European Defense Market Integration: The Aerospace Sector in 1987-1999

PhD dissertation defenseby

Sorin Lungu(March 29, 2005)

The Fletcher School of Law and DiplomacyTufts University

Agenda

• Objectives & relevance• PhD dissertation structure• Analytical framework• Interview sources• Conclusions• Future research agenda• Q&A

Objectives & relevance

Objectives: • Examines to what extent the EU, industry, and leading national

governments contributed to the consolidation that happened in Europe’s defense and aerospace sector in 1987-99, while examining the role that perceptions of “economic security” played in this process.

• Indirectly, it addresses the great question of whether the creation of the EADS was EU (national governments and/or the Commission) driven, or if it was the industry that actually spurred the event.

Objectives & relevance

Relevance:

• Explores the changing patterns of governance in Europe’s aerospace and defense sector since the end of the Cold War.

• Investigates which factors and actors were the most influential in this process, and why.

• Evaluates what political, industrial, economic, and technological circumstances enabled certain actors to bring about the consolidation.

• Assesses whether the corporate sector played a catalytic role in speeding up the dynamics of change and integration in European defense industrial policies.

• Concludes by reflecting to what extent Europe had by the end of the 1990s the competitive and defense technological base that might lessen the risk of a fracture in transatlantic relations.

PhD dissertation structure

• Literature review (cross-disciplinary analytical framework)• “Economic security” and the European aerospace and defense sector in

1987-99• Power, techno-economics, and transatlantic relations: Airbus Industrie,

Galileo and the European RMA in 1987-99• Corporate strategies, financial performance, and relations with the national

governments from the late 1980s to the mid-1990s: DASA, BAe, Aérospatiale, Dassault Aviation, and the Matra-Lagardère group

• “EADC is dead, long live EADS!” – the European aerospace and defense sector in 1996-99

• Analytical conclusions (the newly emerged pattern of governance in Europe’s defense and aerospace sector in 1987-99) and future research agenda

Analytical framework

“The restructuring of the European [defense] industry is far from being a simple pro rata adjustment of supply to changes in demands arising from objective changes in the security environment. It is inextricably bound up with the development of institutions, policy paradigms (in both the military and the industrial domains), business networks, and relationships between companies and governments.”

John Lovering, “Which Way to Turn? The European Defense Industry After the Cold War,” in Anne Markusen and Sean Costigan, eds., Arming the Future: A Defense Industry for the 21st Century (New York: Council on Foreign Relations Press, 1999), 342.

Analytical framework

A redefined post-Cold War relationship

among technology, economic security & international affairs

“Dual-use” technology, strategic industry &

strategic trade policy

Structural power &international state-firm

bargaining theory

Transnational networks &corporate governance

THE EUROPEAN AEROSPACE

& DEFENSE SECTOR (1987-99)

Technology, economic security & international affairs

INTERNATIONAL STRATEGIC

ENVIRONMENT

INTERNATIONAL STRATEGIC

ENVIRONMENT

POST-COLD WAR TRANSATLANTIC SECURITY &

ECONOMIC RELATIONS

POST-COLD WAR TRANSATLANTIC SECURITY &

ECONOMIC RELATIONS

MILITARY TRANSFORMATIONS

(CAPABILITIES & RMA)

MILITARY TRANSFORMATIONS

(CAPABILITIES & RMA)

ECONOMIC, TECHNOLOGICAL & DEFENSE INDUSTRIAL FACTORS

(“DUAL-USE” INDUSTRIES, TECHNOLOGY POLICIES & CORPORATE STRATEGIES)

ECONOMIC, TECHNOLOGICAL & DEFENSE INDUSTRIAL FACTORS

(“DUAL-USE” INDUSTRIES, TECHNOLOGY POLICIES & CORPORATE STRATEGIES)

Relevant factors in assessing shifts in transatlantic relations during the 1990s

Technology, economic security & international affairs

EXTERNAL DIMENSIONDominate “cycles of national

innovation” in “leading sectors”

EXTERNAL DIMENSIONDominate “cycles of national

innovation” in “leading sectors”

