Fleet-footed firms tip the transatlantic balance: Fragmentation of European market has delayed restructuring, writes John Eisenhammer

WHILE there has been talk for years of moving towards a pan- European armaments industry, the reality remains that of segregated markets highly sensitive to the needs of maintaining independent national champions. This has encouraged a growing tendency to cross-border hand-holding, but few full- blown takeovers or mergers.

The European country whose defence industry has faced post-Cold War financial pressures most akin to those in the US is Germany. Sales in the sector over the past four years have been halved, as defence procurement was slashed, prompting a reduction of the industry's workforce from 280,000 to 140,000. If the trend in the defence budget is not reversed, the Federation of German Industry predicts the workforce could shrink to under 100,000.

By means of cutbacks and diversification, Deutsche Aerospace (Dasa) has reduced the share of defence in its total sales from 49 per cent in 1991 to 29 per cent.

'A big problem for the German firms is their dependence on the local market, and government spending, because of the country's highly restrictive export policy. This has increased the readiness for manufacturing alliances with the French, as in helicopters or missiles, so the products can be exported anywhere through France,' says Professor Wolfram Funk of the Military University in Hamburg.

A recent parliamentary report in France forecast that the national defence industry, on a good scenario of steady sales growth, will lose a further 60,000 jobs over the coming years, while a poor scenario of strongly declining sales could boost the loss to 130,000. But even though the French industry has been shrinking like everywhere else, it has so far escaped the the sort of ferocious budget cuts meted out in Germany or the US.

'We are still looking at medium-term real growth for the defence sector. None of the big firms is facing the sort of financial pressures to give up its independence,' says an analyst with Societe Generale in Paris.

In most of France's key defence areas, there remains a doubling up, such as Aerospatiale and Dassault in aerospace. So far the preferred approach to market pressures has been limited industrial collaboration, such as helicopters between Dasa and Aerospatiale, or missiles between France's Matra and British Aerospace.

In common with the experiences of most competitors, European defence firms have found the oft talked-about conversion of weapons production into civilian manufacturing to save jobs has promised much and delivered little.

'Outside of electronics and optronics, conversion has been exceedingly difficult. The defence firms are too specialised, the transformation is costly, and the civilian markets saturated,' said Professor Funk.

Instead, firms like Dasa have chosen to diversify, buying in civilian activities while cutting back defence.

But even though the job losses have been big, there should be no undue pessimism about the state of the European industry, according to Digby Waller, defence economist at the International Institute for Strategic Studies in London. 'If you look at sales, rather than employment, the decline is not as great as some believe. Defence remains a very strong industrial player in all the big European countries,' he said.

Because of the national divisions within the European market, Mr Waller said the industry's future would largely be shaped by governments. 'By their procurement policy, they will decide whether they want firms to stay independent, merge, or go under,' he added.