Battleground Italy and the Future of the European Defence Industry

M47. “Battleground Italy” and the future of the European defence

industry

by Jestyn Cooper

Progress towards consolidation in the defence industry can be viewed as a broad spectrum, with the rapid emergence of pan-European consortia in missiles and space at one end, and a resolute grouping of nationally-ordered shipbuilding firms at the other. Dominating the ‘middle ground’ are the two recently formed, aerospace-based conglomerates, BAE Systems and European Aeronautics Defence and Space (EADS). The process of rationalisation which last year created these remains far from complete.

In one sense, there are financial and legal issues which remain unaddressed, such as the formal name-change for the ‘new BAe’, and the listing of EADS as a private company in its own right. More significantly, though, the successor companies have now turned their attentions, perhaps decisively, towards the Italian arena. The privatization of Finmeccanica could well represent the ‘final prize’ in what has been a long-running saga, before Europe’s defence companies attempt to seize upon the opportunities presented by their counterparts in the United States.

The Italian conglomerate has long-recognised that, under prevailing market conditions, continuing independence is no longer a realistic option, and has sought instead an aerospace-focussed partner of a similar size and outlook. Indeed, Finmeccanica chose early last year to pursue Spain’s CASA, rather than accept offers to join with BAe, DaimlerChrysler Aerospace (DASA) or Aerospatiale Matra. With the former now unified with Marconi’s defence business, and the French, German, and Spanish interests combined within EADS, the Italian government’s announcement that it intends to halve its stake in Finmeccanica in June 2000 would appear to leave the company with only limited options.

At the heart of Finmeccanica is Alenia Aerospazio, which has substantial operations involving civil and military aviation, and space systems. The company is a leading manufacturer of trainers, military transports – the C-27J is currently produced under a joint venture with Lockheed Martin – and the AMX light combat aircraft. Alenia is also a major sub-contractor to Boeing’s civil aircraft programmes. Other firms in the conglomerate include Agusta, the helicopter contractor, and Fincantieri, a shipbuilding and naval systems house.

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It is Alenia, however, which specifically interests both BAE Systems and EADS. These firms, and their constituent parts, are already extensively inter-connected.

· Alenia Marconi Systems, under the auspices of the ‘new BAe’, will soon merge its missile business with those of both Aerospatiale Matra, and Matra BAe Dynamics, to form a company which is intended to offer more substantial competition to the world’s leading missile manufacturer, Raytheon.

· Alenia Spazio, the space systems division, are due to join Astrium, the pan-European consortium created by DASA and Matra Marconi Space.

One further aspect of these complex relationships involves civil aviation, in which ATR, a producer of turbo-prop regional airliners, is also jointly owned by Alenia and Aerospatiale Matra.

Alenia’s greatest appeal, however, lies in its involvement with the Eurofighter programme. The Italian firm holds a 19 per cent stake, which when transferred would ultimately give control of the project to either BAE Systems (who currently hold a 37 per cent stake) or EADS (presently 44 per cent, through the combined shares of DASA and CASA). The recently announced decision by the Hellenic Air Force of its intention to purchase the Typhoon has provided additional impetus to this contest.

In attempting to lure Alenia, EADS have concentrated on Finmeccanica’s traditional preference for 50:50 joint ventures. This arrangement formed the basis of Alenia Marconi Systems, ATR, and European Helicopter Industries, the last of which links the businesses of Agusta and GKN Westland. The ‘joint venture route’ would probably be used to merge Alenia and EADS as a pre-cursor to the formation of a European Military Aircraft Company. However, such an arrangement would almost certainly be contingent on the involvement of Dassault, a company with sizeable civil and military aircraft operations, and part-owned by Aerospatiale Matra. Their potential role in the ‘grand European plan’ has proven one of the great imponderables of defence consolidation in recent years.

More recently, as the competition with BAE Systems has intensified, it has been speculated that EADS will “likely include not only a 50:50 joint venture with Alenia Aerospazio, but also a Finmeccanica stake in EADS”.

