Defence industry fights for its future

As the Americans consolidate, Europe's arms manufacturers are staking all on the Eurofighter. Reed Landberg reports

Lockheed Martin's announcement last week that it is buying Northrop Grumman for $11.2bn completes a four-year frenzy of mergers and consolidation in the US defence industry that has left European industry executives frustrated that its own inevitable shakeout has yet to start.

After Lockheed's purchase is complete, it will command $37bn a year in sales - more than the combined turnover of British Aerospace, Daimler Benz, Aerospatiale, and GEC-Marconi and Thomson-CSF.

It's a statistic that petrifies European executives.

"The latest mega-fusion underlines the urgency for a restructuring of Europe's defence and space industry," said Manfred Bischoff, chief executive of Daimler-Benz's Dasa aerospace unit. "We must act as quickly as possible."

The US consolidation was government sponsored. Four years ago, the US defence secretary William Perry gave industry executives an ultimatum: "We expect defence companies to go out of business, and we will stand by and let that happen."

The problem, as he saw it, was that too many companies were chasing ever- fewer defence dollars. The message was clear: consolidate or go to the wall.

Within the industry, that meeting has since become known as "the last supper". The problem is that the European defence industry hasn't yet had its "last supper".

The tough talk from Dasa highlights industry's frustration with governments that are reluctant to allow closer partnerships and even whole mergers in the weapons business which is still splintered across regional boundaries.

For Europe, the latest battleground is the small but agile warplane, the Eurofighter. The $60bn procurement is the biggest single manufacturing project on the continent, and the focus of Europe's national defence contractors' ability to work together.

Conceived in 1983 as a single solution to replace ageing Tornado and Jaguar jets in Italy, Germany, Britain and Spain, Eurofighter is ready to enter the manufacturing stage where 629 planes will be made for the nations' air forces.

The programme has had its difficulties. France quit in 1985 after determining the plane would be too big to land on its aircraft carriers. Then in 1992, Germany threatened to quit unless major cost cuts in the process could be made.

Now, though, the UK, Italy and Spain are ready to proceed with Eurofighter by the end of this month. Germany is the last of the four remaining partners to signal political support needed for production to begin at British Aerospace, Daimler-Benz Aerospace, Alenia of Italy and Casa of Spain.

And Chancellor Helmut Kohl's cabinet is likely to approve funding for the aircraft next Friday when the current year's budget is reviewed, analysts and politicians have said. Should the defence ministry win its DM47m (pounds 16 million) budget request, the political path through the parliament to final approval would be clear. Manufacturing could begin next year.

And so the pressure is on. Executives, political leaders across Europe and even unions are calling on Germany to move forward with this project, calling it critical for the consolidation of the region's defence industry.

"The whole aerospace program is at stake," said Ingrid Lullmann, who represents the unions IG Metall, DAG and CGM at Daimler-Benz in Germany. "If this project is not carried out successfully we will no longer have any aerospace business to take seriously."

The project is so important that Dasa has offered early repayment of DM1bn of loans it received from the government for its unrelated Airbus manufacturing businesses. Talks are still in progress, though this measure may be the one that allows a cash-strapped German treasury to pay for Eurofighter even as it trims spending to meet criteria for a single regional currency, the government's top priority.

Outside Germany, the Eurofighter is seen as as a symbol of the future of the region's aerospace industry. It's one of the few key projects in which rival national defence contractors work together.

At BAe and Dasa especially, executives so fear the likes of Boeing and Lockheed Martin that they're anxious to press ahead with mergers of national defence businesses. For all the companies of the region, scarce defence funds are chasing too few projects.

Where the US currently has only two major warplane procurements under way, Europe has three: the Eurofighter, the Saab Aircraft-made Gripen and Dassault Aviation SA's Rafale.

Europe has four tank programmes against one in the US and 11 missile makers competing with four in the US. All those programmes in Europe share total defence spending of about $130bn a year, less than half the US budget. Executives see this can't continue.

"What we need are true European joint ventures," said Bischoff at Dasa. "We have no time to indulge in the favourite game of Europeans, which is who dominates whom."

Eurofighter is an obvious solution, the companies say. It combines the resources of four nation's defence budgets and defence industries into a single plane that each of them need. In the face of this logic, though, European governments have frustrated industry with their own sluggish pace of approving such reforms.

At Airbus Industrie, the most successful joint European program to date, French, German and British officials are quibbling over how to reform the commercial jetliner maker into a single entity.

Work on the Horizon frigate being built by the UK, France and Italy has stalled on a dispute over the missile system. And the Future Large Aircraft, a military cargo transport, remains an aeroplane only on paper while governments refuse to front $4.5bn for development.

Even the Eurofighter, conceived in 1983, has frustrated industry. Dasa in Germany threatened to pull out of the project earlier this year unless the government sent it a "clear signal" soon that manufacture could begin on time. It complains it's spending DM1m a day on preparations for the plane that it still might never build.

"We can't bear much longer the costs of preparation without concrete orders," lamented Juergen Schrempp, chief executive of Daimler-Benz, at the company's annual meeting in Stuttgart in May.

If Eurofighter doesn't go ahead, executives like Schrempp could lose faith in other projects, such as Airbus' plan to spend $9bn building a new double-decker jumbo jet to better compete with its arch-rival Boeing.

More important is the Eurofighter's necessity to defence companies in Europe already struggling to make ends meet. Since the Berlin Wall fell in 1989, military budgets across the North Atlantic Treaty Organisation have fallen by a quarter.

Industry needs the work on the plane to support about 300,000 jobs across Europe. And even without this plane, air forces in the four nations will need a fighter to replace aging aircraft now nearing the end of their lives.

If it's not the Eurofighter that European nations buy, the alternative will probably be one made in the US by the likes of Boeing and Lockheed Martin.

That threat alone is perhaps the most potent incentive to push the project forward, especially for union leaders like John Deans, the convener at BAe's Warton warplane factory in the north of England.

"If we are not careful we'll be handing over the defence of European skies to the United States," Deans said.