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The european defence market

Great challenges - small moves

Textbook 2008 162 Pages

Politics - International Politics - Topic: European Union

Excerpt

Table of Contents

1. INTRODUCTION
1.1. Purpose
1.2. Background
1.3. Literature Review
1.4. Design & Methodology
1.5. Analysis
1.6. Limitations
1.7. Expected Outcomes
1.8. Ethical Issues

2. RESEARCH PROBLEMS
2.1. PROBLEM 1 — Identify the key companies in the European defence sector
2.1.1. Introduction
2.1.2. BAE Systems
2.1.3. European Aeronautic Defence and Space Company (EADS)
2.1.4. Finmeccanica
2.1.5. Thales
2.1.6. Rolls-Royce
2.1.7. DCNS - Direction des Constructions Navales Services
2.1.8. SAFRAN Group
2.1.9. Saab Group
2.1.10. Rheinmetall AG
2.1.11. Dassault Aviation
2.1.12. Remarks
2.2. PROBLEM 2 — Assess the defence companies’ current position in their respective national industry and forecast their potential market power in a common European defence equipment market
2.2.1. Introduction
2.2.2. The task
2.2.3. Limited monopsony
2.2.4. The Herfindahl-Hirschman Index (HHI)
2.2.5. Dispersion
2.2.6. Limitations
2.2.7. The British market
2.2.8. The German market
2.2.9. The French market
2.2.10. The Swedish market
2.2.11. The Italian market
2.2.12. Outlook
2.3. PROBLEM 3 — Explore duplications of armaments and technological skills within the EU, suggest strategies to reduce those and companies’ options to deal with this situation
2.3.1. Introduction
2.3.2. Is duplication unfavourable?
2.3.3. What factors led to duplication?
2.3.4. The European situation (Article 296)
2.3.5. Shareholding structure
2.3.6. Intra-community transfers
2.3.7. Juste Retour and offsets
2.3.8. Examples of duplication in Europe
2.3.9. Atlantic’s west coast – Consolidation in the U.S
2.3.10. Legal and other counter measures to reduce and avoid duplication?
2.3.11. Companies’ strategies
2.4. PROBLEM 4 — Explore absence of armaments and technological skills within the EU, suggest strategies to overcome this non-existence and companies’ options to use this situation in their favour
2.4.1. Introduction
2.4.2. Absence of armaments and technological skills within the EU
2.4.3. Legal and other counter initiatives to reduce and avoid absenteeism
2.4.4. Companies’ options to use this situation in their favour
2.5. PROBLEM 5 — Present European armaments cooperation and identify strategic options for future cooperation, merger, and acquisition
2.5.1. Introduction
2.5.2. The need for cooperation
2.5.3. European armaments cooperation
2.5.4. The future shape
2.5.5. A vague strategy
2.5.6. Recent developments
2.5.7. Future actions

3. CONCLUSION/RECOMMENDATION
3.1. Conclusion
3.2. Recommendation

4. ACRONYMS

5. REFERENCES / BIBLIOGRAPHY

APPENDICES JJJJ

List of Figures

Figure 1 – Shareholding structure EADS as of 30th June 2008

Figure 2 – Shareholding structure DCNS

Figure 3 – Shareholding structure SAFRAN Group as at 31 May 2008

Figure 4 – Voting rights SAFRAN Group as at 31 May 2008

Figure 5 – Business structure Saab Group

Figure 6 – Major European aerospace and defence cross holdings

Figure 7 – Progression of the HHI in the U.S. defence industry

Figure 8 – Eurofighter/Typhoon production share allotted

Figure 9 – U.S. military spending fiscal years 1945 – 2004

Figure 10 – Consolidation of U.S. defence contractors 1990–1998

Figure 11 – R&T and R&D

Figure 12 – Cumulative military expenditure of current EU member states

Figure 13 – Changes in % of cumulative military spending (EU)

Figure 14 – U.S. and cumulative EU military spending (1998–2007)

Figure 15 – Changes in % in U.S. military spending (1988–2007)

Figure 16 – Major world engine cross holdings JJJJ

List of Tables

Table 1 – The top 10 defence companies in the European Union (2007)

