The Europeans are Coming! The Europeans are Coming! Hide the Defence Industry!

President George Bush and Secretary of Defence Donald Rumsfeld, two of our most unabashed Americaphiles, may well take their final helicopter ride together in the US-101, a slickly marketed presidential transport with “Made in Old Europe” radiating from every cowling. The Bradley Fighting Vehicle, a poster child for US military might for decades, will soon be owned by BAE Systems North America, the domestic arm of a defence contractor as British as Stilton and tea cakes. The Navy’s new Littoral Combat Ship will feature dozens of key systems networking with one another in distinctly Italian, German, or Scandinavian accents. After decades of US hegemony over heavily one-way defence trade, European firms are making quite a racket these days. What does it all mean?

A Short History Lesson Bi-lateral defence trade has been a fact of life since French cannon equipped much of the Colonial fleet during the Revolutionary War; the difference has long been in the visibility of the hardware. While European industrial fragmentation and limited R&D investment had relegated them principally to supplying components and subcomponents to US defence primes, the US had traditionally eschewed component sales in favor of “encouraging” other nations to buy entire programs such as the F-16 Fighting Falcon, AMRAAM medium range air-to-air missile, and the MK-48 heavyweight torpedo. Whether through the Foreign Military Sales program or direct commercial sale, the US was the sole high profile player in the trans-Atlantic defence trade. A vigorous “Buy American” contingent on Capitol Hill staunchly defended this approach, routinely introducing legislation (most recently in 2004) that would have prohibited US defence hardware from incorporating even relatively standard components from global suppliers.

European industrial consolidation in the areas of space (Ariannespace), aircraft (Airbus) and helicopters (Eurocopter) began to level the playing field somewhat, with more sophisticated products being turned out at a faster pace than ever before. The “Buy America” lobby was hit particularly hard the last few years as performance and cost issues have won out over flag-waving nationalism. With many critical defence components such as ship reduction gears, helicopter elastomeric bearings, and soldier and vehicle ceramic armors hard to find in the US, manufacturers had no choice but to look overseas for reliable sources of supply. Congress, unable to bar troops in combat from access to the best equipment possible, shrank back from taking on the Pentagon brass and industry demands for overseas goods. The aerospace industry had long been global, of course, with Boeing heavily dependent upon Japanese partners for key wing, tail, and body sections of its 777 and new 787 jets; military jets’ ejection seats and landing gear have long had British or French origins, with little notice being taken. The last few months, however, have begun to put a new emphasis on this trend.

BAE Systems = USAE Systems? Standing on the south lawn of the White House it is likely that President Bush can look just across the Potomac and see the glowing white “BAE Systems” letters atop one of the tallest buildings in Rosslyn, Virginia. Within just a few short years the company has shot up the list of US defence contractors, jumping ahead of such stalwarts as SAIC to land in the top 10 with last week’s $3.3 billion United defence acquisition. Far from raising red flags over “foreign” share of the Pentagon budget, the company’s acquisition-based growth has largely been embraced by the Department of defence for bringing an energetic and aggressive new player into the club of Tier-1 prime contractors. In contrast to the failed bid by US-based General Dynamics to acquire the UK’s top land vehicle manufacturer, Alvis PLC, in 2004, the BAE-United defence deal highlights some potential shifts in the defence M&A world in the coming years. While concerns over foreign control of critical technologies and contracts is likely to limit major deals in the US to a handful of trusted British, Australian, and perhaps Canadian companies, the United defence deal signals both new Pentagon acceptance and European aggressiveness in the US market.

US-101—Open Skies Ahead? While military pilots and rotorcraft enthusiasts were not surprised by the January decision selecting the US-101 as the winner of the $6.1 billion presidential helicopter competition, many in the broader defence community and aviation industry were caught off guard. Sikorsky was the heavy favorite, being both a US company and the holder of the presidential fleet contract as long as presidents had been flying in helicopters; combined with a strong Connecticut congressional delegation and the support of “Buy America” legislators from both sides of the aisle, a Sikorsky win had long seemed a foregone conclusion. Among the many theories of how the US-101 grabbed the prize, there is broad consensus that it was a three-fold combination of: 1) a much longer operational track record for the EH-101 versus Sikorsky’s SH-92; 2) the assembling of a creative US partnership team of Lockheed Martin and Bell Helicopter (each with its own very strong congressional lobbying clout) to offset much of Sikorsky’s home field advantage; and 3) a preference by test pilots for the performance of the aircraft within the flight regimes required for the presidential mission. If nothing else the decision must have prompted serious soul-searching among the Marine Corps and Navy brass before they declared a European aircraft the platform of choice for a president not known for his enduring love of all things European.