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Certainly, BAE Systems has conceded that it cannot match the joint venture proposal, given the disproportionate size and scale of the two businesses. Instead, they have opted to play upon developing Alenia’s interests in the US, and other non-European markets. The Italian firm has strong ties to both Lockheed Martin and Boeing, and BAE Systems’ bid for the former’s Aerospace and Electronic Systems division would therefore appear especially timely. In addition to this, the acquisition of Marconi’s defence operations added Tracor’s US-based defence electronics business to the British company’s portfolio.

BAE Systems is also likely to have brought the Joint Strike Fighter programme to the negotiating table. While Alenia want to become involved as a sub-contractor, the Italian government, in the words of their defence attache in Washington, increasingly seek to participate “to the maximum extent possible”. It is this mutual trans-Atlantic orientation that would appear to favour BAE Systems, a company that derives just one-third of its sales from Europe - compared to a total of around one-half for EADS.

Aside from the markets it serves, BAE Systems is also far more diverse than its continental counterpart. Whereas EADS exists largely on the basis of revenue from civil aircraft manufacture, most particularly from Airbus, ‘new BAe’ have expanded from a military aircraft ‘core’ to encompass a broader range of work in the systems integration area, with operations covering land, sea, air, and space. At one stage, earlier in the year, it was speculated that the company might form an alliance with Thomson-CSF, to further underline the scope of work in which Alenia might participate. As a result, BAE Systems have been able to present itself as “a controlled empire builder with global ambitions”.

The future of the Airbus programme itself adds one further dimension to the pursuit of Finmeccanica. Italian officials and industrialists have made no secret of their desire to participate (despite Alenia’s ongoing work for Boeing), and yet EADS have remained suspiciously quiet on this issue. Perhaps they are afraid of over-playing their hand; BAE Systems could ultimately exercise its veto to prevent the formation of the long-sought Airbus Integrated Company, a move which in turn would greatly undermine the floatation of EADS. Such a development would appear, though, to be highly unlikely. Instead, the offer of selective involvement in future Airbus projects, including the A-3XX, will probably be extended by both of the groups vying for Finmeccanica’s attention.

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Alongside the commercial logic, there are important political issues to be resolved. To join EADS would serve to further demonstate Italy’s commitment to Europe, something which has long been hinted at by their participation in a number of high-profile collaborative military equipment programmes. Such a move would also place both Alenia and the government firmly in the ‘European camp’ at any future negotiations regarding enhanced trans-Atlantic defence co-operation. However, this would inevitably create a situation “dangerously close to creating the two defense (sic.) fortresses many have feared”.

A decision on the future of Finmeccanica in general, and Alenia Aerospazio in particular, is believed to be imminent. The share of the conglomerate that is held by the Italian state, through the IRI holding company, is due to be reduced from 63 per cent, towards just 30 per cent, as of June this year. The listing of EADS as a private firm, registered in the Netherlands, is expected at the same time, effectively giving rise to a late May deadline for a final announcement on the issue.

Alenia’s destiny is far from clear. Whereas ‘The Times’ concluded in January that the company’s “close working relationship with BAe on Eurofighter has left the British firm the favourite to win this contest”, just one month later, ‘The Independent’ asserted that BAE Systems, “looks likely to be outgunned by the Franco-German-Hispano grouping”.

The outcome will either validate the European, politically-driven logic of continental consolidation, or will instead promote growth through the pragmatic pursuit of business in the United States. While this will not be the last round of integration, it will nevertheless serve to clarify and conclude upon the momentous changes that have been witnessed in Europe’s defence industry over recent years.

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The views of the author are his own. The UK Defence Forum holds no corporate view on the opinions expressed therein. The Forum exists to enable politicians, industrialists, members of the armed forces, academics and others with an interest in defence and security issues to exchange information and views on the future needs of Britain’s defence. It is operated by a non-partisan, not for profit company.

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