By allying itself with American company Northrop Grumman, the European Aeronautic Defence and Space Company (EADS), has won a historic contract worth 35 billion euros (£28 billion) to provide the Pentagon with tanker aircraft. Boeing has lodged an appeal against this decision, at a time when many voices are being raised in America in favour of greater protectionism.
This contract is of strategic importance for EADS and the European defence industry. Cancellation of the contract could lead to greater protectionism on both sides of the Atlantic and a temptation, on the European side, to lift the arms embargo on China, in order to compensate for the lack of contract opportunities. This interview follows on from a chat with readers of the ‘Groupe des Belles Feuilles’ (GBF) website. Founded in1988, the French-European affairs think tank brings together students and young professionals from France and other counties, independent of political affiliations.
Should this contract be understood first and foremost as a contract between Americans, with the Pentagon seeking to escape from the Boeing monopoly?
Yes. For the Pentagon it’s about not being confronted with a monopoly for such an enormous market of tanker planes (545 aircraft for three sections). For the client, a monopoly means a lack of choice, and too often very excessive prices. The American saying ‘You can ask what you want, you only get what they have’ sums up this idea. This sends a very strong message to all its suppliers, on behalf of congress and the American government. We should take good note of this in Europe, where the defence markets are still too often fragmented, and reserved for national champions.
The American army has always shown ‘economic patriotism’ at every opportunity. Perhaps the offer made by EADS was better? Could there be other reasons behind this?
The defence market is unlike other markets. There are important security factors (imagine the potential consequences of a break in the supply of military equipment to a third country, for example). There is also the question of technological innovations and industrial competences. In truth, the Pentagon is not alone in being closed to foreign suppliers. Europe is no better in this regard, with the exception of the British ministry of defence.
It should be stressed that in order to win this mega-contract, EADS americanised its offer to a maximum: General Electric reactors, location of a production chain in the city of Mobile, Alabama – not only for all the tanker planes sold in the world, but also for all the A330 cargo planes. In turn, this boosts production of A330 sections in Europe, with a positive effect on participation rates and unit costs. According to the Pentagon and many observers, the EADS offer was actually the better of the two offers. This point can be illustrated by the UK and Australia’s choice for the European aircraft (in spite of their being, in principle, well disposed towards American defence companies), and more recently that of Saudi Arabia.
Will this contract lead EADS to reduce its presence in Europe, in order to foster a growth strategy in the United States and in other countries close to the USA?
No, it is not a question of pulling in the sail in Europe, but of increasing EADS’ industrial capacity wherever the markets are, as one thing is clear: in the defence field, in order to sell in significant volumes, one should also be present industrially in order to respond to the security, technological and industrial concerns of client states. The fact that the euro is currently very strong accentuates still further this need to produce in the dollar zone. By around 2020, EADS hopes to produce 20% of its turnover outside of Europe (today that figure is close to zero).
Can we foresee the opening of other, significant sized markets for EADS outside of Europe (and the USA) in years to come?
The American defence budget represents approximately 55% of the global market! That said, the ‘BRIC’ countries (Brazil, Russia, India and China) are experiencing increased economic growth, which translates into significant increases in their defence budgets. In particular, China and Russia have, quite willingly, seen their military spending increase. Since the Tiananmen Square protests of 1989, China has found itself under embargo. The Europeans give into the Americans, who see China as a rival and a threat –which leaves Russia to supply the Chinese with the equipment they require. That poses a real dilemma for the Europeans, as it will probably not be possible to safeguard the future of the European defence industry if the American market is closed in the long-term and the Chinese market is under embargo…