Versailles 2011 05 Euro Defense 20110506 Presentation v008

8/6/2019 Versailles 2011 05 Euro Defense 20110506 Presentation v008

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2011 EURODEFENSE CONFERENCE


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ToC

Concepts and definitions (DIB, EDTIB, EDEM)

Trends about Defense budgets and the industry

EU27 vs USA gap & F+UK vs RoEU gap National budgets evolutions (incl. R&T)

Exports and the evolution of the world-wide market

Lessons learnt about Defense-related policies

LCC and international cooperation

Competitive vs cooperative learning

Focus on Offsets and contractual modes

VERSAILLESEURODEFENSE - 06-MAY-2011 2


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DIB Defense industrial base

Two reference concepts

The Demand side:EDEMEuropean Defense Equipment Market

The Supply side:EDTIBEuropean Defense andTechnological Industrial Base

The alternative:international cooperation vs. autarcy



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THE issue

A market is characterized by

Suppliers / Clients / Rules / Prices

Programs and technologies

An effective (critical) size Working about rules is important,

yet THE issue at stake dealswith the emergence of actual CLIENTS

committed to some European convergence(in the political, strategic, industrial domains, etc)and long lasting effective demand perspectives

Where are the clients? the budgets?



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Market heterogeneity

In the ASD domain,European countries separate between3 categories, depending on industrial bases and budgets:

Countries procuring ready-to-use materials withouteventually producing more than small contributions,and therefore focusing on transfers and offsets

Countries producing and procuring,and therefore interested in the preservation

of the local national industrial base (eg UK)

Countries producing without procuringbecause the local/internal market is mature/saturated,and therefore preserving the industry with exports (eg F)

EURODEFENSE - 06-MAY-2011 VERSAILLES 5


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Economic investigationsabout Defense

Lessons learnt

In all countries, Defense industry-related reformshave addressed constraints introduced:

by decreasing national budgets, and by increasing costs for Defense systems

Introducing the EDEM requires NEW budgetsthat are not covered by national + European budgets

Introducing the EDEM requires NEW rules(addressing coordination + transaction costs)

Rules do not replace budgets.

Competition is not the only reference



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Part 1



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EDEMMajor transformation since the end of the 1990ies,with significant exports

2010 figures

Annual turnover: G US$ 97 Competences: 800,000 people

(supply chain)

Combined Defense spending of theEU27 countries: G US$ 280

Source:www.asdnews.com, cf ASD Report (APR 2011)

The EU Defense Market: Industry and National procurement

!



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Transatlantic gap

2009 data appraised PPP Unit USA UE27

Total population M 307 500

GDP G 13 068 13 607

Total Defense budget G 531 188

Defense CAPEX G 159 52

Defense R&D G 74 11

Military personal k 1368 1271

CAPEX per military capita k 116 30

OPEX per military capita k 272 79

29.9% 27.7%

13.9% 5.8%

Source: MinDEF/DAF/OED -- Ann Stat de la Dfense 2009-2010



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US DoD FY2011 requests

FY2011 budget request released FEB 2011 includes:

G$733.3 for national Defense G$548.9 for the regular (non-war) operations (base budget)

G$159.3 for ongoing military operations (Afghanistan + Irak +)

G$25.1 for defense-related activities other than DoD R&D: for the second year in a row, FY11 requests decline 5.2% to G$78.0 (-G$4.3),

with the notable exception of basic research (6.1) increasing by 6.7% to G$2.0

Supplemental acquisitions totaling G$33.6 G$33 for war costs

G$0.655 for the DoDs share of the humanitarian relief operations in Haiti

The House and Senate appropriations Committeesapproved draft FY2011 appropriations bills providingrespectively G$513.3 and G$512.2 for the base budget.



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F+UK vs. Rest of EU27

2009 data appraised PPP Unit F+UK

Rest ofEU27= 25countries

Total population M 126 374

GDP G 3886 9721

Total Defense budget G 80 108

Defense CAPEX G 25 27

Defense R&D G 6.9 4.1

Military personal k 437 1284

CAPEX per military capita k 56 21

OPEX per military capita k 126 63




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CAPEX in EU27

Total Defense CAPEX in Europe

Acquisition: FR+UK = G 25 ; Rest of EU = G 27

R&D: FR+UK = G 6.9 ; Rest of EU = G 4.1

CAPEX relevant as per reference to the Europeandirectives about programs in cooperation do notrepresent important yearly amounts: EDA budget (2009): M 8.4

EDA programs (2009) (A+B+C): M 170

OCCAR programs (2011): G 3.06

[in M]: A400M (699.262), BOXER (406.524),COBRA (24.018), ESSOR (30.348), FREMM (827.972), FSAF/PAAMS(270.163), TIGER (802.177)

Our guess: this is not superior than a yearly G 4.0



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NL Defense budget 2011

Cutbacks in the Defense CAPEX amount M 810 (>70%of the 2011 CAPEX), & another M150 in the longer term