Table 2 – Financial state BAE Systems 2007

Table 3 – Financial state EADS 2007

Table 4 – Order book EADS 2007

Table 5 – Financial state Finmeccanica 2007

Table 6 – Financial state Thales 2007

Table 7 – Financial state Rolls-Royce 2007

Table 8 – Financial state DCNS 2007

Table 9 – Financial state SAFRAN 2007

Table 10 – Financial state Saab 2007

Table 11 – Financial state Saab 2006

Table 12 – Financial state Rheinmetall 2007

Table 13 – Financial state Dassault 2007

Table 14 – Market concentration thresholds

Table 15 – HHI on UK companies with defence-related business

Table 16 – HHI on the UK aerospace industry by company size (2006)

Table 17 – HHI on German defence companies

Table 18 – HHI on the German aerospace and defence industry (2007)

Table 19 – HHI on French companies with defence-related business I

Table 20 – HHI on French companies with defence-related business II

Table 21 – HHI on the Swedish defence industry

Table 22 – HHI on the Italian defence industry

Table 23 – HHI on the European top 100 defence companies

Table 24 – HHI on U.S. defence companies in the world’s top 100

Table 25 – Costs resulting from intra-community transfer burdens

Table 26 – 2003 EU exports of conventional defence products

Table 27 – Refusals of intra-community transfers

Table 28 – Eurofighter/Typhoon production share allotted

Table 29 – Current Juste Retour programmes

Table 30 – Duplication of developed systems

Table 31 – Countries operating UAVs

Table 32 – Global Hawk - Progression of costs

Table 33 – Armaments cooperation in Europe

Table 34 – Distribution of U.S. Department of Defense prime contract awards among the largest arms-producing companies 1992, 1997, and 2002

Table 35 – Number of U.S. Department of Defense prime contractors in selected types of weapon systems (1990 and 2000)

Table 36 – Major West European acquisitions of companies based in the U.S

Table 37 – Major acquisitions within Western Europe

Table 38 – Population in the EU and the U.S. mid-2007 JJJJ

List of Appendices

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1. INTRODUCTION

1.1. Purpose

The ever-increasing number of international missions and the diverse tasks European forces carry out does not match the decrease in defence budgets in most European countries. Since both, however, are unlikely to change, the transformation will have to come from new ways that armaments are procured in the European Union.

The conversion, away from national defence markets towards one truly European market, challenges defence companies. In order to understand the implications for companies and the changes in the market, valuable and contemporary information is needed. The author recognizes a deficiency in literature dealing with the European defence market and its players and thus regards it as essential to make a contribution to close this literature gap.

1.2. Background

The European defence industry is a fragmented one; this development has its roots back in the mid-1950s when France rejected a unified European defence approach. Ever since, European countries have bought their armaments either from their major ally or from national arms producers. The major confederate for Western countries has been the United States for former Warsaw Pact countries it was the former Soviet Union. Purchased armaments from allies have mainly been “off-the-shelf” goods with a high technical sophistication, which have not required additional engineering input from the buyer; if at all, it was usually limited to maintenance. Purchasing weapons from the major ally, however, increases the dependence and prevents the development of a nation’s own high-end military technology.

The closer connection between European Union countries has, however, not led to a consolidation in the European defence industry. This is mainly prevented by Article 296 (ex Article 223) of the Treaty establishing the European Community (cf. Appendix A§I). Article 296 allows member states to derogate from community procurement rules if their essential security interests are concerned. The practice has shown that EU member states use Article 296 as, what defence expert Burkard Schmitt from the European Union Institute for Security Studies calls, a “blank cheque” (Schmitt 2005a). This expression should indicate that member states almost always claimed that their security interests are concerned when procuring defence material, thus protecting their armaments industry rather than their essential security interests.

Despite the lack of consolidation, cooperation on a small scale took place beginning in the 1960s. The cooperation was, however, limited to a small amount of countries, mainly the usual suspects[1] and also bound to certain projects (e.g. development of air-to-air missiles). It was by no means a concerted, holistic plan to serve Europe’s defence needs (cf. Schmitt 2005a).

This situation prevailed until the beginning of the millennium. Governments began to realise that the gap between defence needs and defence budget was getting bigger and bigger. More and more European countries got involved in military missions outside Europe which required defence material that was capable of being used outside European latitudes. Requirements became so sophisticated that their development could hardly be shouldered by one country alone.

The European Union has the clear vision of consolidating the armaments industry and making it more efficient. The afore-mentioned purchase of American off-the-shelf goods is still practiced by a lot of Eastern European countries and should be, from an EU point of view, turned into intra-community transfers. This should also raise the level of technical sophistication and eventually promote exports of armaments outside the borders of the European Union.

