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Mergers in the European defense industry.

Mergers in the European Defence Industry

Big Is Beautiful -- Even Bigger May be Better

The urge to attain "critical mass" appears to have become irresistible in many sectors of the West European defence industry, particularly electronics, missiles and aerospace. Spurred by the approach of the 1992 Single European Market, the trend is increasingly characterized by cross-border mergers.

These marriages will, it is hoped by the smiling grooms - if not by all the brides - produce offspring of sufficient size to compete on equal terms with the giants of the US defence industry. For their core business, the newly formed enterprises hope to win the lion's share of post-1992 defence contracts in Europe, with growth to come from significantly increased market shares in the US and, to a lesser extent, the Pacific Rim.

With the sudden thaw in East-West relations, however, and the dramatic cuts in defence budgets now planned on both sides of the Atlantic, the new European elephants may turn out to have been ill-conceived. A smaller number of large corporations are now going to be chasing a smaller number of generally smaller contracts. And, even after the new European elephants have gone through their birth pangs of internal restructuring and cost-cutting, their overheads are going to be as monstrous as their size. If defence contracts continue to be awarded on a piecemeal basis by individual nations, therefore, some of them will hardly be worth competing for by the new elephants.

The US giants, in the words of General Dynamics President Herbert F. Rogers, can "shrink or grow as the defence budget shrinks or grows". European employers, on the other hand, are under far greater constraints when it comes to laying off hundreds, or even thousands, of skilled workers and experienced executives, in order to remain profitable.

There are two possible solutions to this dilemma for the new European elephants: to convert many of their defence activities to the civil sector; or to use their new weight to press for real standardization of defence equipment throughout the Western alliance, including France and the US, with multi-national procurement of identical systems. Previous efforts in this direction have failed for a variety of reasons. Now, however, it is in the interests of both the budget-strapped defence ministries and the defence industry itself.

The fly in the ointment of this solution is the US Congress. It has always been highly protective of US industry, and pork-barrel politics is still very much the order of the day: witness the reinstatement of budget lines for the V-22 Osprey and the F-14D fighter, against the wishes of the US Department of Defense. In the present climate, the US defence industry is going to be fighting for its life just as much as the Europeans.

To force the US door open, therefore, the new European elephants are almost certainly going to have to forge much closer links with their US counterparts, possibly growing even larger in the process. If this is allowed to work both ways, it will have the highly beneficial effect of destroying once-and-for-all the concepts of Fortress America and Fortress Europe.

If this does not happen, European defence ministries will soon find themselves in a very uncomfortable position. In seeking bids for, say, new combat aircraft, major [C.sup.3]I systems, longrange SAMs or fire-and-forget anti-tank missiles, they could easily be faced with only one viable European proposal, versus two less costly, off-the-shelf alternatives from the US. If the decision has to be to "buy European", on political grounds, it will be in the interests of neither the military users nor the European taxpayers.

Heard this before somewhere? Yes, you have. But this is a new football game. The goal posts have just been moved.
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Title Annotation:prospect of shrinking defense budgets means industry must change
Author:Furlong, Robert D.M.
Publication:Armada International
Article Type:editorial
Date:Dec 1, 1989
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