an MBDA subsidiary (MBDA Deutschland) which manufactures guided missiles and air defence systems. However, opinions of these mergers, especially in the case of Airbus Group, are negative, as German politicians openly admit.

One problem concerns the fact that major Bundeswehr’s procurement projects implemented by EADS/Airbus Group (the A400M transport aircraft, the NH90 and Tiger helicopters) have been delayed by several years as a result of difficulties in managing the ‘European’ company and in the decentralisation of production (in addition to the diversified and changing national specifications).

Moreover, both the company’s headquarters and its technology competence centres have been moved from Germany to France in recent years. The German government, which holds 12% of shares in the company (as does France) refused to authorise its further ‘Europeanisation’ in 2012, i.e. the planned merger with the UK’s BAE Systems. It feared that the merger would have brought a further marginalisation of the German production plants within EADS/Airbus Group and a weakening of the market position of other German defence companies (KMW and Rheinmetall Defence) due to possible better access of BAE Systems products to European markets.

The German government could prevent the merger because of its stake in EADS/Airbus Group, but Germany also has other instruments to control the ownership structures of the country’s private arms-producing companies. In particular, these include the requirement, provided for in the law on foreign businesses, to obtain the consent of the Federal Ministry for Economic Affairs and Energy before any takeover of some or all shares in a German defence company by a foreign business.

It was probably on this basis that the German government blocked the sale of the ‘military’ assets of the ThyssenKrupp Marine Systems (TKMS) to the UAE’s Abu Dhabi MAR fund in 2011, only allowing the fund to acquire the company’s ‘civilian’ and foreign assets. (end of excerpt)

Click here for the full story, on the OSW website.


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