DOMESTIC DIMENSIONDevelop “hegemonic potential”

and “effective military capabilities”

DOMESTIC DIMENSIONDevelop “hegemonic potential”

and “effective military capabilities”

Rand Corporation’s view of new generators of national power in the post-industrial age (2000)

Structural power & international state-firm bargaining theory

“… [It] is the power to shape and determine structures of the global political economy within which other states, their political institutions, their economic enterprises and (not least) their scientists and other professional people, have to operate … Structural power, in short, confers the power to decide how things shall be done, the power to shape frameworks in which states relate to each other, or relate to corporate enterprises. The relative power of each party in a relationship is more, or less, if one party is also determining the surrounding structure of the relationship.”

Susan Strange, States and Markets (New York: Basil Blackwell, 1988), 21-22.

Structural power & international state-firm

bargaining theory

Security

Credit

Production

Knowledge/Technology

Structuralpower

Structural power & international state-firm bargaining theory

Government-GovernmentGovernment-Government

Strange’s and Stopford’s “triangular diplomacy model”

Adapted after Figure 1.6 presented in Susan Strange and Michael Stopford (with Michael Henley), Rival states, rival firms: Competition for world market shares (Cambridge: Cambridge University Press, 1991), 22.

Company-CompanyCompany-Company

Government-Company

Government-Company

Structural power & international state-firm bargaining theory

Lawton’s “pentagonal diplomacy model”

Adapted after Figure 2.1 in Thomas Lawton, Technology and the New Diplomacy: The creation and control of EC industrial policy for semiconductors (Aldershot: Ashgate Publishing Company, 1998), 18.

Firm-FirmFirm-FirmEU Commission-

FirmEU Commission-

Firm

State-FirmState-Firm

State-StateState-State

EU Commission-State

EU Commission-State

Transnational networks & corporate governance

International technology strategic alliances (1987-1999)

25 26 45 54 41 56 37 37 52 45 38 38 110

100

200

300

400

500

600

700

800

900

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Year

Num

ber

Total

Information technology

Biotechnology

New materials

Aerospace and defense

Transnational networks & corporate governance

CHARACTERISTIC “Anglo-Saxon” type “Continental European” type

Dominant orientation Capital markets Networks

Ownership Widely spread and public Concentrated and private

Influential stakeholders Shareholders and senior managers Banks, trading partners, employees, and governments

Flexibility in respondingto economic and political change

Capital and labor markets well structured for a rapid response

Capital and (rigid) labor markets not well suited for response

Principal objective To align the interests of shareholders and managers

To achieve continuity and mutuality of all stakeholders' interests

“Anglo-Saxon” vs. “Continental European”corporate governance

List of interviewed people

GERMANY

• Dr. Hans Ruehle (former Minisiterialdirektor and Head of the Plannungsstab, German MoD in 1983-92; and former Head of the NATO MRCA/Tornado Agency).

• Dr. Thomas Enders (VP Defense and Civil Systems, EADS).• Hans Olaf-Henkel (former President of the Federation of German Industries between 1995 and

2000)• Werner Dornisch (Head of Berlin Office of Diehl Stiftung & Co, member of the Board of Directors

of Diehl Gruppe)• Vice-Admiral Ulrich Weisser (retired, German Navy – former Head of the Plannungsstab,

German MoD in 1992-98).• Dr. Hans-Heinrich Weise (Ministerialdirektor, Abteilung Ruestung, German MoD).• Peter-Wolf Denker (Head Political Affairs Germany, EADS).• Joerg Leister (Head Berlin Office for Political Affairs Germany, EADS)• Stefan Hess (Head Space and Defense Section, German Aerospace Industries Association) • Dr. Holger Mey (President Institute for Strategic Analysis, since Summer 2004 VP EADS

Germany – Defense & Security Systems)

List of interviewed people

FRANCE

• Patrice Hummel (VP Policy & Strategy EADS Hq).• Admiral Jean Betermier (retired, French Navy - personal adviser to the CEO of EADS).• Ingénieur Général de l’Armement Alain Crémieux (retired, French Armament Agency, former

Armament Attaché in London and Washington, former Armament Counselor to the French Ambassador to NATO)

• Dr. Christian Harbulot (Director of l'Ecole de Guerre Economique and one of the persons which was very active in redefining the concept of economic security in France in the post-1990 setting).

