A Transatlantic Defence Market, Forever Elusive? by Clara Marina O’Donnell
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A transatlantic defence market, forever elusive? By Clara Marina O’Donnell ★ EU member-states and the US would benefit from more open defence markets across the Atlantic. Military forces would find it easier to co-operate in the field, governments could pay less for defence goods, and the transatlantic relationship would be strengthened. ★ But markets remain fragmented. States are often more concerned with creating jobs than with buying the most cost-effective equipment. And they are reluctant to rely on each other to supply defence goods or to protect their military technologies from falling into the wrong hands. ★ Commendably, Washington and the EU are taking steps to loosen their excessive export controls. But to be effective the reforms must be more ambitious and co-ordinated. In addition, European governments must use the economic crisis as an opportunity to stop shielding unsustainable national defence industries. The US and most countries in Europe have had close Guns and jobs political and military ties for decades. Through NATO, For decades the US and European countries with large they are committed to their mutual security and they national defence industries have relied mostly on have often fought side by side, including in Kosovo, Iraq domestic suppliers. And when contracts have been and Afghanistan. awarded to foreign firms, states – including those in For years many experts, industry leaders and politicians Europe without their own defence industry – have have been highlighting the potential benefits for generally required that a certain amount of the transatlantic allies of more open defence markets. Greater production take place on national soil. Governments competition would allow for cheaper defence goods and have preferred equipment to be made at home partly promote cutting-edge technological development. Fewer because they want to ensure access to, and control over, bureaucratic barriers between national markets would sensitive weapons systems and technologies. But buying make it easier and more cost-effective for governments to defence goods has often also been seen as a way to buy and develop weapons together. Their armed forces support the national economy. Politicians, particularly would use more common equipment, improving their those with constituencies that employ people in the ability to fight side by side. Currently, multinational defence sector, have been reluctant to spend taxpayers’ deployments are often hampered by countries using money abroad. incompatible hardware – for example, different radios have A recent study by the Center for Transatlantic Relations, made it hard for troops from various nations to commissioned by the US Department of Defence (DOD), communicate on the battlefield. Finally, an integrated discerns a trend since 2006 towards more openness in market would help cement the transatlantic alliance. defence markets across the Atlantic 1 Yet defence markets across the Atlantic remain hamstrung and ‘somewhat “better value” Jeffrey Bialos, Christine Fisher and Stuart Koehl, by heavy restrictions on technology transfer, burdensome buying habits’.1 But there is a long ‘Fortresses and icebergs’, export controls and government reluctance to buy way to go. The report acknowledges that the Pentagon Center for Transatlantic equipment from abroad. For the US, which alone accounts Relations, Johns Hopkins still awards around 98 per cent of for half of the world spending on defence, the current state University, 2009. of affairs is sustainable, although very inefficient. But in its procurement budget to US Europe defence budgets have become too small to maintain companies and that various European countries still rely national industries and the survival of the European mostly on domestic suppliers. For example, between industrial base is at risk. 2006 and 2008, the Italian government awarded 60 per Centre for European Reform T: 00 44 20 7233 1199 14 Great College Street F: 00 44 20 7233 1117 London SW1P 3RX UK [email protected] / www.cer.org.uk 2 cent of its new defence contracts to Italian firms, while development (R&D), Washington 4 ‘European – United 56 per cent of new German defence programmes went to spends approximately S55 billion.4 States defence expenditure German suppliers. Broadly speaking, European in 2008’, European companies have adopted three Defence Agency, In addition, local employment remains important. approaches: December 2009. American defence manufacturers sometimes spread their production efforts across various US states in order to * The BAE model strengthen support within Congress for their contracts. Over the years, BAE Systems has acquired several large Washington officially waives its ‘Buy American’ American defence companies and become a significant requirements towards most countries in NATO. (The employer in the US.5 The firm has also underplayed its Buy American Act requires the US government to prefer British origins, stressing American patriotic values in its US-made products in its purchases.) But in