We Need Competition AND Cooperation

Trying to explain why a company like EADS wants cooperation and competition at the same time, we need to address first some elements of the background envirnment.

It is now well known that most western countries have moved from a static defence posture backed by nuclear deterrence to a policy of dynamic crisis management within the Alliance's framework. This translates into key business drivers for defence industry like: less defence procurement, more operations, and lower priority for defence budgets in front of new socal constraints, such as health and welfare.

Another important element in the environment is the increased awareness that recent conflicts have evidenced key capability gaps. For instance, DCI - the NATO Defence Capabilities Initiative - has shown gaps within the Alliance, such as the capability to engage time sensitive targets, all weather, low cost smart munitions required for long lasting operations, theatre ballistic missile defence, to name just a few. DCI has also shown gaps between the US and their allies in key areas such as ISR (Intelligence, Surveillance and Reconnaissance), real time targeting, and strategic lift.

Finally, the political environment also is showing important evolutions, although signals are still somewhat conflicting across the Atlantic when it comes to defence maters. For instance, from a European perspective, the US are already perceived as enjoying a dominant position. However, the US administration is clearly willing to increase defence spending and to leapfrog technologies for aerospace and defence. US policy makers seem to be divided about the question of whether or not the US should support a European Security and Defence Policy. In contrast, the European Union is stating its willingness to establish such a European Security and Defence Policy, when, at the same time, most European defence budgets are still below their stated objective target of 2% of GDP (1), and are often decreasing. More of a concern is also the constant decline in European R&D funding. Also, European policy makers seem to be divided about the question of the link between European military assets and NATO.

Identifying Future Defence Market Trends

In this context, identifying future defence market trends is difficult and can be seen from two different perspectives.

On the negative side, there is the increase in the transatlantic technology gap caused by the difference by a factor of about 3 or more between the US and Europe when it comes to the overall level of funding R&D and technologies. This is seen by some as a reason to advocate a 'Fortress Europe' (trying to protect supposedly weak European assets) and a 'Fortress America' (trying to avoid 'leaking' US technology to Europe).

On the positive side, it is a fact that we have seen some acceptance of new transatlantic business arrangements (e.g. BAE Systems acquiring Sanders, the Raytheon Thales joint venture). In Europe, within the framework of the LOI - Letter of Intent - between six nations (2), a new framework is being defined to deal with such difficult issues as security of supply and export control of armaments, a body like OCCAR for instance is advocating a relaxation of the famous 'juste retour' principle which was impeding most European cooperation programmes by imposing international work-share arrangements in proportion of national funding.

Finally, defence funding in Europe should also eventually incease as a result of the current obslescence of a large fraction of the military inventory, of new DCI and interoperability requirements, and the planned installation of a European Rapid Reaction Force. Overall, new programme opportunities should appear in Europe and in the transatlantic 'two way street'.

Toward 'Co-opetition'?

For those reasons, co-opetition - meaning a combination of co-operation and competition between the same aerospace and defence companies - will be the new name of the game:
We, as an industry, all want to be a global player, even if according to different business models (e.g. Boeing and EADS on one side, with a mix of commercial and military activities, Lockheed Martin and BAE Systems on the other side, with a clear focus on military activities). Since our customers clearly cannot accept monopolies, those global players will compete and are ready to do so.

In contrast, it is also clear for us that a 'Fortress Europe' would not be strategically sustainable in front of a mighty 'Fortress America'. In addition, we might anticipate that the US will need an extended market to sustain their competitive procurement approach, and Europe is their second market by size and solvability. Also, European industries need to mitigate the risk of the technology gap and are seeking to share new NATO programme opportunities with their US counterparts (e.g. AGS - Air Ground Surveillance, TBMD - Theatre Ballistic Missile Defence). Therefore those same global players will co-operate.

EADS has reached its target of being a globally competitive player in commercial aeronautics and space. We are willing to achieve an equivalent position in defence, and therefore willing to enter in strategic cooperation with US companies.

What Still Needs to Be Done

As a conclusion, there is a willingness on both industrial sides, but our customers' conditions are not yet met: we are still lacking a transatlantic defence policy framework, with more integration and more transparency on the customer side, from security policy to defence policy and eventually armament policy. We still need more visibility on business development opportunities, such as acceptance of foreign ownership and the corresponding regulatory framework. And, eventually, we will need more evidence that it makes pure business sense, that is: more European and transatlantic programmes, with the adequately shared technological content, more understanding on the joint access to export markets, within the limits of agreed counter-proliferation policies, more return on investment when considering the new procurement trends asking for more funding up-front from industry.

As a conclusion, from the EADS perspective, there should be more reasons for NATO nations to co-operate than to compete, including in the defence field of activities, and EADS is ready to be fully involved as a global competitor as well as a desirable and reliable cooperation partner. European aerospace and defence industry has been going as far as possible in taking the initiative of restructuring. The next significant transatlantic step will require an equivalent willingness and support from the nations as customers and regulators of defence industry.

NOTES:

    (1) Current orders of magnitude for the ratio between defence expenditures and GDP are 3% in the US, 2.4% in the UK, 1.85% in France and 1.2% in Germany.

    (2) The UK, France, Germany, Italy, Spain, Sweden. The LOI is defining provisions between the participating nations to facilitate the installation of transitional defence companies in six areas: security of supply, export control, security of information, intellectual property rights, R&D funding, harmonisation of requirements.

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