Yet despite its visibility, the US-101 deal is neither the first nor the last major acquisition program with a European flavor. It is easy to forget that US Navy and Air Force pilots train every day in the Hawk advanced jet trainer, courtesy of the UK; the Navy is currently leasing several Australian high-speed naval vessels for advanced testing and evaluation; and the Coast Guard’s Deepwater Program will feature the EADS CASA CN-235 for medium-range MPA missions. The fact is that the biggest surprise from the US-101 selection was that it did surprise so many people who should have known better. As the military struggles to deal with asymmetrical threats, an area in which incumbent US contractors often have more limited advantages over their foreign counterparts, we are likely to see increasing emphasis on “best in class” product selection regardless of country of origin.

Implications for Other Defence Players For US contractors the implication of recent events is fairly clear: national advantage is likely to offer declining value in ensuring winning bids in head-to-head competition. This is likely to translate into four requirements in the coming years:

* Improved market insight and forecasting. This is critical to shaping R&D spending well in advance of formal requirements. The current QDR process is likely to lay out some roadmaps for spending priorities, but relying on DOD predictions is a poor path to developing innovative technologies and solutions * Greater competitive intelligence. Many US contractors lack competitive intelligence teams (either disbanded during the post-Reagan years or never established in the first place) and thus have only limited insight into what both domestic and global competitors are up to. Program managers may have a product-level view, but corporate-level “risk analysis” is woefully inadequate to prevent surprise victories by unexpected players * Exacting program management. The financial impact of ongoing conflict is being felt in every corner of the Pentagon. Even sacred cows such as shipbuilding, satellites, and aircraft programs are under the microscope, with cancellation becoming a more viable option when cost or weight overruns put programs well behind timelines and over budget (think Crusader, Comanche, SBIRS, and Virginia-class submarines, to name but a few). From operations to sales & marketing to R&D, contractors have to up their game to not only win a competition, but to stay alive in the following years * Increased international partnership. Innovation has gone global and key technologies are no longer a US prerogative (if they ever really were). Whether through Joint Ventures, M&A, or industrial partnerships US companies must go beyond offering domestic goods for sale here an overseas and develop truly global products and services.

For foreign contractor there are three key lessons to be learned from both the US-101 and BAE-UDI transactions that might fundamentally alter their business prospects and strategies:

* The US market is open for business. Despite recent success stories, many foreign contractors have shied away from the US on the assumption that it would be too costly to overcome the incumbency advantage of local players. Clearly the US-101 victory shows that with the right strategy, and the right product mix, the market opportunity is quite lucrative. * Partnership are key. Without Lockheed Martin and Bell onboard it is questionable whether the US-101 would have overcome Sikorsky’s incumbency and hometown advantages. Just choosing US partners, however, is not enough. The key is assembling the right team for the specific proposal and then avoiding inter-team squabbling, which doomed many JV’s in the 80’s and 90’s. * Focus on long-term strategies, not one-off contracts. BAE’s growth, and its ability to tuck away one of the stars of the US defence industry, has come from a long-term view of the US market and a seemingly well-developed plan for embedding itself into the Pentagon’s inner circle. Strategy requires the right products, people, connections, customer insights, and suppliers in your value chain. It is a complicated ballet, but one that the best companies in the world, from Microsoft to GE to Dell Computer to BAE Systems, seem to get right time after time.

European visits to the new world have had their highs (think the Marquise de Lafayette) and their lows (think Vivendi’s costly acquisition of Universal). Undoubtedly defence players will experience both in the coming years, but there are more signs than ever that now is the time to think creatively and expansively about the US opportunity. In contrast the last year should be a wakeup call for anyone in the US industry thinking that the status quo was still in place. Aerospace and defence will see many winners and losers in the future, but national origins are likely to be less and less a driver of which way the business goes.

Of course the accelerating openness of the US market will not stop at European shores. In fact, when BAE Systems receives deliveries of reactive armor for its Bradley Fighting Vehicles what will be stamped on the outside of many of the shipping crates? “Made in Israel” (by Rafael), of course.

Jason Rabbino is Global Vice President of Jane’s Strategic Advisory Services and is based in both London, UK and Washington, DC. He works with corporate and government clients worldwide on issues of product and market strategy, strategic alliances, M&A due diligence, and defence policy.

