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Tuesday 19 December 2017

European Defence, from a corporate view

  • European defence is naturally at the heart of the strategic thinking of European companies and is also an important element for non-European companies in the sector. But what exactly is covered by the term "European defence"? 

For a company, European defence takes shape when equipment, services or research programmes are launched jointly under the authority of a central body in order to meet the needs of several European countries that have previously coordinated their defence strategy. This definition, which is very operational if it is translated in practice, leads to a win-win situation for customer states and supplier companies. Indeed, by relying on a larger and more homogeneous market, companies are able to develop new equipment or new services at lower costs, thus improving their international competitiveness. For their part, States have free access to competitive products from a strategic industry that is secure, export-oriented and technologically advanced. The European Union has recently estimated the cost of the absence of an integrated Europe of Defence at an amount that could reach up to 45% of the annual defence expenditure of the Member States. 100 billion euros per year could be at stake. 

The truth is that, in practice, the implementation of a European defence has been laborious and still falls far short of the ideal definition. However, most companies in the sector have taken the European dimension into account when developing and implementing their strategy. Several levers are used: cooperation on research programmes (rare), joint responses to calls for tender (frequent), creation of joint ventures to serve a geographic market or develop a range of products (frequent), cross-border mergers and acquisitions (quite frequent). Their main objective has always been to minimise development and production costs under the double constraint - not always easy to comply with - of the division of pre-existing technological competences and the requirements of State location, the famous "geographical return" which proved so disruptive. However, there have been some great successes that have resulted in good initiatives, such as tactical missiles with MBDA and air-to-air and cruise missile programs. There have also been failures, either because of the inability to agree on a common definition, or because the common definition has proved to be very (too) complex to achieve, such as for the military transport aircraft. 

  • 63 years after the failure of the European Defence Community, the European Union has just given a new impetus to Europe's defence with the launch of a permanent structured cooperation, and soon, a European defence fund. What is your analysis of the issue? 

Recent initiatives seem to be moving in the right direction. A centralised authority is defined, with the European Union taking charge. The launching of a Permanent Structured Cooperation (PSC) should lead to a convergence of strategic points of view, and its industrial consequences. Finally, the European Defence Fund has significantly more resources than those of the European Defence Agency (EDA), which was set up in the early 2000s, in the image of the American DARPA. Due to a lack of resources, the EDA has not been able to generate large-scale collaborative research projects, but it has nevertheless improved stakeholders' understanding of the difficulty inherent in this type of programme.
 

  • In search of its strategic industrial autonomy, Europe will rely more than ever on defence and armament. Great opportunity or heavy responsibility for companies?  

Both, of course. This is an opportunity because the emergence of a reference market made up of credible customers will be a considerable asset in the global competition. It is also an opportunity because the institutions and tools that are being put in place will define a framework within which companies can increase the efficiency and diversity of their research by reducing unnecessary duplication. The leeway thus freed up will be used to explore new disruptive technologies. 

It is also a great responsibility for companies. They must move away from a framework of strategic reflection that includes a reference state, client for launching national programmes, and other export customers, to a much more diversified multiple universe where one of their tasks will be to inform public choices and ensure convergence compatible with industrial requirements. All this must be achieved without losing sight of the interests of traditional stakeholders: staff, shareholders, local authorities. They need to succeed. 

  • Do you think that this relaunch of Europe's defence policy will enable European companies to stand up to the American giants?

I do not think that the expression "stand up" is appropriate. The global defence industry is characterised by a mixture of cooperation and competition. The term "coopetition" is often used to describe it. The reinforcement of Europe's defence policy is, in some respects, well received on the American side. Whether it is the increase to 2% of the GNP in the defence budget or increased participation in joint actions, European efforts are welcomed. The fact that this translates into enhanced industrial cooperation between Americans and Europeans, within a well-established framework of reciprocity, cannot displease anyone, in particular when tackling new fields with a high technological content, such as cybersecurity for example. It is not forbidden to think that "cooperation" will extend over the Atlantic. 

  • In 2012, the merger between EADS and BAE Systems was compromised by the reluctance of European states. In your opinion, should European industrial cooperation be led by companies or governments?

European industrial cooperation is developed mainly, but not exclusively, at the initiative of companies, under the control of governments. Companies identify the points of convergence or divergence which are at the heart of technological choices. Good cooperation often starts with a programme of jointly developed equipment or services. However, state control goes well beyond traditional competition control. As in the United States, mergers involving foreign shareholders are subject to government approval. The availability of certain sensitive technologies is also under control. States also have an incentive power to promote certain reconciliations. This is particularly the case with the launch of particularly structuring programmes. A topical example is the UAV program.

  • European states often have different expectations and rhythms when it comes to implementing a common policy. How are defence and armaments companies evolving in a multi-speed Europe?

The principle of enhanced cooperation answers this question. Companies rely on one or more cores from several Member States that are particularly active in certain fields: land, naval or aerospace armaments. In my opinion, this is an essential element of the system put in place. It makes it possible to better define the characteristics of programmes or an activity without falling into the trap of disintegration, while remaining open because it is always possible for a Member State to join the initial team later. The "Permanent Structured Cooperation" shares the same view by inviting its members (25 member states) to converge on objectives for the defence budget and the launching of military programmes.

Philippe Camus is CEO of Keynolt Inc. He has been Executive Director of EADS (Airbus) France.

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