1.3. Literature Review

The European defence sector has never attracted many researchers and thus armaments procurement from both the demand and supply side has only been the subject of a very small number of studies. This has the drawback that the sources from which information can be drawn are often limited, and this may also be the reason why little research has been done, which constitutes something of a vicious cycle. The advantage, however, is quite obvious; since this field is not as grazed as many other fields of study; own, valuable research can make a difference to the academic community and does not simply disappear in the Mare Pacificum of dissertations.

Even though, as stated, studies on the European defence sector are limited, some researchers engage with the issue or touch upon parts of the matter. Authors who are concerned with the European Security and Defence Policy are, for example, Gnesotto et al. (2004), Howorth (2000), and Menon (2004). Authors, who take a look at it through the spectacles of an economist, are Darnis et al. (2007), Schmitt (2005), and Kenny (2006). Further authors contribute to the discussion on socio-cultural factors, such as Fuller (1995), Heinsohn (2006), and Huntington (1996). Technological factors are well described by Hackett et al. (2007), Schmitt (2003; 2005), and van den Doel (2003). A valuable contributor dealing with legal issues is again Schmitt (2005), together with Missiroli (2004) and Zanders et al. (2006).

Important studies on the European Security and Defence Policy (ESDP) are conducted by the European Union Institute for Security Studies. The Paris-based institute publishes books such as ‘Defence procurement in the European Union’ (Schmitt 2005a), that deal in particular with defence procurement. Furthermore it publishes ‘Occasional Papers’ that deal with contemporary developments and areas that need to be focused from the institute’s point of view. Another regular publication series are the ‘Chaillot Papers’ which are written by ‘external experts as well as the Institute’s research fellows, and based on collective work or individual research, they deal with all subjects of current relevance to the Union’s security’ (EU-ISS 2007). The institute is an autonomous agency and although it provides valuable information, the quantity is still very limited, mainly through its size.

Another institute that offers important information in the field of security studies is the London-based International Institute for Strategic Studies (IISS). Its well-known annual publication “Military Balance” is described as ‘the authoritative annual inventory of the world’s armed forces’ (IISS 2008a). The institute is right in saying that this report provides an ‘annual assessment of the military capabilities and defence economics of 170 countries world-wide’ (IISS 2008b).

The author has furthermore used judicial and legislative texts including Interpretative Communications from the European Commission, Directives, WTO agreements along with judgements and opinions by the European Court of Justice. In general, official documents that have an impact on parties in the European defence market. These documents give a broad insight into the behaviour of the players in the market (mainly companies and states).

Furthermore, official documents from national governments, the European Union, the U.S. Department of Defense, the United Nations (UN), and the North Atlantic Treaty Organization (NATO), to name only a few, are valuable providers of information.

Finally, Aristotle defined man as zóon politikón, meaning political animal. The unlimited amount of factors that influence the course of short- and long-term politics can all be tracked back to individual human beings, such as political leaders, voters, et cetera. People determine actively and passively how politics – including European Security and Defence Policy – is made. Books on social studies helped me to understand what kind of problems and trends are likely to arise in the future that may have to be tackled by ESDP, and hence the companies that provide the goods and services.

1.4. Design & Methodology

This research was inductive; hence no holistic theory was tested. The research was neither a pure quantitative nor a pure qualitative one. Nevertheless, some research problems focused more on facts and figures while other drew more on the interpretation of other researchers in the field of defence and security issues.

The preponderant part of data that has been collected was comprised of information stated in online sources and/or documents such as company websites and reports, comparative databases, research institutes’ publications, or industry association resources, to name only a few.

1.5. Analysis

In order to analyse the market concentration the Herfindahl-Hirschman Index was used, together with the coefficient of variation in order to determine the spread of turnover within a market. Own calculations using software applications proved to be essential to enhance the value of published data or simply to extrapolate and display figures. Furthermore financial ratios have been applied in order to make figures from different enterprises comparable to each other or merely to find out about future trends, opportunities or challenges.

1.6. Limitations

The area of armaments sets limitations on the depth of study in some fields, especially in the areas of security issues, product development, and engineering. This holds true for publications from companies but also from public institutions.

1.7. Expected Outcomes

The research shall provide information on strategic options for companies that are active in the European defence sector and are facing market conversion.

