Europe Defense Firms Feel Pressure To Unite

PARIS - Defense-industry executives in Britain, France and Germany said they agreed broadly that Europe's leading contractors should merge into a single company to survive, though any agreement is far off.

No contracts have been signed nor have any preliminary agreements been drawn up about how exactly Europe's defense industry should restructure to cope with a roughly 25 percent decline in defense spending across the continent.

Even so, executives with British Aerospace, Daimler-Benz and Aerospatiale each said they agree their companies must eventually combine into one to survive bruising competition from the likes of Lockheed Martin and Boeing in the United States. Agreement or not, though, there are huge stumbling blocks before such an entity actually forms.

"There is now a broad commonality of view among industrialists that there is a need to create one major consolidated company," John Weston, managing director of BAe's defense wing, said at an aerospace conference in Paris. "There is little clarity as to the form such a company might take."

The remarks come less than a week after Yves Michot, chairman of Aerospatiale, said the partners in Airbus, a European commercial plane-making consortium that includes BAe, Dasa and Aerospatiale, each want to form defense alliances similar to the structure of Airbus. Overseeing both Airbus and the defense alliance would be a single over-arching entity for the whole of Europe.

BAe and Dasa executives said the Spanish, Swedish and Italian industry could be brought into the group in a second wave.

Political difficulties

While industry leaders are united about what ought to be done, government leaders in the major nations also must agree, and that may prove difficult.

In France, for example, the new socialist-led government formed after elections on June 1 has publicly questioned the value of selling state-run companies, something the German and French companies see as a precursor to reform.

Even if the French government isn't on board with the industrialists, the nation's industry put itself on record yet again as backing reform.

"There are very strong arguments for creating this single European aircraft corporation as quickly as possible, which is our position at Aerospatiale," said Jean-Louis Fache, executive vice president of strategy at Aerospatiale.

For years, European industrialists have praised the need to form cross-border alliances and even mergers of whole companies to cope with lower defense spending and more wily U.S. rivals.

To date, though, only small ventures on specific projects have emerged.

Now, the industry's leading executives are beginning to make more specific noises about what ought to be done.

Weston and his German counterpart suggest the first wave of restructuring should include a merger of the top prime contractors in defense - BAe, Daimler-Benz, Aerospatiale and Dassault Aviation.

`Trailblazers'

"France, Germany and Britain can be the trailblazers in the process," said Wolfgang Piller, a board member of Dasa. "They form the largest European markets and they are the nucleus of the Western European aerospace industry."

That's where the agreement ends, though. Piller, pointing out the French government's reluctance to shed its stake in state-owned defense companies, said governments of the region must drop their role in the industry.

"Governments have to see the fundamental necessity of privatization . . . and be willing to forgo their influence," Piller said. "Public and private shareholders are committed to different aims. And so there are bound to be conflicts."

At BAe, Weston spelled out details about exactly what his company would like to see. The company, he said, must have a scale comparable to U.S. companies such as Lockheed Martin and Boeing and must have independent managers to respond to demands of the market. The new entity also must have the confidence of financial markets, suggesting an entity floated on a stock market.

His comments suggested a new urgency pushing forward reform across the industry, even outside the U.K. that's traditionally been leading the push for change. Europe, with defense spending of $125 billion a year, is supporting three times the number of contractors on less than half the budget of the U.S., he said.

"Building a strength in Europe will make us more attractive partners for the U.S.," Weston said.