This is nothing new. Fabrique Nationale manufactures the M16 rifles our troops are equipped with. The Apache helicopter program has contracts with almost every NATO country to manufacture avionics and airframe parts. Electronics every have Made in Taiwan stamped on them.

What about when the Euros sell our designs from their US acquisitions to China or refuse to supply parts because we didn't get UN approval for defending ourselves?

Definately nothing new. BAE Systems is a sub contractor on several large defence projects where Lockheed or NGC are the prime contractor.

They are ramping up and becomming a more major player in the US defense industry, but they were a player long before this.

The company I work for is a US corporation, but we have busines units in England and in Canada. Our company sells a lot of products to the defense industry.

There are times that we are required us to use our domestic support staff to address issues with products that have been developed outside the US because of security concerns.

I also wouldn't expect the government to contract with our non-domestic business units to build subsystems going into sensitive defense hardware.

Exactly. What about foreign firms making money out of R & D funded by the US tax payer. The industry needs more compititi0on, that is for sure, but it should be internal. Just one more step down the path of national suicide.

Personally I think these deals were made to persuade the Euros from their position of trading with China. If that is true now we live in a world where the EU can have there way just by taking outrageous positions.

The trends in this article are quite chilling, particularly the business of BAE. That firm needs to be bought out. DO not forget that BEA is a major stockholder in Airbus.

We need to get over this notion that the Euros are our "allies," and that includes the UK. If labor wins again, and they find a way to dump Blair, it will be a whole other kettle of fish.

There has never been this sort of integration with high end R & D. the FCS or the f-35 are not rifles.

We will rue the day we allowed this to happen.

a noble cause, yours,

but left to our own devices, the american military procurement system has degenerated.

there's no competition.

middle class welfare recipients vote for the same u.s. congress people and senators who take money form northrup and lockheed.

the result is, as an article on the u.s. navy on this forum the other day detailed, an unaffordable navy.

U.S. firms are still very, very overwhelmingly in the lead here, and control major stakes in virtually all of these programs. I'm as suspicious of reliance on foreign producers for defense as anything, but this is a bit much.

Oh come off it, that article was from the NYT. If we want to be a superpower then we have to spend more than 3.5% of GDP on the military. There were years in the cold war that we spent 17%. It is not lack of competition that is the maojor factor: It is the hugh increase of entitlement programs enacted during the Clinton years (with the GOP in power on the Hill, I might add.)

It is just more short sighted boommers in power that cannot learn the lessons of their fathers.

Indeed, you are correct.

A little inside: BAE is in trouble back in the UK and is therefore expanding their external markets, to include acquisitions, to compensate for extensive UK political losses and contract loses. Nite-Works and a few other things caused the UK government to view critically ALL BAE activities and they are not looking good under the glare of scrutiny.

I do. And I am very active in the UK (six trips this year), working with MoD, DPA. Also very active in middle east.

US industry is far ahead and when it comes to foreign involvement, a) work-share ensures US keeps a huge part of any contracts, b) contract awards by the USG are very restrictive and any TAA/DSP-5 actions are examined to ensure no loss of technological edge, and c) no national security assets (like tankers) will ever go to foreign suppliers.

Rumsfeld was pissed at that Republican from CA in the house who tried to get buy America in some defense approp bill. Can't blame Rummy, the military should be run like a business give the contract to the best company - thats the American way of doing things.

Might be good business sense, but in the end, if we don't manufacture our military hardware here, what are the ramifications for our defense in the future. The EU is not a friend of the United States. If they ever turn overtly hostile, I hope that we have the ability to begin manufacturing what we need here at home.

But I doubt it.

I do not see a big problem.

If Iran Can still fly F-14s after we have stopped resupplying them spare parts for over 20 years now. How much better and faster can we deal with a supply glitch from a fussy Euro.

Competition will only make us stronger, does anyone else remember the "huge" economic threat from Japan in the 80s.

Vader, "I find your lack of faith disturbing".

1777 - Charlieville
Bunches of cannon
1864 - Lots of Irish, German, and British recruits
1898 - Krag Jorgensen
1903 - Mauser action on Springfield
1917 - Enfield
Renault
SPAD
Neuport
DeHavelin
Lewis
"French 75"
1940's - Merlin
1960's - Canadian berets ("rifle green")
Canberra
Harrier
1980's - Barretta 9mm
H&K
Hawker;
and (I seem to remember) .223 ammo from Taiwan

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