Economic Implications of European Security: The Future European Defence Industrial Base
Mr. Lars G. Josefsson
Chief Executive Officer of Celsius
Celsius Corporation today is the 14th largest European defense company. Our goal is to grow and to place ourselves among the top 10. This is a challenging undertaking at a time when most countries are downsizing their military forces. I am convinced, nevertheless, that we will achieve our goal.
To maintain and improve our competitiveness we must not only accept the changes occurring throughout the world but also try to influence those changes and their different prerequisites. This calls for flexibility and keeping the clock from being turned back. We should see changes not as a threat but as a challenge full of possibilities. Industries must prove their viability in times of turmoil, a fact that is the essence of a free market.
In the 1997 EU document Realization of the Unions Strategy for the Defense Industry, the European Commission states that it is urgent to push for a European defense industry strategy so that we can keep and improve the levels of competition and competence.
But how? That question is not answered.
The Commission report does say, though, that about 70 percent of the selling of defense material comes from space and electronic industries. However, much of the value added behind the different weapon systems and other defense material comes from small- and medium-sized companies.
In the European debate it has been emphasized that centers of excellence under the umbrella of a European-wide corporation should be developed. I do not believe, though, that creating giant corporations covering everything from missiles and aircraft to electronics is the only wayor the best wayto meet the challenges from and be on a par with the United States.
It should be stressed that there are many governments that are reluctant to buy from foreign companies or to harmonize their procurements. In addition, where defense companies are in the public sector, it can be difficult to create a cross-border merged company that will be financially attractive to private shareholders.
We also have to recognize that there are European defense companies, of which Celsius Corp. is one, that currently have substantial business interests in and trade with the U.S. Some of these companies may not always share the enthusiasm for future large-scale European rationalization, since this could hamper future prospects for trade and collaboration with the United States. It is also interesting to study what is happening in the U.S. After a decade of mergers the government and the Congress have started to question the industry consolidation that is creating private monopolies. And yet despite consolidation, as was stated in the Financial Times, the U.S. defense industry now employs 400,000 more people than in 1987.
PROBLEMS OF THE EUROPEAN DEFENSE INDUSTRY
It is the objective of the European defense industry to offer high-technology, cost-effective equipment at competitive prices. However the industry faces a number of problems in that regard:
- There is over-capacity.
- The industry is nationally protected.
- Cost effectiveness has second priority.
- We are too occupied with looking at the U.S. industry as a threat.
- R&D resources are used inefficiently.
In order to fix these problems, I believe that three key issues must be addressed. First, Europe has to decide whether to follow the road of central planning or market economics. Second, a method for effective multilateral R&D/Product Development must be established. Third, the process of creating true cross-border companies must be accelerated.
CENTRAL PLANNING VERSUS MARKET ECONOMICS
I do not think that a centrally planned defense industry is the way to maintain and develop a modern, efficient, and competitive industry in Europe. I am afraid such a solution would be counterproductive and widen the gap between the American and the European defense industries. Centrally planned industries have never been able to compete. They have never proved to be efficient and I do not believe that the formation of a European Armaments Agency would be an effective way to manage common activities.
I am concerned that various representatives in Europe believe that the solution is a centrally planned defense policy, with only one supplier and one acquisition agency. I do not believe in such a solution. Historically, centrally planned economics have proven inefficient, often resulting in the need for heavy governmental subsidies.
Furthermore, the independence of small nations can be at risk if they can choose only between one U.S. and one European solution. In the U.S., questions already have been raised regarding the value of large mergers as the number of competitors decreases and monopolies occur. Europe should learn from this situation and avoid encouraging European monopolies within the defense sector. From a small nations perspective, this kind of solution could also reduce the options for cross-border cooperation, be it in Europe or in the U.S., simply because you must contribute to be an interesting partner and thereby receive something in return. Market economics presume that having many customers and many suppliers is the key element for creating competition and ensuring the effectiveness of the system. Europe has to find ways of developing along this route.
The cost of defense systems is largely determined when the requirements of the system and the system design have been set. By determining costs in this way, Sweden has had striking financial efficiencies (approximately a factor of 10) in international comparisons in such areas as intelligent artillery ammunition BONUS and the new heavyweight torpedo Tp 2000.
This area is the key to developing the competence needed for the future. As warfare heads quickly in the direction of the intelligent battlefield, future security clearly requires more investment in such development. I believe the U.S. currently outspends Europe three to four times over when it comes to R&D/Product Development.
Sweden believes that to engage in technological cooperation a country must have a high level of national competence and technological know-how. Only countries and companies with such competence and know-how will find qualified partners. In other words, it is an absolute prerequisite to be strong at home if you want to collaborate in the field of technology. In this regard, Sweden has been not only a recipient of technology in the defense sector but also a contributor to it. A conscious national investment in technological competence can lay the foundation for future strategic alliances.
To me, R&D/Product Development has great potential to increase European efficiency. European investment in this area should preferably be made multilaterally, avoiding duplication where possible, and should be based on the principle of national sovereignty. I also think that national investment in this area should be made inor flow back tothe particular country. This is important not only from the point of national security, but also for the development of the national high-tech industry base. To encourage initiatives and create a spirit of competition on the customer side, I think it is also important that countries that undertake a specific initiative be given the lead role in the execution of joint projects. This will minimize the need for large central agencies in Europe.
A market-driven focus on multilateral R&D/Product Development will inevitably lead to a more integrated European defense industry structure. Such a structure is the basis for cross-border companies, as complementary skills surface and in-depth knowledge between cooperating industries increases. Cross-border companies are needed in order to eliminate the present overcapacity and to maintain competitiveness. But the process of cross-border consolidation is very slow. In my view this is a result of the game of dominance played by both governments and companies. To me the question of central planning versus market economics has to be clearly answered before the process can be speeded up.
However, there have been some recent successes, one of which is the announcement of an agreement among Celsius, Raufoss of Norway, and Patria of Finland to create a joint ammunitions company. This company will be one of the largest European companies in the field of small- and medium-caliber ammunition.
Speaking from Celsiuss point of view, I believe that in order to have a viable defense industry capability in Europe you have to have at least a few competent industries within each sector, perhaps with the exception of advanced aircraft. Competition is a prerequisite for maintaining a technological edge. We should therefore welcome competition from the U.S. that focuses on future developments in and production of defense equipment. I have proposed that the Nordic countries reserve 1% of their defense budgets for multilateral Nordic R&D/Product Development projects in order to stimulate defense industry cooperation as well as increase the efficient use of respective budgets. Such action will be possible if governments are prepared to invest jointly, give initiating nations the lead role as well as a commitment that a fair return will be given on the R&D money they invest, and support the national defense and industrial capability. I am happy to say that the Swedish Defense Commission this spring emphasized that a viable European defense industry is essential for cooperation with the U.S. and to assure European freedom of action.
To conclude I want to state that Celsius intends to stay in business as one of Europes leading defense industries. We look forward not only to competition but also to cooperation with governments and defense industries in Europe and in other parts of the world.