1.8. Ethical Issues

The researcher had responsibilities towards his supervisor, the university and other authors, in terms of conduct, honesty, and integrity. Examples of ethical behaviour include referencing using the Harvard System of Referencing style requested by the university and therefore the avoidance of plagiarism of any kind.

2. RESEARCH PROBLEMS

In order to satisfy the general research problem

An evaluation of strategic options for companies in the European defence sector in light of increased challenges for armed forces both in number and nature and a changing market for European armaments”,

we have identified the following five specific research problems which will be subject to analysis on the following pages.

Specific Research Problems

(1) Identify the key companies in the European defence sector
(2) Assess the defence companies’ current position in their respective national industry and forecast their potential market power in a common European defence equipment market
(3) Explore duplications of armaments and technological skills within the EU, suggest strategies to reduce those and companies’ options to deal with this situation
(4) Explore absence of armaments and technological skills within the EU, suggest strategies to overcome this non-existence and companies’ options to use this situation in their favour
(5) Present European armaments cooperation and identify strategic options for future cooperation, merger, and acquisition

2.1. PROBLEM 1 — Identify the key companies in the European defence sector

2.1.1. Introduction

The first research problem shall help to provide a first overview of the companies we are going to talk about in this paper. It concentrates on the analysis of the companies’ history, products and services, their shareholding structure and financial state. Especially the shareholding structure plays a key role in consolidation thoughts. Active and passive political influence through the means of order placement, direct and indirect shareholding, as well as policy making makes this industry a special one.

The writer is well aware that not only European companies operate in the European defence sector but also corporations from other parts of the world (with American companies at the forefront). We will, however, concentrate on companies with headquarters in EU territory, since a favourable consolidation, which will be subject for investigation and explanation later in this paper, has already been achieved in the U.S. defence sector.

In order to start off, we are going to use the list of defence companies that has been published by DefenceNews.com – the online component of the weekly paper Defence News. This list ranks the top 100 defence companies in the world, from which almost a quarter (24) are based in EU territory. The researchers of DefenseNews.com have identified the following 10 companies as Europe’s top ten in the defence sector (Table 1).

Table 1 – The top 10 defence companies in the European Union (2007)

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a In millions of U.S. dollars. Currency conversions calculated using prevailing rates at the end of each firm’s fiscal year.

b Percentage figures in text section may differ, due to own research.

c Although the company operates under Dutch law with its headquarters in the Netherlands, it is mainly a German, French, and Spanish cooperation.

Source: DefenseNews.com 2008a, adapted; own presentation

2.1.2. BAE Systems

History

BAE Systems was created on 30 November 1999 through a merger between British Aerospace (BAe) and Marconi Electronic Systems (MES), the defence arm of The General Electric Company (GEC). British Aerospace had already signed an agreement with the German DaimlerChrysler Aerospace AG (DASA) in December 1998 to merge the two companies, when GEC announced to de-merge MES. British Aerospace[2] decided to discard the plan to merge with DASA and acquired MES instead.

Products / Services / Areas

The company designs, develops, produces, and sells armaments for land, air, and sea warfare. It is furthermore engaged in the fields of through-life support, homeland security, systems integration and information technology (BAE Systems 2008a). It considers Australia, Saudi Arabia, South Africa, Sweden, the United Kingdom, and the United States of America to be its home markets.

Shareholding structure

After having changed the predecessor British Aerospace from a statutory corporation into a public limited company (plc) and subsequently having sold all shares previously owned by the British government, one special share[i] remained with the government in order to veto foreign control over the company.

Apart from this special share the current shareholding structure (as of July 2008) looks similar to that of other public limited companies.

As of July 2008, AXA (also via its funds) is BAE Systems’ biggest shareholder. The remaining shares are owned by many U.S. and British financial investors, followed by continental European investment funds and funds from other regions of the world (e.g., Japan). The government of Kuwait holds 0.37%; the government of Sweden 0.17% (both via their funds).

Financial state

Table 2 – Financial state BAE Systems 2007

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2.1.3. European Aeronautic Defence and Space Company (EADS)

History

The European Aeronautic Defence and Space Company (EADS) emerged on July 2000 through the link-up of the German company DASA, the French Aérospatiale-Matra, and CASA (Construcciones Aeronáuticas SA) of Spain. The company operates under Dutch law and is headquartered in Schiphol-Rijk (Netherlands). Its operating headquarters, however, are in Ottobrunn (near Munich), Germany and Paris, France.