Staffs will be reduced by 30%; the number of top-levelpositions will be reduced from 119 to 80

Large OPEX reduction, e.g. in the RNL Air Force (KLu): Number of F-16s reduced from 87 to 68

The Cougar transport helicopter will be phased out

3rd DC-10 will not be taken into service

2 Ground installation defense platoons and1 Patriot battery will be taken out of service

HOWEVER the Dutch Parliament has approved thepurchase of 2 JSF test planes (costing together M270)



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The budget

gap betweenF + UK vs.Rest of EU

DefenseCAPEX



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World military expenditures

According to SIPRI, world military expenditure in 2010is estimated to have reached G US$ 1,620 (current)

This represents a 1.3% increase since 2009,and a 50% increase since 2001

This corresponds to 2.6% of World GDP



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National or regional shares of armssales for the SIPRI top 100 for 2008

Region / country # of companies Arms sales ($b)

USA 44 229.9

Western Europe 34 122.1

Russia 7 10.8

Israel 4 7.0

Japan 4 6.9

India 3 4.2

South Korea 2 1.8

Singapore 1 1.3

Canada 1 0.7

TOTAL 100 384.7Source: SIPRI



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Confrontation betweeninfluence zones where

the industry gains anaccess to reserved markets

Emerging actors do not

expect any autonomyfrom existing integrationnetworks, and relate onlyto a precise zone of

influence

Rationales for Defense exports

During the Cold war Today

Globalization of thesupply chain

International competitionoccurs now without anyreference to reserved influence zones

Emerging actorsintroduce their ownstrategy (teaming,influence zones, etc)



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Situation in civilian aeronautics

In 2007, the USA vs Europe confrontation polarizesaround champions : Boeing vs. Airbus

USA: Sikorski, GEAE, Goodrich, Honeywell, PW, Bell

Europe: Eurocopter, RR, BAE, MTU, SAAB, Mess-D, Liebherr,

THALES, SNECMA, DASS, CASA, Mess-B, Alenia, Agusta, etc

others:Elbit (Isreal), Embraer (Brazil) and Bombardier (Canada)

In 2011, emerging actors in BRIC countries havebecome effective (and aggressive) competitors

eg with single aisle aircraft: Russia: Sukhoi Super Jet-100 + Irkut MS21, UAC

India: RTA70

China: AVIC (ARJ21) + COMAC (C919)



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The industryworld-wide

competes for thesame export

markets

Military exports:Export have becomemore complex and morechallenging for theEuropean industry



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Part 2



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Towards an actual EDEM...

Competitive efficiency of the industrydepends on the access to market

Production has to generate actual profits,not only cover R&T + development costs.R&D has to be procured with specific procurementmodalities in order to securebasic research (exploration) activities

Creating the conditions of an actual EDEM requires:

the cancellation of the notion of national return

the installation of (mutual) dependencies

further restructuration in the industry



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Licensing

Co-production

Co-development

Teaming

Strategic alliances

Joint ventures

Acquisition Supply chain

International cooperation

Modalities Instances of programs (2001)

Patriot PAC-3 for German Army (LM+EADS)

Rolling airframe missile (Raytheon + BGT)

JSF

Meteor

Alliance for medium caliber ammunition

LM Alenia Tactical transport systems

LM aerospace electronics business (BAe) SAAB JAS-39 Grippen (GE-Volvo Aero) with

Honeywell, LM, Sundstrand


These cooperation modalities open the path towards

various levels of economical and organizational efficiency


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Lessons learnt:

International cooperation incurs usually: Increased life cycle costs [LCC] (+25% to +50%)

Longer time schedules; and delays

Increased difficulties for export negotiations

Improved life cycle costs (from R&T todecommission) ONLY occur when:

Diverging specifications for the program

Duplication of adm interfaces and production lines

Demultiplication of disclosure specifications andinformation sharing rules within the consortium

ARE AVOIDED.



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Strategic management ofknowledge (learning processes),Management of technologies

Characterizing the nature ofeconomic efficiency requiresfurther investigation associatedwith

Learning and innovatingWITH the partners

(cooperative learning)vs.

Learning and innovatingAT THE EXPENSES

of the partners(competitive learning)

Source:Versailles & Merindol,DPE, 2005"Transatlantic cooperationand R&D management:an inquiry into the problemof complementarities"



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Licensing

Co-production

Co-development

Teaming

Strategic alliances

Joint ventures

Acquisition Supply chain

Cooperation efficiency?