• Patrick Barraquand (VP Marketing Eurocopter, EADS).• Dr. Jean-Paul Hebert (a well respected French academic in the field of defense industrial issues

from CIRPES).

List of interviewed people

OCCAR • Stephen Logan (Program Coordination and Prospective Cooperation Section Leader).

NATO • Robert Gregory Bell (NATO Assistant Secretary General for Defense Support). • Richard Williams (Head PfP Coordination and Support Section -- Armaments Planning,

Programs and Policy, Defense Support Division). In 1992-96 was the Head of the Defense Cooperation Section at the U.S. Embassy in Paris.

• Diego Ruiz Palmer (Head, Council Operations Section -- Crisis Management and Operations Directorate). In 1991-97, he led the Armaments Planning Section, responsible for the harmonization of the defense procurement plans of the Alliance member nations. Served in 1997-99 as Head of the NATO Armaments Review Task Force, aimed at reforming armaments cooperation processes, and as Chairman of the review's civil and military working groups. In 2000-01 was International VP Central and Southern Europe, Northrop Grumman International.

• Bob Reedjik (Head Planning and Policy Section -- Defense Support Division). • Michael Ruehle (Head, Policy Planning & Speechwriting Section -- Political Affairs Division).• Captain James Moseman (U.S. Navy - U.S. Mission to NATO). Currently Director, Europe and

NATO, Northrop Grumman International.

Conclusions – “New BAe”/BAE Systems (January 1999)

“New BAe”

Thompson-CSF

DassaultIndustries

STN Atlas

Thompson Marconi Sonar

GTDARRadar

Dassault Aviation

Saab

Aérospatiale Matra

Matra BAeDynamics

Airbus Industrie

EuropeanAerosystems

Alenia Marconi Systems

AleniaAerospazio

DASA CASA

EurofighterEuroradar

Matra Marconi Space

LFK

49%35%5.8%

49.9%

50%

33%

50%

20%

12%30%

37.9%

20%

50%49%

50%

38%

37.9%

70%

33%

33%

4.2%

Conclusions – EADS (November 1999)

Daimler-Chrysler

French pooling company

SOGEADE(Société de Gestion de

l’Aéronautique, de la Défense et de l’Espace)

Holdingcompany

Public

EADS(Dutch NV)

All figures after flotation and capital increase (summer 2000) and SEPI sell downAll figures depending on size of capital increase( ) = shares in EADS NV

SEPIFrench private

financial investors

LagardèreSCA

SOGEPAFrench state-owned aerospace holding

company (including Aérospatiale’s shares)

45.8%(30%)

8.4%(5.5%)

45.8%(30%)

13%(3.9%)

37%(11.1%)

50%(15%)

34.5% 65.5%

Frenchprivate investors

50%(15%)

Conclusions – Aérospatiale Matra (February 1999)

AérospatialeMatra

DassaultAviation

AérospatialeAirbus

AérospatialeATR

Eurocopter

SOCATA

Maintenance poleSOGERMA Matra Nortel

Communications

MatraMarconiSpace

Airbus Industrie

GIE

ATRGIE

Employeesabout 2%

Stock marketabout 17%

Lagardère SCA33%

French state48%

Matra BAe Dynamics+ Aérospatiale Missiles

EUROMISSILEGIE

EUROSAMGIE

Space and strategic

launchers

Systems poleMS&I, MDS and

ISTI

45.76%51%

100%

50%

100%

100%100%

100%

100%

70%

50%

33.3%

33.3%

37.9%

Arianespace

15.2%

50%

shareholders pact

Conclusions

Company/Criteria(Year 1999)

Boeing Lockheed Martin EADS

Total sales $58 billion $23 billion $22 billion

Profits $2.3 billion $0.382 billion $0.94 billion loss

Civilian/militaryproduction mix (%)

60/40 10/90 76/24

Main products Commercial planes

Military systems Airbus & helicopters

Conclusions – The new pattern of governance in Europe’s aerospace & defense sector (1987-99)

Politics

The decreasing role of the European nation state in the international/European economy

The increasing power of “national industrial champions” and supranational/transnational organizations like the European Union (in particular the European Commission).

o What is the object of European integration – to set up a rival to the United States or a partner in its global hegemony?