Products / Services / Areas

The company is subdivided into five divisions: including the biggest European civil aircraft producer Airbus, the world's largest helicopter supplier Eurocopter, the European leader in space programmes from Ariane to Galileo Astrium, and finally the divisions Military Transport Aircraft, and Defence & Security. The latter is a provider of comprehensive systems solutions and makes EADS the major partner in the Eurofighter consortium as well as a shareholder in the missile-systems provider MBDA (EADS 2008a).

The company generates around a quarter of its total sales from defence contracts (DefenseNews.com 2008a; own calculations). Major production sites are located in France, Germany, Great Britain, and Spain as well as in the U.S., and Australia.

Shareholding structure

Having mentioned the veto right granted to the British government with BAE Systems, political interests in the case of EADS become much more complicated. Political leaders in both France and Germany have always been very set on having an equal representation of their national interest in the board and shareholding structure. This issue has been debated by political leaders of both countries on several occasions. Therefore, EADS can still be seen as a political construct rather than a freely operating company, which would have management taking decisions which are best for the company, not best for the respective (shareholding) state.

Figure 1 – Shareholding structure EADS as of 30th June 2008

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Source: EADS 2008b

Noteworthy: The Russian state-owned Vnesheconobank acquired around 5% of EADS’ free-floating shares at the end of 2007.

Financial state

EADS’ financial situation is affected by delays in the A380 and A400M programme; however, this is counterbalanced by a massive order book (Table 4).

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Table 3 – Financial state EADS 2007

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Table 4 – Order book EADS 2007

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Source: EADS 2008c; own calculations

2.1.4. Finmeccanica

History

This Italian company has a tradition of state ownership after its set up in 1948. The Italian Ministry of Finance still holds around a third of Finmeccanica’s shares. It is currently involved in several business areas such as satellite/space, aerospace, missile production, navigation systems, etc. through wholly owned subsidiaries but also through many joint ventures.

Products / Services / Areas

The company organises itself into seven departments: Aeronautics, Helicopters, Space, Defence Electronics, Defence Systems, Energy/Transportation, and Integrated Systems. Around 55% of Finmeccanica’s business is defence-related. The company is headquartered in Italy and has its largest foreign industrial base in the United Kingdom. It also produces in other European countries and the U.S. .

Shareholding structure

Although the Italian government reduced its influence in Finmeccanica in 2000 it still owns 32.45% of all Finmeccanica shares (Osiris). The remaining shares are in free float.

Financial state

Table 5 – Financial state Finmeccanica 2007

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2.1.5. Thales

History

The French company Thomson-CSF changed its name to Thales after they had acquired the British defence electronics group Racal Electronics in 2000. This also made the UK a key market for Thales. Although the French government reduced its interest in the company, it still holds more than a third of all voting rights.

Products / Services / Areas

Thales operates almost all over the world. It divides its business into seven regions: France, United Kingdom, Other Europe, North America, Asia-Pacific, Near & Middle East, and finally Rest of the World. Thales designs, develops, and deploys integrated solutions and equipment to meet security requirements in the aerospace, defence and security markets (Thales 2008a).

Shareholding structure

The French state holds 38.55% of the voting rights. A further 21.05% of the voting rights are held by Alcatel. Therefore, 59.6% of the voting rights are held with shareholders who are bound by a shareholder agreement (Thales 2008b).

Financial state

Table 6 – Financial state Thales 2007

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2.1.6. Rolls-Royce

History

The British company Rolls-Royce was taken into state ownership in 1971 because of problems with the RB211 turbofan jet engine. The car business was separated from Rolls-Royce Limited, the predecessor of the current company, in 1973. In 1987 the company was re-privatised and hence returned to the private sector. Today, RR is the biggest manufacturer of military and civil jet engines in Europe.

Products / Services / Areas

Rolls-Royce is the world’s second largest defence aero-engine manufacturer, providing around 25 per cent of the world’s military engines. Their portfolio covers all major sectors, including transport, helicopters, combat, trainers and tactical aircraft (Rolls-Royce 2008a).

Shareholding structure

Rolls-Royce has a common shareholding structure for a public limited company. Many shares are held by financial and insurance companies, as well as banks and trusts. The shares are evenly distributed in free flow and no single shareholder owns more than 7%.

