European Affairs

French contractors occupy a big place in the European defense industry, which assigns an important role to exports. They account on average for 20 to 30 percent of the continental part of the business – and also play a major part in shaping the European industrial base.

A transformation of the European industrial base is in progress. In the last decade, significant consolidation has already taken place in the aerospace and electronics fields. Four large, diversified European groups rank among the world’s top 10 defense suppliers: BAE Systems, EADS, Thales and Finmeccanica. Some smaller-scale restructuring has occurred in naval and land systems activities, with more and larger to follow.

As far as France is concerned, defense-acquisition policy is considered an important lever for developing the performance of this defense industrial base. This policy is based on a principle of competitive autonomy relying on domestic suppliers but also on European capabilities. Our main goals include optimizing the economic efficiency of the investments made by the Defense Ministry to meet the French armed forces’ requirements. To do that, a large priority is given to market mechanisms and competitive bidding, whenever possible. Another goal involves guaranteeing access to the industrial and technological capabilities needed for the long-term fulfillment of these requirements. This, in turn, involves three important objectives: long-term security of supply for the armed forces (a matter clearly of paramount importance); unrestricted use of the equipment procured; and the possibility of exporting the equipment to friends and allies in accordance with international regulations.

We pursue the “competitive autonomy principle” in terms of each specific type of equipment. The first category is equipment that can be acquired through cooperation with partner nations and allies. This option is systematically entertained whenever possible. It is a natural basis for European cooperation, but also an opportunity for extra-European partnerships if they can be set up on a well balanced basis, either bilateral, multilateral or, for instance, within NATO. This category includes the A-400M transport aircraft, Tiger and NH 90 Helicopters, Multi-Mission frigate, Meteor and Aster missiles, earth observation satellites and some other equipment. A second category concerns equipment involved in France’s protection of its national sovereignty and weapon systems aimed at defending our vital interests – for example, nuclear deterrence. For technologies of this kind, France intends to maintain its control and preserve its own ability to design, manufacture, and support such equipment nationally. A third category includes equipment procured from the global marketplace, including common equipment but also a few specialized systems to be acquired in small quantities, not enough to justify new developments. That was the case for surveillance aircraft, such as AWACS and E2C Hawkeye.

We apply this competitive autonomy principle to the various stages of armament programs from preliminary development up to realization and support. We are also attentive to the need to involve small and medium enterprises in the development of the defense industrial base. Small business is undoubtedly a key player for innovation.

Competitiveness is a key factor for the sustainability of our programs and of our industry. It applies similarly to worldwide export, which is an essential aspect of the industry’s economic balance in a context of ever-tougher international competition on armaments. How can we expect to have a competitive industry if we are not using fair competition to shape it? Personally, I support the idea of a unified European defense equipment market. So I am very pleased to see the progress made during the last year with the European Defense Agency’s (EDA) “code of conduct on defense procurement.” Not legally binding, this agreement was voluntarily accepted by 22 of the agency’s member states. Now the EDA has an electronic bulletin board, offering new on-line opportunities for suppliers across Europe to compete for contracts that previously would have been protected under Article 296 of the founding treaty of what is today the European Union.1 More than 100 such business opportunities posted on the bulletin board with an aggregate value estimated at over €5billion. Some of these opportunities are open to non-European companies; others not, depending on national policies.

The associated “Code of Best Practice in the Supply Chain” was designed to extend the Code of Conduct principles throughout the supply chain. Last September, the National Armaments Directors in the Agency’s Steering Board also signed two important new agreements on Security of Supply and Security of Information – thus removing two major impediments to using non-national suppliers. Although much remains to be accomplished in this field, they represent a big step forward in solidarity and interdependence among European ministries of defense, particularly the agreement on Security of Supply with its mutual assistance clause in the case of crisis or operational emergency.

In addition, it is urgent to improve the intra-community transfer procedures for goods and services. A “truly European DTIB” means in the long term that doing business across Europe should be as easy as doing business within any given country’s borders. We clearly need to reduce red-tape for cross-border flow of exchanges between different branches of the same companies or between defense companies in order to facilitate industrial alliances and partnerships. Not only will it benefit the industry but it will also save money in defense budgets. The cost of control was estimated at more than €3 billion per year in the EU – more than one aircraft carrier a year! Pragmatic solutions must be found.

Research and technology can be a tool for shaping defense industries. Even if what I have just described is achieved, market forces alone are not enough to transform the Defense Technology Industrial Base. We also need some incentives to motivate further the restructuring of the industry. As a matter of fact, “virtuous” cooperation enables higher technological and performance ambitions along with cost reductions. The UCAV Neuron project launched last year with Italy, Spain, Greece, Sweden, Switzerland and France can be considered in that regard as a good reference.

The recently approved EDA Joint Investment Program on Force Protection is also a good example of a new way of doing collaborative R&T (Research and Technology) programs in Europe: it is open to all Member States and 20 of them have joined, for a total amount of about €55 million. Today, the percentage of cooperative procurement and cooperative R&T in each country is far too small. But it can only be increased through a progressive and voluntary strategy of convergence in national procurement policies and capability requirements.

It is important not to oppose the logic of cooperation against the logic of competition, but rather consider them complementary tools. We can also note that competition frequently can take place within the cooperative processes. In this respect, cooperative programs are obviously an interesting alternative to old-fashion offset practices among European countries: through participation starting from the development phase, a potential buyer of a system will be able to obtain a work-share, not only on its own order, but on the whole production on the basis of the best technical and economical offer. This could be a smart way to give a boost to European trans-national supply chains and to avoid industrial duplications.