practice, advertising campaigns. The strategy has been very foreign companies must still create jobs in America if effective and BAE has become the only European among they want to win a sizeable defence contract. In Europe, the top five suppliers to the DOD. governments frequently ask for compensation policies known as ‘offsets’. These oblige foreign firms to invest in Others have tried to replicate BAE’s success, and between the country or transfer technology as part of the sale. 2007 and 2009 alone there were 75 mergers and Offsets are often worth more than the value of the acquisitions by European firms in 5 contract and frequently the investment is not even in the the US.5 British companies, ‘Return of the giants’, defence sector. For example Saab’s offset arrangements including Rolls-Royce and Meggitt, Jane’s Industry Quarterly, with Hungary, in order to lease its Gripen fighter, led have found it easier to make big May 2010. 2 ‘Quid pro quo: The Electrolux to set up a factory to investments, due to close political changing role of offset in manufacture refrigerators in the ties between London and Washington. However in the 2 the global defence market’, north of the country. Defence spring of 2008, the Italian firm Finmeccanica broke new Jane’s Industry Quarterly, companies have also built hospitals ground by becoming the first continental group to buy a October 2009. and schools. sizeable American company, DRS Technologies, in a deal worth $5.2 billion. Offsets and broader job creation requirements can damage the armed forces and competition. A company Some European firms believe that the ‘BAE strategy’ has may win a contract not because it has the best product, drawbacks. Washington requires European groups who but because it offered the most generous compensations. buy US companies to introduce extensive security firewalls between their American and European Officially, the EU has recognised offsets as inefficient and operations. (Firewalls prevent staff in different costly. Member-states have even taken steps to limit departments from sharing information and European them: in 2009, most governments signed up to a owners from having access to details of sensitive US voluntary code of conduct which promised to reduce programmes). As a result, companies such as BAE have their scope. Member-states have also agreed on an EU only partial knowledge of the activities of their American directive on defence procurement, which from 2011 is subsidiaries. And instead of benefiting from synergies, designed to put an end to compensation policies within they often have to maintain separate research the EU. But until recently several members-states, notably departments and separate production lines when they Poland and Bulgaria, were still introducing national supply the US and European markets. legislation to make offsets mandatory. In light of the importance several European countries attribute to * The EADS model offsets, it is likely to take years Like BAE, EADS competes for very large DOD contracts. 3 Clara Marina before national behaviours change. It has notably bid for a deal worth over $50 billion to O’Donnell, ‘The EU And the European Commission build the next generation of air-to-air refuelling tankers. finally opens the European might have to take recalcitrant But unlike the British defence giant, the European group defence market‘, CER member-states to the European has not acquired any large American defence firms. 3 policy brief, June 2009. Court of Justice. EADS builds factories in America whenever it secures a contract with the Pentagon. But the lack of US The struggle for market access subsidiaries has at times made it hard for the European company to win bids. Aware of the need to create local jobs and avoid the label of ‘foreign suppliers’, defence companies in the US * The Thales model and Europe have developed various strategies to break Thales has adopted a more modest level of ambition than into each other’s markets. They have developed either BAE or EADS. To date, the European defence firm partnerships, set up joint ventures and bought local has not succeeded in making any major US acquisitions. defence firms. European defence companies, increasingly So Thales has avoided bidding for large US defence cash-starved at home, have been particularly active in contracts, recognising that its relatively small presence in their attempts to sell to the Pentagon. Indeed while annual America and its partial ownership by the French state budgets for defence equipment across the EU are about could limit its chances. S40 billion combined, the US spends around S165 billion on procurement. And while member-states spend a In order to supply the US armed forces with weapons total of around S8 billion a year on research and systems, Thales has often teamed up with leading 3 American companies. Several years ago, Thales and the prompting Northrop Grumman to withdraw from the US firm Raytheon formed the largest transatlantic joint competition. Several European leaders, including French venture to date, in order to sell radars and other President Nicolas Sarkozy, loudly accused the US equipment to Europe and the US.