Modalities


All these cooperationmodalities may rely oncooperative learning,

or on competitive learning

International cooperationcannot be appraised

without investigating theunderlying managementof strategic knowledgeassets (incl. R&T)


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Strategic managementof knowledge

The industrial strategy dilemma,as appraised from the industry

Technology transfers relate to thedynamics of elaboration for strategic knowledge assets,and for new technologies (innovation)

If one transfers its distinctive knowledge assets,it loses sooner or later its relevance in any partnership

If one ONLY transfers the products of its distinctiveknowledge assets

(and commits to on-going R&D),then it preserves its position in the value chain,and its contribution to the partnership

There is a need for strategic knowledge mapping(cf the methodology introduced by the I-Space Institute)



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Offsets

Offsets may be understood as a way to sponsor a program, or as the initiation of win-win competencetransfers and long-lasting interactions

Sponsorshipa package added to have the bride look nicer

Lockheed F-16 deal in Poland

Transfer of competencesa long-lasting cooperation suited to tight couplingbetween complementary players

Dassault and Embraer on basis of the Mirage III export to Brazil

Boeings F-18 deal in SpainVERSAILLESEURODEFENSE - 06-MAY-2011 33


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Transaction costs

When the consortium has to manage

Asymmetric knowledge bases,

Multi-lateral roles, and

Multi-lateral responsibilities,

the governance model becomes more complex.

Such a complexity introduces delays and costs.

TRANSACTION COSTS rise exponentiallywith this complexity, and explain delays and costs.



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Transaction costs minimization

Sound programs managementrequires transaction costs minimization.

In complex programs with international cooperation,this requires a TOP-DOWN organizationteaming a governmental office with a system integrator,and their bilateral negotiations with the rest of the industry.

The governmental office is also THE client.Its authority depends on its market power

and on its (technological + managerial) competence.

The JSF program introduces a sound reference modelfor optimized governance in international cooperation(as seen from the US perspective).



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The devilis

in the detail

S&T efforts requireconsistent attentionaboutlearning processes,and contractual modes



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Conclusion



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Points to be addressed

Institutional issues

Coping with gaps (F+UK vs UE; UE vs USA)

Coping with the new aspects of EU burden sharing

Preservation of competences in the industry Architectural [ie. Integration] knowledge

Component knowledge (supply chain / subcontractors)

Introduction of an actual industrial policy

Coping with international programs (R&D / production)

Attributing precise responsibilities (State/industry)

Fostering stable anticipations on transaction costs



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Towards a cultural revolution?

A concrete COMPULSORY European preference has to be introduced (346?)

The notion of European preference does not mean

much without R&T and production budgets

Any fair return rule inside Europe has to be stopped,and replaced by a logic of complementarities that doesNOT care about mutual dependencies inside the EDEM

Governance rules and contractual modes have to be

introduced consistently with the purchasing power(R&T and production) of the States

If this revolution does not occur,the industry will seek for survival with local strategies



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MAJOR ISSUE

Preserve

individual andcollective

competences

S&Tpolicies



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Aviation Week and Space Technology,Special double issueAPR-25/MAY-02 2011

Further reading

Shi Lang [Varyag]

J-20

DF-21D

J-15



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www.opensolutions.be

www.ispaceinstitute.com

How to contact us

Dr Valrie MERINDOL

[email protected]

http://www.merindol.net

+33-0-617 09 06 43

Dr (HDR) David W. VERSAILLES

[email protected]

http://www.versailles.net +33-0-609 52 54 56

Blog: http://dwv.tumblr.com



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The European complexity

NATO

UEEDA

LoI + OCCAR

countriesrepresenttogethermore than 90%of EuropeanDefense

investments

CroatiaAlbania

NorwayTurkey

CanadaUSA

LoI

Sweden

OCCAR

Belgium

France

GermanyItalySpainUK

Iceland

GreeceLuxemburgNetherlandsPortugalPolandCzech Rep.Hungary

EstoniaLatvia

LithuaniaSlovakiaSloveniaBulgaria

Romania

Denmark

AustriaIrelandFinland

MaltaCyprus



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Air forces: Fighters

NATO

UEEDA

CroatiaIceland

NorwayTurkey

CanadaUSA

LoI

Sweden

OCCAR

Belgium

France

GermanyItalySpainUK

Albania

GreeceLuxemburgNetherlandsPortugalPolandCzech Rep.Hungary

EstoniaLatviaLithuaniaSlovakiaSloveniaBulgaria

Romania

Denmark

AustriaIrelandFinland

MaltaCyprus


Legend:

Air Defenseprovided byNATO

Fightersprocured inUSSR

or in China

Aircraft

Eurofigther

JAS39Gripen

Mirage 2000

F-16

F-18

JSF


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Retour sur les dfinitions

6.1 Basic research

6.2 Applied research

6.3 Advanced Tech Dev

6.4 Advanced Component Dev

6.5 System Dev & Demonstration

6.6 Management support

6.7 Operational system Dev

R&D

(RDTE)

R&Tou

S&T



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EU27 R&T contributors

6.1 Basicresearch

6.2 Appliedresearch

6.3 AdvancedTech Dev

6.4 AdvancedComponent Dev

6.5 System Dev& Demonstration

6.6 Managementsupport

6.7 Operationalsystem Dev

R&D

(RDTE)

R&T




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DWV&VM, 2011

Documents

Versailles 2011 05 Euro Defense 20110506 Presentation v008