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Financial state

Table 7 – Financial state Rolls-Royce 2007

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2.1.7. DCNS - Direction des Constructions Navales Services

History

Following a number of scandals concerning corruption and mismanagement within DCNS’ predecessor Direction des Constructions Navales (DCN) in the 1990s, the French government decided to reform its naval system. DCN became a national service under the French Ministry of Defence; previously it had been incorporated into the Délégation Générale pour l'Armement (DGA), the French defence procurement agency.

In 2002 DCN and Thales formed the joint venture, Armaris. This cooperation led to the current group structure which will be further explained in the section shareholding structure.

Products / Services / Areas

DCNS designs, manufactures and services surface vessels, submarines, propulsion and weapon systems. It counts over 50 navies worldwide as its clients. The major clients are the French Navy and the French defence procurement agency (DGA). (DCNS 2008a).

Shareholding structure

On 29 March 2007 ‘ DCN and Thales […] finalised with the French government the agreement concerning the consolidation of their activities within the French naval defence sector. […] The operation follows the joint declaration of intent, which both groups signed on the 15th December 2005 […]. Upon signing of the agreement, DCN will acquire the totality of Thales’s naval activities in France (excluding its equipment activities) and will become the sole shareholder of Armaris and MOPA2, the prime contractor for France’s PA2 aircraft carrier programme. Simultaneously, Thales [ ] acquire[d] a 25% stake in DCN alongside the French government, which will retain a 75 % stake’ (DCNS 2007a). On 3 April 2007 it unveiled its new corporate identity to its employees, and one day later to the press (DCNS 2007b).

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Figure 2 – Shareholding structure DCNS

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* EEIG: European Economic Interest Grouping.

N.B.: Thales also has an option to raise its stake to 35% between March 2009 and March 2012.

Source: DCNS 2008a; own presentation

Financial state

Table 8 – Financial state DCNS 2007

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Source: DCNS 2008a

2.1.8. SAFRAN Group

History

The French SAFRAN Group was founded on 11 May 2005 through a merger between SNECMA – a French group that was mainly active in the propulsion and aerospace equipment sector – and the defence and communication conglomerate SAGEM. The SAFRAN Group has organized its defence activities with its subsidiary Sagem Défense Sécurité.

Products / Services / Areas

This high-technology group organized itself into four branches: Aerospace propulsion, Aircraft equipment, Defence Security, and Communications. Each of these branches coordinates the operations of its constituent companies. In addition to its subsidiaries, the SAFRAN Group also has a number of joint ventures and affiliates. SAFRAN has industrial, design and commercial operations in more than 30 countries (SAFRAN 2008a).

Shareholding structure

The following two pie graphs display the shareholding structure and the voting rights of SAFRAN as of 31 May 2008. After the examples of EADS, Thales, and DNCS, we identify the French state a fourth time as an overwhelmingly present and important shareholder. The company Areva which holds 7.4% of all shares and 10.8% of the voting rights is also mainly owned by the French state.

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Source: SAFRAN 2008b

Financial state

Table 9 – Financial state SAFRAN 2007

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Source: SAFRAN 2008c

2.1.9. Saab Group

History

Most people will probably associate the name Saab with Swedish cars. In 1990 the passenger-car division within former Saab-Scania became, however, a separate company, Saab Automobile AB, which was equally owned by Saab-Scania and General Motors. Five years later the Saab-Scania Group was divided up into two companies – the Saab Group and Scania AB. In 2000, General Motors acquired the remaining 50% of Saab Automobile AB. Therefore, Saab Automobile AB is 100-percent owned by General Motors, and is a separate company not belonging to the Saab Group. The name and brand Saab, however, is used by both Saab AB and Saab Automobile AB (Saab 2008e).

The Saab Group is mainly engaged in defence and security business, producing fighter aircraft, electronic warfare systems, weapon systems, etc.

Products / Services / Areas

The Saab Group is organized into 17 business units. Its products can be found in more than 50 countries around the world. In the financial year 2007, 65% of all sales were made outside Sweden (Saab 2008c). Saab offers products and services in the field of aviation, communication, sensor systems, simulation & training, support solutions, weapon systems, command & control, electronic warfare, signature management, space, unmanned systems, and civil security (Saab 2008b).

