Shaping the Future European Defense Industry in Light of Ongoing Rationalizations
Mr. Lars G. Josefsson
President and Chief Executive Officer, Celsius AB
May I begin by extending my congratulations to the Hungarian government and to the Hungarian people for their recent membership in NATO, along with Poland and the Czech Republic. Their membership emphasizes the right of each nation to determine its security political structure.
One year ago, I had the privilege of presenting my view to this Workshop on shaping European defense industries.That view was based on the experiences of a decade of reduced tensions in the post-Cold War world and it still prevails, yet during the past year we have also experienced a war in Europe. Last years presentation focused on the topics of: overcapacity; nationally protected industries; lack of priority given to cost-effectiveness; U.S. industry as a threat; and the inefficient use of R&D resources.
This year I would like to concentrate on three questions:
- Should the defense industry operate on market conditions or through central planning?
- How can we establish an efficient multilateral method for R&D/product development?
- How can the process of establishing true cross-border companies be accelerated?
Recently the first cornerstones of a Common Foreign and Security Policy (CFSP) were inaugurated by the EU in accordance with the Amsterdam Treaty and by the decision of the member-states to appoint Mr. Javier Solana as the first Secretary General for the Unions Common Foreign and Security Policy. Since the defense industrial component is an essential part of the security policy of the Union, issues regarding the European defense industry and its future conditions are crucial.
As Europe extends south and east, it is important that no new dividing lines arise. And as the new democracies of Central and Eastern Europe focus on membership in NATO and the EU, it will be necessary to rationalize defense industries in these countries in the same way it is being done in Western Europe. The surviving parts of their defense industries, together with the rest of Europes defense industries, must focus on developing projects of mutual interest.
But how can competition be promoted not only within an enlarged Europe but also between European and U.S. defense industries? Will the new member-states of NATO turn to the U.S. or to their neighbors in Europe when they need new equipment?
The role of a sovereign and independent nation cannot be underestimated. The road towards CFSP will be very long, particularly in light of present discussions regarding future enlargement and the fact that the same issue is being handled at the U.S. federal level. What will the consequences be for small nations if British, French, and U.S. defense industries become dominant? Will existing defense industries in the rest of Europe be able to operate in free market-driven competition with these three countries? I believe that the answers rest with these three countries.
DEVELOPMENTS IN EUROPE
In the past year we have experienced a move towards a market economy. The defense industry in France is being privatized and rationalizations are completed nationally. The BAe acquisition of Marconi is another example of national consolidation, which even further underlines the importance of the independent sovereign nation. This national consolidation is also about to create two powerful centers of competence in Europe: British and French defense industries.
I would like to offer a warning, however: if consolidation goes too far, it could jeopardize the cost-efficient development of new systems. It could also make it difficult for small nations to meet demands when monopoly or oligopoly prevails.
As a result of rationalizations in Sweden, Celsius AB today represents 50% of the Swedish defense industry. Celsius AB is a high-tech system house that develops submarines, uses state-of-the-art stealth technology to build surface ships, and also focuses on missile technology, sensors, counter measures, and command and control systems for the army, navy, and air force.
We consider ourselves active in the restructuring process that is now underway in Europe. Examples of changes that have been accomplished during the past year are:
- The establishment of NAMMO A/S, a Nordic company in the ammunition field with headquarters in Norway (a joint venture of Sweden, Finland, and Norway)
- The establishment of Nexplo Industries, an explosives company with headquarters in Sweden (a joint venture of Sweden and Finland)
- The establishment of Taurus GmbH, a joint venture between DASA/LFK (2/3) and Bofors Missiles (1/3) to develop a new family of stand-off missiles.
It is my conviction that cross-border industrial cooperation is necessary in order to achieve efficient access to the market and to reach critical mass in the technological base and an increased base for product development. Overcapacity in Europe still prevails and further efforts must be made.
COOPERATIVE INTERNATIONAL EFFORTS
Sweden, Germany, France, the UK, Italy, and Spainthe countries in Europe with the biggest defense industriesare striving for a common view in such areas as security of supply, export procedures, R&D, and harmonization of military requirements within the framework of a Letter of Intent, which was signed by the Defense Ministers of these countries in July 1998. We hope that this common view will be presented by the end of this year and that this work leads to results that will facilitate the restructuring of defense industries. To proceed with constructive rationalization of the European defense industry it is important that commercially viable mergers, acquisitions, and sales of parts of national defense industries be carried out flexibly and without national obstacles.
RATIONALIZATIONS WITHIN THE U.S. DEFENSE INDUSTRY
During recent years, substantial rationalizations and consolidations have been made in the U.S. As a result advantages of scale and a focus on systems integration have taken place. Consequently, better conditions have been achieved for covering R&D costs, increased financial endurance in public procurement negotiations have been effected, and companies have improved their possibilities for allocating funding between business units with reference to demands. It is obvious that sectorial changes prevail in this rationalization process. The aircraft industry has come much further than the shipyard industry, which seems more fractionated.
In U.S. post-merger strategy, activities seem to focus on a combination of increasing market share and restructuring internal assets. Production is outsourced and the responsibility for innovation and development of components is to a large extent handed over to subsuppliers. Five key elements seem essential in this strategy:
- Integration of units to accomplish synergies and cost savings
- Focus on core businesses
- Increased concentration on export markets
- Expansion of non-defense-related activities.
I agree with what Mr. Jacques Gansler said regarding the need for rationalization and cost-efficiency. Historically, the reason for cooperation was cost-efficiency. But we have to be very careful not to cross the borderline where sufficient competition does not prevail, because then we would focus not only on the lack of innovative capability but also experience increased costs for customers and, consequently, taxpayers. In order to develop true, constructive competition we must also be aware that no Fortress Europe nor Fortress U.S.A. will facilitate it. To that end we must rid ourselves of trade barriers that cause unhealthy business arrangements.
I welcome the fact that corresponding views are entering into the European debate. Because of overcapacity we will need further restructuring and consolidation, and we must do the work in a rational way. Solutions for Europe must also contain a European element in order to produce stable and progressive European companies. We must maintain a technological edge to support our customers demands and to challenge international competition. It is my absolute belief that we must strive for a balance with the U.S. defense industry; at Celsius we consider the U.S. as one of our domestic markets.
The capability to maintain defense industrial competencies within the country gives credibility to the security policy of the country and promotes technological development. By closely cooperating with the U.S. defense industry, a high level of technological know-how can also be preserved in Europe. It will be necessary for the U.S., in its dialogue with Europe, to constructively analyze different trade barriers that could be imposed on an international company wanting to do business with the U.S.
To sum up I would like to reemphasize four important issues:
- Competition is the lifeline of all industry, including the defense industry. Through competition new technological achievements are encouraged and cost-efficient solutions are sought.
- Small and medium-sized nations must be an integrated part of the restructured defense industry in Europe. Such integration will utilize Europes entire force as well as stimulate the developing capabilities of each nation to benefit its industrial capacity.
- Competitive and viable cross-border mergers must be created in Europe in parallel with those in the French and British defense industries in order to maintain competition.
- Advanced high-tech capability is a cornerstone for cooperation and competition with the U.S. We must take active part in transatlantic industrial solutions.