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Center for Strategic Decision Research


Defense Industry Restructuring and the Implications of ESDI/DCI

Dr. Thomas Enders
Executive Vice President and Member of the Executive Committee,
European Aerospace and Defense Company (EADS)

ESDI has been a continuing theme of discussion for the Alliance throughout the 1990s. Unfortunately very little serious action or effective implementation has come from this decade of talk by European governments as well as countless conferences and various initiatives. It took the conflict in the Former Yugoslavia, and particularly the Kosovo war of 1999, to shake up European decision makers and initiate meaningful efforts towards structural reform and joint military planning and forces (“separable but not separate from NATO,” as Lord Robertson aptly said). However, whether we have already passed the “point of no return” in our work towards a fully fledged ESDI—leading eventually to joint military forces and joint decision making on war and peace—remains to be seen. Clearly, until 1999 and Petersberg, the ESDI glass was not even half full.


In industry, we can observe the political corollary to ESDI that is being reflected by the aerospace and defense industry’s discussion about restructuring, consolidation, and “Europeanization.” With the end of the Cold War, the demise of the Soviet Union, and the ensuing rapid decline of Western defense budgets, the need for consolidation has become increasingly apparent to defense companies. National consolidation and sector-specific joint ventures were the first response to this challenge. In view of the defense market and political fragmentation so typical for Europe, these were rather low-risk options. However, they still managed to yield significant economic benefits. But by 1996, in view of the mega-mergers in the U.S., it was clear to European industry leaders that national consolidation and joint ventures were inadequate counters to the competitive challenge being posed by U.S. industry.

The impetus Kosovo brought to ESDI parallels the same impetus the Boeing-McDonnell Douglas merger of 1996 brought to the consolidation of the European aerospace and defense industry. By mid-1997 the major aerospace and defense companies—BAE, Aerospatiale, DASA, and CASA—were discussing full-merger scenarios.

By the end of 1997 the concept of a big multinational aerospace and defense company, titled EADC, was endorsed by three heads of government—the U.K., France, and Germany—and in March 1998 industry presented a blueprint for such a company. Because French industry was handicapped by state ownership and fragmentation, BAE and DASA took the lead and tried to form a nucleus for EADC.

Although this effort failed in early 1999, it triggered a wave of consolidation in the ensuing twelve months starting with BAE-Marconi, Aerospatiale-Matra, DASA-CASA, and finally DASA-Aerospatiale-Matra-CASA in December 1999. Within a one-year period six major aerospace and defense companies consolidated into only two, BAE Systems and EADS, with the Italians entering into joint ventures with both.

What I wish to point out from this short history of ESDI and EADC is that defense and aerospace industry consolidation is clearly ahead of political consolidation, or ESDI. I would therefore argue that it is not just ESDI that carries significant implications for the defense industry, but also the advanced status of industrial cross-border consolidation, particularly in the aerospace sector, which in turn impacts the formation of ESDI. Put militarily, industry is increasingly operating on the “inner line” vis-à-vis its fragmented national customers.


I do not wish to argue that industry would like to perpetuate this state of fragmentation. In fact, the contrary is true. Industry can fully exploit the economic benefits of cross-border consolidation when national customers harmonize their military requirements and procurement policies to the maximum extent possible.

In this respect, the initiative by six European Defense Ministers two years ago to elaborate a Framework Agreement for such harmonization, intended to pave the way for cross-border consolidation of the aerospace and defense industry, has been very encouraging. What has been less encouraging is that we are still waiting for this agreement, and the slower pace of such harmonization compared to that of industry is clearly disappointing.

Industry and governments are moving at different speeds toward “Europeanization,” and this poses a risk to multinational companies such as EADS. It is also detrimental when governments, for purely domestic reasons, try to turn back the clock of European harmonization and claim that national regulations, for instance, in the export field, should prevail over European regulations. Such behavior is damaging to industry and should not be tolerated by other European governments.

So you may be sure that in the future EADS will be at the forefront of the fight against national parochialism whether this be in export or in industry-related areas. For European governments to call for cross-border consolidation and then to subject the resulting integrated company to different regulations in their respective countries is counterproductive to both industry and government efforts.


But what about transatlantic cooperation, embodied in initiatives such as DCI and in particular projects such as MEADS? Are they being facilitated or jeopardized by the industrial consolidation taking place on both sides of the Atlantic?

As much as ESDI and NATO are meant to be complementary, so should European and transatlantic industrial cooperation be. European governments have to decide where they want to develop and procure autonomous capabilities and where cooperation with the U.S. enhances Alliance cohesion, interoperability and provides the best value for the money.

Currently, industry on both sides of the Atlantic is stepping up its search for viable transatlantic business cases. (Example: NG-DASA.) “Fortress Europe” is certainly the last thing we have in mind. Rather, a pragmatic “cooperate and compete” approach—prevalent amongst U.S. companies—will come to characterize the transatlantic business relationship—provided the U.S. Administration and Congress fully embrace the concept of partnership with Europe and reform their overly rigid export and technology regimes accordingly. The late May speech by Secretary of State Albright in Florence and the recent conduct of the U.S. Department of Defense regarding MEADS provide at least some hope.


To sum it up, what does industry need from ESDI and European governments in order to be successful and to deliver better value for the money in the future?

  • Harmonization in as many areas and amongst as many countries as possible. The Framework Agreement needs to be signed soon, and detailed follow-up action in the areas addressed should ensue without delay. If a six-way approach proves impracticable, two or three “core countries” should take the lead.
  • European governments should identify in which areas they want to procure autonomous (ESDI) capabilities and in which areas they prefer transatlantic cooperation. BMD and AGS might fall into the latter category.
  • The six-nations Framework Agreement needs a complementary bilateral Transatlantic Framework Agreement between the EU and the U.S. The current bilateral approach and the “categories concept” of the U.S. administration are placing European nations and industry at a disadvantage.

ESDI can become effective only if it is backed by viable and competitive defense industries. On the other hand, European defense industries urgently need an agreed-upon political framework to be able to restructure successfully, to operate profitably, and to provide a credible and strong backbone for a common European security and defense.

Providing the necessary political basis is, however, far too important a task to leave to individual governments and their primarily domestic agendas. Europe needs to drive this process—could the High Representative of the EU for CFSP and the WEU Secretary General perhaps take on this role?


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