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Figure 5 – Business structure Saab Group

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Source: Saab 2008a; own presentation

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Shareholding structure

The Saab Group is controlled by its two major shareholders[4] BAE Systems and the Wallenberg family[5]. The family controls 19.8% through its holding company Investor, and another 8.7% through its own foundations. BAE Systems controls a share capital of 20.5%. Hence BAE Systems and the Wallenberg family control 49% of all Saab Group shares. The voting rights, however, are distributed as follows: BAE Systems 20.4%, Investor 38.3%, Wallenberg foundations 6.1%. The remaining shares are in free float with shareholders possessing both share capital and voting rights below 5% (Saab 2008d).

Financial state

Despite the increasing key financial ratios, the Saab share dropped considerably in 2007. Between 1 January 2007 and 31 December 2007 it lost 38.33% of its value (Six.se 2008a). A reason for this was that Saab faced a full inquiry into bribery allegations (Ibison 2007; Saab 2008f, p. 5–7).

The three strategic business segments defence and security solutions, systems and products, and aeronautics developed as follows.

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Table 10 – Financial state Saab 2007

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Table 11 – Financial state Saab 2006

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Notes for Table 10 and Table 11

a According to Saab this decrease is ‘directly attributable to the order received from Pakistan

in the second quarter of 2006 for an airborne surveillance system for approximately SEK 8.3bn, which was reduced in 2007 by SEK 1.35bn’ (Saab 2008f, p. 40).

b Saab's aeronautic operations are dominated by the Gripen program (Saab 2008f, p. 42)

c The increase was mainly caused through a ‘contract with the Swedish Defence Material Administration worth SEK 3.1bn to upgrade 31 Swedish Gripen aircraft’ (Saab 2008f, p. 42).

d Compared to 2006

Source: Saab 2008f

2.1.10. Rheinmetall AG

History

The German corporation Rheinmetall AG operates in the markets for automotive components and defence equipment. Rheinmetall grew considerably through a number of acquisitions from 1993 onwards, mainly having diversification in mind. When new CEO Klaus Eberhardt took over in 2000 the principle of “concentration on core capabilities” (Rheinmetall 2008a) was announced and conducted. The three core areas were defence, automotive, and electronics. A couple of earlier acquired enterprises were sold, leading to the current state of the corporation.

Products / Services / Areas

In the automotive segment Rheinmetall develops, produces and services, passenger-car pistons, commercial-vehicle pistons, large-bore pistons, piston modules, systems and components for air supply and emission control, actuators, solenoid valves, oil pumps, vacuum pumps, water circulation pumps, coolant pumps, aluminium engine blocks, plain bearings, bushings, thrust washers, dry bearings, etc.

In the defence sector Rheinmetall specialized in the following areas: Armoured wheeled and tracked vehicles, support and mine-clearing systems, NBC protection systems, turret systems, weapons and ammunition for tank and artillery systems, medium-calibre weapons and ammunition, self-defence systems, propellants and powder, civilian chemicals, air defence systems, high-performance radar systems, command, control and reconnaissance systems, C3I systems, fire control units, unmanned aerial vehicles, land simulation, flight simulation, maritime and process simulation (Rheinmetall 2008b). Rheinmetall Defence, the company’s defence arm, operates in Austria, Germany, Great Britain, Greece, Italy, the Netherlands, Poland, Switzerland, Canada, USA, India, Malaysia, Singapore, and the United Arab Emirates (Rheinmetall 2008c).

Shareholding structure

The shares are distributed over a variety of banks, funds, insurance companies, etc. No single shareholder owns an exorbitantly high percentage of Rheinmetall shares. The asset management company Schroders owns 7.91% of Rheinmetall shares, and hence is the corporation’s largest shareholder.

Financial state

The figures displayed are from the company’s defence segment (Rheinmetall Defence).

Table 12 – Financial state Rheinmetall 2007

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2.1.11. Dassault Aviation

History

The company’s history can be traced back to its founder Marcel Bloch, a Frenchman who later renamed himself Marcel Dassault. The roots of the group go back to 1916; it was, however, only from 1965 onwards that the company grew considerably through specialisation and acquisition. Similar to other French defence companies, the French state executes influence – in the case of Dassault Aviation indirect – through its participation in EADS which is one of two major shareholders of Dassault (cf. Shareholding structure).

Products / Services / Areas

The group is active in both the civil and military market. The Falcon business jets are the backbone of the company. All of the different Falcon series together accounted for 57% of all sales and 86% of all orders; leaving the defence segment with 43% and 14% respectively (cf. Financial state).

