International -- Intl' Business: EUROPE
EUROPE IS LOSING THE WEAPONS SHOOT-OUT (int'l edition)
On June 11, the world's arms merchants will gather for the Paris Air Show to parade their latest weaponry. But in the chalets that ring the airfields, European defense executives will probably be contemplating the future of their business with a lot less optimism than their American counterparts. Not only are Europeans losing sales to stronger U.S. rivals, but they also disagree on how to integrate their splintered defense industries to counter America's threat.
Europe's arms makers, and the defense ministries that work with them, can't afford to maintain the status quo. As global defense budgets shrink and rivals in the U.S. team up into such megacompanies as Lockheed Martin, Europe's industry is starting to look like an also-ran. Massive consolidation would boost efficiency and focus research on the most promising projects. But despite a flurry of cross-border alliances and the push for a joint arms procurement agency, full-scale mergers between defense contractors of different countries are rare. How to achieve them will be a matter of hot debate in European capitals this year.
Some mergers are occurring, but at an exasperatingly slow pace. Consider Britain's VSEL PLC. Last October, British Aerospace PLC (BAe) bid $800 million for this submarine builder, prompting a counteroffer from Britain's General Electric Company PLC (GEC). Then, the government called a truce while it spent six months pondering the takeover's effect on the defense industry. BAe and GEC got the nod to resume their fight only in late May.
Meanwhile, the warning signs are flashing. U.S. arms makers exported $11 billion worth of weapon systems in 1993, giving them a 49% share of the world market, up from just 32% in 1991. Exports by British, French, German, and Italian arms makers fell to $6.3 billion, down from $9 billion two years earlier. Operating margins of the big European companies averaged 3.7% in 1993--less than half of the U.S. average. If these trends continue, "there will be a lot more European aerospace engineers out of work toward the end of this century," predicts Keith Hodgkinson, executive research director at Lehman Brothers in London.
BICKERING OVER JOBS. The Dutch government's recent order for attack helicopters shows how slow the industry has been to match the Americans. The Dutch chose McDonnell Douglas offerings instead of the Tiger models designed by Eurocopter, a consortium of France's Aerospatiale and Germany's Daimler Benz Aerospace (DASA). The Dutch figured they would save $115 million by buying American Apaches--proven models that McDonnell knows how to produce efficiently. The Tiger, on the other hand, is in the prototype stage only.
Europe's cross-border ventures often produce other kinds of headaches. The Eurofighter 2000 consortium, made up of BAe, DASA, Italy's Alenia, and Spain's Construcciones Aeronuticas, was formed to share the costs of designing and selling a next-generation fighter. But bickering over how many jobs each country will get, plus technical delays, have pushed the commercial launch date back two years and upped its fly-away cost to around $45 million per plane, some 9% higher than the original estimate.
Frustration over such programs is fueling calls for more radical steps. Susan Willett, an economist at London University's Center for Defense Studies, figures consortiums such as Eurofighter 2000 "are merely reproducing inefficiencies that already exist on a national level." Willett believes Europe's defense industry should consolidate across national borders into a few strong players. Such consolidation would result in just a handful of megacompanies--perhaps BAe or GEC in Britain, DASA in Germany, and Aerospatiale in France. Britain's Defense Procurement Minister, Roger Freeman, recently called for British contractors to look for acquisitions throughout Europe.
Yet few countries are willing to let foreigners acquire their defense industries. More palatable is the creation of a pan-European procurement agency to make collective weapons purchases for all participating countries. Boosters in France and Germany argue that it would prod the industry to rationalize by creating a single customer, with more clout to demand the best price. The move could also force participants to buy European weapons exclusively. "One should counter the USA's `Buy American' with a consistent `Buy European,"' says Manfred Bischoff, DASA's president. "Unfortunately, this is easier said than done."
The risk exists that joint procurement--which may be years away--could end up just coddling local arms makers. In the meantime, local consolidation will probably continue. In France, for instance, the aerospace industry is ripe for teaming up, possibly between Aerospatiale and much smaller Dassault. "That's not good enough," says Tassos Philippakos, a senior aerospace defense analyst at Moody's Investors Service in New York. "[The Europeans] have to go further if they hope to catch up with the U.S." For now, Americans needn't fear a new offensive from Europe.By Julia Flynn in London, with Linda Bernier in Brussels, Marsha Johnston in Paris, and Peggy Salz-Trautman in Bonn