The Transatlantic Defense Industrial Base: Restructuring Scenarios and Their Implications
Authored by Dr. Terrence R. Guay. | April 2005
This monograph compares the post-Cold War restructuring of the defense industries in the United States and Europe with the aim of understanding the implications for the transatlantic industrial base. We argue that different processes of industrial restructuring and consolidation present obstacles to transatlantic initiatives, and that government policies and conflicting political visions exacerbate the opportunities for collaboration between the United States and Europe. We assess the extent to which the restructuring of the U.S. and European defense industrial bases has uprooted national champions and, assisted by global competition, provided an industrial foundation for more extensive transatlantic cooperation. We conclude by suggesting factors that will shape further restructuring and consolidation in the short- and medium-term, and making recommendations for assisting the development of a transatlantic, rather than bipolar, defense industrial base.
This monograph compares the post-Cold War restructuring of the defense industries in the United States and Europe with several objectives in mind. First, it is important to examine the process of restructuring and consolidation on both sides of the Atlantic, and the different forms that this industry has taken. This will provide some sense of the strategic visions of the private and public sectors, and the opportunities for partnerships at the corporate and military procurement levels. Second, it is necessary to learn what roles private sector and public officials have played in the restructuring process, and the extent to which U.S. and European political, industrial, and military leaders have collaborated in this restructuring process through formal channels such as the North Atlantic Treaty Organization (NATO), the European Union (EU), or bilateral relations, and informal channels. This will help us to understand the extent to which U.S. and European defense industry restructuring have been independent or mutual processes. Third, it is essential to describe the obstacles that make the armaments market significantly different than other markets for goods and services. Such political and economic obstacles in Europe and the United States go a long way toward explaining why a truly transatlantic defense industrial base has been so difficult to create. The present ?bipolar defense industrial base,? and the lack of political will to change this, is responsible for much of the ?capability gap? among NATO members. Finally, the monograph will conclude by assessing the extent to which the restructuring of the U.S. and European defense industrial bases has uprooted national champions and, assisted by global competition, provided an industrial foundation for more extensive transatlantic cooperation. It will also suggest likely scenarios for further restructuring and consolidation, particularly along the transatlantic dimension, in the short-term (0-3 years) and medium-term (4-10 years), and make recommendations for assisting the development of a transatlantic, rather than bipolar, defense industrial base.
Promoting transatlantic defense industry links is not a panacea for the larger issue of establishing a defense industrial base that can develop new technologies and sell them to the Pentagon and European defense ministries at competitive prices. That can in all likelihood be achieved more easily by opening procurement to all bidders. That means persuading the Pentagon (and Congress) to award more contracts to European firms. It also means giving the EU?s EDA real responsibilities and decisionmaking powers in procuring weapons systems for member states?a move which would curb the dirigiste traditions of certain governments. Such recommendations will face significant opposition on both sides of the Atlantic.
A possible problem for U.S. defense firms is that Bush administration foreign policy actions have caused anti-American sentiment in some markets. In Europe, countries that opposed the Iraq War will very likely opt for European-produced weapons systems over U.S. products whenever possible. U.S. laws that already strongly favor domestic defense firms now are being used by U.S. companies to fend off foreign competition.50 Sikorsky employed such a strategy in its competition with Augusta-Westland to replace the President?s fleet of helicopters. Although Sikorsky?s strategy proved unsuccessful, such tactics could prove risky if European governments retaliate by limiting purchases of U.S. defense exports. On the other hand, Control Risks, a UK-based international security consultancy, claims that U.S. defense companies were important business winners in 2003 due to the success of their products during the first month of the Iraq War.51 The lesson here is that, despite the superiority of many U.S. military items, politics may trump sound economics.
Within the EU, a growing chorus of voices is calling for a single, competitive market in armaments that is treated in much the same way as other economic sectors. As the European Commission succinctly put it, ?[T]he survival of a European defence industrial base able to support the ESDP will depend on successful national and trans-European consolidation of the industry as well as transatlantic partnerships between companies.?52 But it will be the intergovernmental Council?not the supranational Commission? that will have the final word on this subject, particularly on how ESDP will shape the EU?s relationship with NATO.
At the national level, key European governments remain relatively hostile to acquisitions by U.S. firms. For example, the German government opposes takeovers of German military vehicles? producers by U.S. companies.53 The 2002 acquisition of the German shipyard HDW by One Equity Partners (OEP), a U.S. institutional investor, led to fears of a sellout of the German arms industry. These fears were ameliorated somewhat in 2004, when HDW was merged with the shipyards of Thyssen Krupp, with OEP?s stake reduced to 25 percent. In France, partial ownership by the state and trusted shareholders (noyau dur) of defense companies makes acquisitions by U.S. firms virtually impossible. Consequently, such concerns?on both sides of the Atlantic?will be difficult to overcome in the near-term.
NATO?s position in this issue is ambiguous. Currently, the alliance plays a relatively minor role in shaping the transatlantic defense industrial base. Occasionally, NATO is responsible for awarding contracts, as it did in April 2004 when it awarded its largest defense contract in decades, a multi-billion euro fleet of surveillance aircraft, to a consortium led by EADS and that included Northrop Grumman.54 But for the most part, NATO can do little at the moment to shape corporate restructuring, except indirectly by, for example, setting weapons performance goals and interoperability standards. The more important question is whether NATO and the EU will conflict with each other over institutional mission and responsibility. At a summit in London in November 2003, Prime Minister Blair and President Chirac said a European defense policy with its own military capability was perfectly compatible with NATO.55 The concern that many U.S. policymakers have is whether an EU operationalcommand cell would duplicate NATO structures. Not only would this be a waste of the already limited budgets of European defense ministries, but it also would affect negatively NATO?s capabilities.
In any case, the outcome ultimately will depend mostly on Europe. European efforts to develop a common defense policy will have a large impact on how that region?s industry develops. If EDA is successful, for example, in procuring common weapons systems from European arms producers, it will be difficult to break the bipolar orientation of the transatlantic defense sector. In fact, it could even put the capabilities of Europe?s defense firms on a par with the U.S. industrial base. But if the EU fails to build any substance into ESDP, and a membership of 25 countries will most certainly make this increasingly difficult, then the chances are good that European defense firms will, one by one, look to U.S. companies to help build their future.
50 Merle, ?In Defense Bidding, Yankee Doodle Does It.?
51. Stephen Fidler and Mark Huband, ?Bush Foreign Policy is Creating Risks for U.S. Companies,? Financial Times, November 11, 2003, p. 11.
52. Commission of the European Communities, European Defence-Industrial and Market Issues, p. 6.
53. Hannes Baumann, ?The Consolidation of the Military Vehicles Industry in Western Europe and the United States?Background Paper for the SIPRI Yearbook 2003,? 2004, http:// www.sipri.org/milex/aprod/mv_background.pdf.
54. Peter Spiegel, ?European-led Group to Win $4.8bn,? Financial Times, April 15, 2004, p. 1.
55. James Blitz and Robert Graham, ?Blair and Chirac in Pledge on EU Defence Capability,? Financial Times, November 25, 2003, p. 5.