The “Europeanization” of the aerospace and defense industry influenced certain operating parameters of the transatlantic relationship.

Conclusions – The new pattern of governance in Europe’s aerospace & defense sector (1987-99)

Markets

“The trade-defense” linkage is identified as an area of great concern in Europe since the mid-1990s.

The defense market becomes a global one.

The representative European companies seek to transcend their national origins and to maneuver for survival and supremacy in a global arena.

They try to make themselves still larger and reap the economies of scale by purchase or merger or, failing these, by joint ventures, alliances, and partnerships.

Conclusions – The new pattern of governance in Europe’s aerospace & defense sector (1987-99)

Firm strategies

The internationalization of technology and economy leads to the lessening of state control and increasing privatization measures.

European arms companies are no longer “workshops” for national armed forces but corporations driven by market imperatives (the technological race with the U.S.).

The representative European companies seek to transcend their national origins and to maneuver for survival and supremacy in a global arena.

Conclusions – The new pattern of governance in Europe’s aerospace & defense sector (1987-99)

Firm strategies

European aerospace & defense firms try to make themselves still larger and reap the economies of scale by purchase or merger or, failing these, by joint ventures, alliances, and partnerships.

Increasingly powerful European companies determine in a substantial manner the ways of restructuring, while the respective national governments underwrite their strategies and decisions.

Conclusions – The new pattern of governance in Europe’s aerospace & defense sector (1987-99)

Finance

• Aerospace and defense firms are increasingly affected by the globalization of finance

– Forced to open to privatization and became dependent on the international mobility of the capital.

• Shareholder value and profit maximization establish themselves as “buzz-words” (in particular after the mid-1990s) in Europe’s aerospace and defense sector.

• The control of Europe’s aerospace and defense sector passes into the hands of a very few, but large companies who are overwhelmingly private.

• The preservation of the French state’s interests in the aerospace and defense industry relies increasingly on the interlocking of cross-financial links between the key players of the French armaments system and substantially less on the ownership of defense companies by the state.

Conclusions – Ownership in the French aerospace & defense sector (2000)

Thompson-CSF(electronics & satellites)

DassaultAviation

(combat aircraft)

SNECMA(aero engines)

Aérospatiale Matra(commercial aircraft, helicopters,

missiles & space)

Alcatel(telecommunications & satellites)

Lagardère SCA(media, publishing &

communications)

French state

47%

4%

33%

46.7% 6%

16%

40%

98%

Conclusions – The new pattern of governance in Europe’s aerospace & defense sector (1987-99)

Technology

• The aerospace and defense sector becomes directly concerned and affected by internationalization of technology and economy.

• The European nation state’s ability to manage military and commercial technology in the context of the U.S.-promoted RMA is heavily challenged.

– Moreover, EU members’ do not undertake impressive efforts for acquiring those capabilities that would allow them to project military power globally in competition with the U.S. (not least for the costs associated with doing so).

• By the end of the 1990s there was no coherent EU-level response to the “dual-use” technology paradigm.

Future research agenda

• Dissuasion in the transatlantic allied context since the end of the Cold War?

– Did European elites take the deliberate decision to trade-off military capability for economic competitiveness?

• To what extent, and in what circumstances, is parity or inequality in technological and industrial capabilities a significant factor in the health of a long-term political partnership?

– To examine the extent to which the degree of parity or inequality in technological and industrial capabilities (in both the military and civilian sectors) has become politically sensitive since the 1980s for the transatlantic relationship.

Q&A