European military defense : who’s running the show?

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Across all industries, we can observe the same tendency to restructure on a large scale, and hyper-concentrations occur. The aggregations lead indeed to synergies and are a source for cost efficiency. This trend gave birth to chemical behemoth DowDuPont in the US, and the optics super-giant EssilorLuxottica in Europe, both resulting in billions in savings. This is particularly true in “sovereign” industries, whose guaranteed cash flow frees their hands to focus on industrial efficiency – namely in the armament industry.

The defense industry is no exception to the trend

Europe has been providing us with a clear materialization of this phenomenon. In recent decades, big industrial names have dropped off the radar, as market leaders gradually absorbed their competitors. Italian manufacturer Fincantieri, though it still does participate in some military programs, has virtually withdrawn from the market. After having produced leading designs, such as the Audace class destroyer, in the 1970s, Fincantieri must now partner with one or several defense companies in order to partake in defence contracts, after having virtually disappeared from the military market. In order to take part in the FREMM warships and Horizon frigates, for instance, Fincantieri had no choice but to partner with Naval Group, a full-sized military integrator. Reporting on one of the US Navy’s latest orders, naval specialist Edward Walsh writes: “Shipbuilders Fincantieri Marinette Marine and Austal USA continued to build littoral combat ships. Fincantieri is teamed with Lockheed Martin for the Freedom LCS variant (odd hull numbers). Austal, teamed with General Dynamics, builds the even-hull-numbered Independence variant to a trimaran design.” A similar trend occurred with the formation of EADS, by BAe Systems and Airbus, itself already a European merger. As such, and it must be chalked up to their credit, these industrial fortresses have indeed enable European industries to stay afloat, or even lead, in highly competitive markets. However, what satisfies the private interests of companies does not necessarily suit a nation’s security needs, as profitability and sovereignty must not be conflated.

In addition, this tendency to concentrate greatly increases the weight of industries, and can give a feeling of impunity, lawlessness or dominating position to armament firms, who will pay little or no heed to their government’s needs or orders. Indeed, with fierce competition on the market, between Arquus, Nexter GD, BAE and KMW, business pressure amounts to a far greater force than governmental regulations. In 2019, German military manufacturers are suspected to have simply disregarded the arms embargo on Eritrea, by accepting an upgrade contract on warships, despite Eritree being suspected of supporting terrorist organizations (article here, in German). With a balance of powers in their favor, large defense firms can be tempted to disregard their own state and focus on making profit. This does not serve national interests. Should these firms merge, European powerhouses would make far greater sense than national ones, as they would combine the virtues of competition and positions strong enough to address global competition. As a counter-example, the Eurofighter entered history as a lengthy and costly program, as it had been protected from competition. The race between Safran and Ixblue, on the other hand, enabled the fitting of state-of-the-art inertial measurement units onto FTI frigates, at a competitive price.

Financial concerns don’t necessarily serve the actual purpose of defense capacities

Armament is needed to protect the integrity and sovereignty of nations, and Europe is no exception in this matter. The European Union has been pushing towards a more integrated defense scheme, and will be unable to drive strategies in this direction if individual armies march at the beat of the industrial firm’s drum. Increasingly, defense firms are able to pass deals as they please, with governments having little or no say. Globes journalist Assaf Uni reports on a 2018 drone deal, in which German parliament member Fritz Felgentreu “nevertheless anticipates no political problems in getting the current government to approve the deal. “If the contract with Airbus and IAI is written and signed according to the definitions appearing in the coalition agreement, there will be no problem with its approval in the German parliament.” Firms say jump, and governments ask “how high?”.

Non-european special interests creeping in

This creates two distinct sources of risk, both of which unacceptable to sovereign nations. The first is the arrival of foreign capital within defense firms. If the foreign capital is European, then the risk is acceptable. Even a reasonable share of extra-European capital would be acceptable and non-damaging to European interests, but it opens the risk of creeping takeovers. Indeed, super-mergers require cash, and will be tempted to acquire it anywhere – China? Russia? The US? This danger is particularly pervasive, as the nationality of a company can be appreciated in many different ways : headquarter location, capital origins, nationality of shareholders, etc. General Dynamics European Land Systems (GDELS), for instance, is technically a European firm, but with entirely American capital – and so the question stands as to whose sovereignty it serves. German Rheinmetall is also penetrated with roughly one third of America-owned shares, and therefore under heavy transatlantic influence.

Making defense markets just another cash-cow

The second risk is the inversion of the balance of powers.  As industries concentrate, governments lose their ability to use competition and make sure engineering firms design what they truly need: with only one supplier, governments will buy whatever the defense firm has chosen to produce, regardless of price or relevance to their needs.

There is sense in concentration, clearly, as larger players in the game can increase their capacity to rationalize programs, and not simply duct-tape weapons components together. But a balance must be found, as the United States achieved in recent decades: today, 5 large defense firms serve the American market, after years of concentration. Other such examples can be also found in Europe, namely in naval markets. In March 2020, Defense Post reported: “France and Italy signed an intergovernmental agreement (IGA) reaffirming full support to Naviris, a joint-venture (JV) between France’s Naval Group and Italy’s Fincantieri. This new agreement makes the long term alliance launched by these two major industrial groups fully operational”, illustrating how two large firms can cooperate on defense programs, without one absorbing the other. 

Competition is essential, especially on strategic markets such as defense firms. If it disappears, de iure or de facto, firms will impose prices and programs, and the sovereignty of European nations, collectively and individually, will be degraded. Taxpayer money is to promote security, not increase the balance sheet of industrial firms. In recent years, German and French firms KMW and Nexter formed a joint venture, KNDS, to combine engineering excellence with capacity to integrate large and complex defense programs. With such configurations, composed solely of European capitals and interests, Europe has a fighting chance to secure its strategic technology and sovereignty. With monopolistic and finance-driven hyper-concentration, the chances are military budgets will increase, but security will wither away.

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