Dassault designs, develops, produces, and sells the combat aircrafts Rafale and Mirage 2000. Furthermore, it is a prime contractor in the nEUROn program, Europe’s UCAV (Unmanned Combat Air Vehicle) demonstrator (Dassault Aviation 2008a, p. 27).

The combat aircrafts are produced in France; the group, however, is active in several countries worldwide, mainly to provide interior fitting, rental services, and maintenance of its Falcon series aircrafts.

Shareholding structure

Dassault Aviation shareholders can be divided into three major groups. The largest shareholder is the Groupe Industriel Marcel Dassault. This group, owned by the Dassault family, holds the majority of 50.55% of all Dassault Aviation shares. The second-largest shareholder is the earlier described company EADS. The company acquired 46.30% of the Dassault shares. In all French companies we were confronted with state participation. In the case of Dassault the French state executes its participation indirectly through EADS. This leaves a remaining 3.15% of the shares with private investors (Dassault Aviation 2008a, p. 35).

Financial state

‘Dassault Aviation has been profitable ever since its creation in 1936’ (Dassault Aviation 2008b).

Table 13 – Financial state Dassault 2007

illustration not visible in this excerpt

2.1.12. Remarks

Having dealt with the initial research question we are provided with a first insight into the European defence business, its players, their products, and backgrounds. We have identified that the shareholding structure plays an elementary part. An accumulation of companies which are subject to state participation is unlikely for other industries. This issue will be subject to discussion below, furthermore Section 2.3.5. is completely devoted to this issue.

Companies, however, do not conduct business alone without interfacing and interacting with other parties; instead they are part of a lively environment of actors surrounding them. We will, therefore, want to use the next research problem to evaluate the market conditions that the introduced companies operate in.

Endnotes

2.2. PROBLEM 2 — Assess the defence companies’ current position in their respective national industry and forecast their potential market power in a common European defence equipment market

2.2.1. Introduction

In the introduction to this paper we have learned some general aspects about the European defence market, such that it can barely be regarded as an open market compared to other markets in Europe. We have also touched on the reasons for this development.

However, despite all protectionism through direct and indirect state participation (addressed under 2.1.) intra-European exports do take place, and the industry tries to find ways to consolidate and participate in other European markets. European cross holdings are a way to achieve this. However, as already discussed under point 2.1., especially in France and Italy the state, through its blocking minority, paralyses further consolidation, but at the same time is given a tool to intervene indirectly in companies that do not belong to its home territory. Figure 6 displays European cross holdings of defence companies and facilitates the spotting of domestic and foreign state influence. As we can observe, the participation in foreign enterprises has led to a reasonable amount of international joint ventures and consortia.

[...]


[1] Germany, France, Italy, and the United Kingdom

[2] The company changed its name from British Aerospace Public Limited Company to BAE SYSTEMS PLC effective from 5 May 2000.

[3] Exchange rate used can be found in Appendix A§III

[4] As at 31 December 2007; according to the Swedish Central Securities Depository.

[5] Marcus Wallenberg is also Chairman of the Board.

[i] ‘The Special Share is held on behalf of the Secretary of State for Trade and Industry (the ‘Special Shareholder’) (now the Secretary of State for Business, Enterprise and Regulatory Reform). Certain provisions of the Company’s Articles of Association cannot be amended without the consent of the Special Shareholder. These provisions include the requirement that no foreign person, or foreign persons acting in concert, can have more than a 15% voting interest in the Company, the requirement that the majority of the directors are British, the requirement that decisions of the directors at their meetings, in their committees or via resolution must be approved by a majority of British directors and the requirement that the chief executive and any executive chairman are British. The holder of the Special Share is entitled to attend a general meeting, but the Special Share carries no right to vote or any other rights at any such meeting, other than to speak in relation to any business in respect of the Special Share. Subject to the relevant statutory provisions and the Company’s Articles of Association, on a return of capital on a winding-up, the Special Share shall be entitled to repayment of the £1 capital paid up on the Special Share in priority to any repayment of capital to any other members.
The holder of the Special Share has the right to require the Company to redeem the Special Share at par or convert the Special Share into one ordinary share at any time.’ (BAE Systems 2008b

Details

Pages
162
Year
2008
ISBN (eBook)
9783640516308
ISBN (Book)
9783640516599
File size
2.3 MB
Language
English
Catalog Number
v142183
Institution / College
Anglia Ruskin University
Grade
1
Tags
armaments european union defence sector market structure

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Title: The european defence market