Although it is clearly the common interest of member states to improve collectively the European Defense Technology Industrial Base, nothing will happen without a determined action of all the stakeholders. So a clear DTIB strategy at the European level is needed to give governments a clear reference basis and to provide visibility on business opportunities to the industrial stakeholders, including major companies and small businesses. EDA now has the authority to develop this document for Europe, not just for specific needs under the European Security and Defense Policy (ESDP).

Transatlantic cooperation is a reality. As I have said, many initiatives are under way to build the European Defense Technology Industrial Base and there is new momentum. But let me be clear: This policy does not intend to build a “Fortress Europe,” as some in the U.S. may fear. It is not intended to close the European defense market.

The Transatlantic defense-industrial relationship is a reality. In fact, today U.S. equipment represents a large part of European procurement. Today, even France is buying armaments from the U.S.: E2C, AWACS (a mid-life upgrade worth several hundred million dollars for this system is planned in 2009), and aircraft launch-and-recovery equipment for our aircraft carrier. Hellfire missiles for the Tiger helicopter may be ordered in the next few years.

The suspicion of a “European fortress” is groundless because it is inconsistent with an evolving defense sector which faces increased market globalization, growing exchange of capital, and split and complex industrial ownership.

Regarding U.S.-French trade only, France is the 5th largest investor in the U.S. with more than $148 billion in capital stock. The French industrial footprint in the U.S. is comprised of 2,500 companies representing 580,000 jobs.

In this defense sector, since the 1980s, European state-owned businesses have slowly been shifting into the private sector: BAE and Rolls Royce in UK, SNECMA, THALES, Aerospatiale (now EADS) and even DCN, France’s well-known naval shipbuilder. The international nature of this flow of capital sometimes makes it difficult to identify the notions of a company’s “nationality’’– a consideration so important in the defense sector. Our industry’s level of integration has also risen, encouraged by ferocious worldwide competition requiring constant search of optimization to offer the lowest prices.

Depending on the sectors, the pace has naturally been different, with a higher level of integration in the aeronautical sector than in some domains such as the naval sector. But the trend is there. The lower tier of our defense industries (at component and subsystem level) is at the forefront of this shift. CFM International, a world leader in aircraft turbo-engines, is owned by GE and France’s SNECMA. Or take the new joint venture in sonar, DRS SS, between the U.S. company, DRS Technologies and Thales Underwater Systems or work by Thales and Raytheon Systems in C3I.

The aerospace/defense industry is a striking example of the benefits provided by an integrated, global framework. There are several historical examples showing the benefits of the transatlantic industrial relationship, which are deeper and broader than it is commonly perceived. There is no interest in blocking the nurturing of this process; we should rather accompany it – within the limits of our own strategic objectives and national security policies.

A strong European defense capability provides opportunities and benefits for the Transatlantic relationship, I believe. And the European Defense Technology Industrial base is not a “fortress Europe” but an opportunity for a Transatlantic Partnership

It is a political opportunity. Strong European industrial coordination will, without any doubt, reinforce the European pillar of NATO. Our European partners will be encouraged to increase their defense efforts in order to assume the EU’s collective security responsibilities, as shown by France or Great-Britain, which have made defense one of their budget priorities, representing around two percent of their GDP. It is not – yet – the case of many others. Having competitive industries to sustain will certainly be an incentive to invest more in this sector.

But it is also an industrial opportunity: a strong European Defense Technology Industrial Base will give us many opportunities to create efficient transatlantic ventures at a lower cost, mutually benefiting from the competition of our products. It is also certainly the interest of the U.S. tax payer today to see the U.S. airborne competing against other models.

In conclusion, I would like to mention one area where a strong transatlantic cooperation is really needed: interoperability. Now more than ever, we see the need for multinational coordination and multinational action vis-à-vis new threats.

Interoperability issues are critical in this respect: it is not just about sharing information between information systems; stakes are higher – it’s about the life of our soldiers who may be victims of fratricide firings. Nurturing interoperability and sharing technology between Europe and the U.S is critical.

Interoperability and the associated technology transfers must, however, be more balanced – in a two-way fashion. France does not want to be a “buyer” of technology embedded in equipment, but a “partner” in technology. Interoperability holds a potential for significant savings in R&D (Research and Development) and infrastructure.

There are impediments. National laws and policies, especially those dealing with technology-transfer restrictions, are obviously a brake to cooperation – within Europe and in Transatlantic cooperation. The security thinking from the cold war is still present today. We must evolve to take into account a new and changing global environment.

France shares the same concerns as the United States: to prevent the proliferation of sensitive technologies. France, like the U.S., has one of the most efficient export control systems in the world – as our U.S. official counterparts are well aware. New partnerships between trusted allies could be created. In my view, we should seek strategic discussions between Europe and the U.S. on this matter. Our common security of supply is at stake.

Lieutenant General Patrick Auroy is Deputy National Armament Director of the Armament Agency of the French Ministry of Defense (Delegation Générale pour l’Armement). This article is adapted from a presentation on March 23, 2007 at The European Institute in Washington.

1Article 296 of the Treaty of Rome stipulates “that no member state is obliged to supply information, the disclosure of which it considers contrary to the essential interests of its security” and, “that any member state may take such measure as it considers necessary for the protection of the essential interests of its security, including its linkage to the production of or trade in arms, munitions and war material.”

 

This article was published in European Affairs: Volume number 8, Issue number 2-3 in the Summer/Fall of 2007.