Defense Industry Restructuring and the Implications of the ESDI

Dr. Giorgio Zappa
President, Alenia Aerospazio (a Finmeccanica company)

CURRENT INSTITUTIONAL INITIATIVES TO REINFORCE NATO’S EUROPEAN PILLAR

In Washington and Koln, significant steps have been taken to both adopt common security capabilities and work toward stronger cooperation between NATO and the EU, which are both committed to enlargement. At the NATO Summit in Washington, the Defense Capabilities Initiative was launched as a means to ensure the effectiveness of multinational missions in today’s security environment. Five areas of focus were identified that resulted in 58 requirements across the spectrum of NATO operations. Some of these requirements relate to the development of European security.

In Europe, several undertakings (the Organization for Joint Armament Cooperation [OCCAR] and the signing of a Letter of Intent [LoI] by the six Defense Ministers of the main European arms producing countries—Germany, France, Spain, Italy, U.K., Sweden—to encourage the industrial restructuring in Europe) are close to becoming operational. However, a further political push is needed to put into effect an industrial policy aimed at improving competitive conditions. But such conditions must not lead to a Fortress Europe against a Fortress America. Transatlantic relationships must consist of multiple areas of competition, cooperative programs, as well as a continuing flow of sub-systems and components from both sides.

Attention now needs to be focused on the debate about whether EU institutional mechanisms should be applied to defense. For example:

• Should we adopt flexible convergence criteria for defense spending like the criteria applied to the Monetary Union?
• Should strengthened cooperation in some areas of common security be a goal of the leading nations?

Attention must also be focused on reducing the number of overlapping competencies and organizations in order to avoid any stalling.

The overall outlook for making European defense effective appears promising. A great effort is being made by European governments to adopt measures that will facilitate mergers, rationalize demand, and harmonize export rules and investment planning. We are looking forward to the Feira European Council meeting where we hope further strengthening of European security will take place.

FINMECCANICA AND EADS: A EUROPEAN RESPONSE TO RESTRUCTURING

The topic I am discussing has particular relevance to Italian industry following the decision made by Alenia Aeronautica to strategically link up in Europe with EADS. This move was intended to open new perspectives for integration in Europe and to further opportunities for future industrial cooperation.

On April 14, Finmeccanica selected the EADS offer to forge an equal partnership venture in military aeronautics. This partnership remains open to further developments and is responding to the requirements for parity rights, full coverage of items, progressive industrial integration in Europe, and autonomous decision making within a number of collaborative programs.

As a major consequence of the agreement between Alenia Aeronautica and three European companies, European restructuring has now moved to the next phase. In fact, the remaining players (BAE Systems, EADS, and Alenia Aeronautica) are linked in a strong cooperative network and will reinforce European industrial capabilities so that we can compete in global markets.

EUROPEAN CONSOLIDATION AND TRANSATLANTIC RELATIONSHIPS

The only possible way to build an effective European military capability is with a common high-tech industry focused on defense and dual-use technologies. Such an industry will also be a useful political tool within the enlarged concept of security. This “industrial leg” should be organized in equal partnerships that can cooperate and compete on equal footing with U.S. companies, following the policy of common transatlantic strategic interests.

But how should this common industrial structure be organized for the future? To determine this, we should consider the positive EU approach to transnational aerospace mergers. However, there is no universally applicable theoretical model for mergers; each situation is unique and any solution should be based on business experience as well as on specific factors.

Mergers appear to be an adequate response to the European need to reduce the gap between U.S. and European strength in several critical technologies—technologies that are supported in the U.S. by huge government investment in defense and dual use. This imbalance must be recognized by the European governments in order to reach U.S. levels and to bring about conditions that will enable Europe to compete in world markets.

To this end, any debate on government ownership should take into account that the already limited European government presence does not influence the business-oriented way in which private companies are managed. The U.S. approach is indirect, but its strategic target is the same: the U.S. government has a fundamental role in restructuring, and spends significant amounts on procurement and R&D.

We should also take into account the point that cooperation with the U.S. could evolve. Several European-American cooperative programs already note the existence of industrial links with high “European content”:

• The military transport C27J program between Lockheed Martin and Alenia Aeronautica
• The U.S. attack helicopter Apache program between Boeing and Westland
• The missile program MEADS that involves several U.S. and European companies
• Possible developments concerning defense systems between Northrop Grumman and DASA

I would also like to note the recent pro-European decision made by the U.K. on the Meteor, whose international team includes Boeing.

CONCLUDING REMARKS

It is my belief that Europe could pursue business opportunities with the U.S. based on a more balanced partnership regarding industrial and technological involvement. A strong Europe will be a better partner to a strong America, and therefore reinforce transatlantic relations.

To implement cooperation, a more flexible approach is needed, one that will enable all partners to share technologies and sensitive product information as well as have direct access to both U.S. and EU markets based on reciprocity. Positive signals are already coming from the U.S. aimed at easing controls on technology and information transfers, and are reflected in the U.S./U.K. declaration of principles on military cooperation. But in order to play a greater role in security and to increase real military capacity, Europe must establish harmonized measures, backed by a strong commitment by its governments. This means establishing an equitable European playing field on which we work to recognize national technological capabilities and to identify each partner’s fields of excellence. This will require equitable solutions that take into account the strengths of each country. It may also require a gradual approach in which national identities coexist in a larger European framework in order to satisfy specific requirements that are part of the institutional demands of each country.