Institut de Relations Internationales et Strategiques Jean-Pierre MAULNY, IRIS Trevor TAYLOR, University ofCransfield Burkard SCHMITT, West European Union Institute Franck-Emmanuel CAILLAUD, IRIS > Adresse >Telephone > Telecopie >Internet IRIS 01 53 27 60 60 2 bis, rue Mercoeur 01 53 27 60 70 www.iris-france.org 75011 PARIS. FRANCE 1 1/ "-! ) . ~ CONTENTS Chapter 1 : Germany P. 4 I) The economic and industrial model of the German defence industry P: 4 II) The German model of the State-Industry relationship P. 9 III) Analysis of the strategies and spreadsheets of these companies : The example of DaimlerChrysler Aerospace (DASA) P. 18 IV) Study of an Economic and Industrial Co-operation Model where a German Company is Involved P. 35 Chapter 2: Spain P. 47 I) The Economic and Industrial Model of the Spanish Public Sector P. 47 II) The Spanish Model of State-Industry Relations P. 53 III) Analysis of CASA'S Strategy and Balance sheets P. 57 IV) Study of models of economic and industrial co-operation with Spain P. 62 Chapter 3: France P. 71 I) The French economic and industrial model P. 71 II) The French model of the relationship between State and Industry P. 82 III) Analysis of French companies' strategy and balance sheets P. 94 IV) Study of economic and industrial co-operation models involving a French company P. 109 Chapter 4: Italy P.133 I) The Defence Industry in Italy P. 133 II) Finmeccanica- a group in the midst of transformation P. 136 III) The role of the State P. 145 2 Chapter 5 :United Kingdom P.lSO I) Corporate governance in the UK defence sector P. 150 II) The British government's relationship with defence industry in the UK P. 154 Chapter 6 : Sweden P.166 I) Sweden's Cold War security policy and historical of Swedish defence industry P. 166 II) The transformation of Swedish security policy P. 170 III) Industrial restructuring And corporate governance in the Swedish defence industry P. 172 IV) Factors shaping the future P. 174 Conclusion P.178 Recommendations P.l94 3 CHAPTER 1 : Germany I. THE ECONOMIC AND INDUSTRIAL MODEL OF THE GERMAN DEFENCE INDUSTRY The configuration of the German armaments industry and the rather particular place it currently occupies in the country's economy are shaped, above all, by the consequences of capitulation in 1945. Following the destruction and dismantling of all production capacity, the armaments industry was gradually rebuilt during the 1960s. Today, certain areas of production are even larger than those of the British and French industries. As a result of the collapse of the Soviet regime and unification, the military budget declined sharply and increased focus was given to civil technology. This focus has always been a characteristic of 1 arms production in Germany . The armaments industry was reconstructed differently depending on the sector concerned. In the aeronautics sector, where Germany had been a leader prior to the war, the industry was held back by the imposition of multiple international restrictions. Technological knowledge in this case was gained via participation in co-operation programmes. However, in the territorial industry and naval construction, German industrial companies were able to use their own skill - and improve rapidly, without the need for external help. One of the distinctive traits of German industry concerns the gradual development of an aeronautics and defence sector centring around Daimler-Benz. Since 1984, this group has acquired companies specialising m electronics (AEG, Telefunken, Siemens­ Sicherungstechnik), engines (MTU) and in aeronautics (Dornier, Fokker, Messerschmidt­ Bolkow-Blohm [MBB]) to form one single subsidiary, DASA. DASA has become national aeronautics champion, bringing together the largest companies of these sectors (apart from Domier Luftfahrt GmbH, which was sold back to the American, Fairchild, in 1996 and Diehl whose subsidiary, BGT, specialises in missiles). DASA is, by a long margin, the largest supplier of the Bundeswehr (Tornado, EF 2000, Tiger, NH 90, etc.), however, thanks to 1 For further information, see Joachim Rohde, "German Defence Industry and Defence Industrial Policy", ESAN-Projekt "Arms Production and Cooperation", Paper No. 10, SWP Ebenhausen, 1997, as well as "French­ German Arms Cooperation: Issues and Perspectives", in : Les relations franco-allemandes : etat et perspectives, IFRI reviews, No. 25, Paris, 1998, p. 69-108; see also Military Technology, Vol. XXII, Issue 2, 1999: "Defence Procurement in Germany". 4 Airbus, it is achieving the greater part of its turnover in the civil sector. The other aeronautics companies are small and medium sized specialist suppliers. A second sector of the armaments industry centres around naval construction. German naval construction generates a turnover of more than 10 billion DM, a third of which stems from the military sector. It is divided into two groups according to size. Firstly, the large naval construction sites of Howaldtswerke Deutsche Werft AG in Kiel (HDW), Blohm & Voss GmbH in Hamburg and the Thyssen Nordseewerke GmbH in Emden (TNSW), and secondly several average-sized companies such as Lfussen Werft GmbH & Co in Bremen (FL W), HDW specialising in non-nuclear submarines, Blohm & Voss in frigates, FL W in small surface ships and corvettes. All these companies are active exporters (HDW, TNSW and Ferrostaal in the German Submarine Consortium, Blohm & Voss, HDW and Thyssen Rheinstahl Technik in the German Frigate Consortium). Lately, naval construction has been undergoing considerable change: in 1995, Blohm & Voss and TNSW were restructured and recombined as a holding company, Thyssen Werften GmbH. Having sold 50% plus 1 share of HDW to Babcock Borsig at the beginning of 1999, Preussag is now about to give up the remainder of its stake in HDW to Celsius. Thus giving birth to a new German-Swedish construction company (HDW and Kockums Naval Systems) which will be the largest constructor of (non nuclear) submarines in the world. 2 The territorial armaments industry is also undergoing restructuring. In view of the drop in military orders, companies in this sector have undertaken a major process of diversification over the past few years. At the same time, there is a strong trend towards concentration : following several mergers and take-overs, only three main players remain in the field of tank and armoured vehicle construction : IWKA AG (Henschel and KUKA), Krauss-Maffai Wegmann GmbH and MaK-Rheinmetall. Henschel and KUKA specialise in mechanised combat vehicles, Krauss-Maffai Wegmann and MaK in battle tanks. The fact that the latter were selected to manufacture GTK put pressure on IWKA AG to merge its activities with the winning team. If this merger goes ahead, there will be only one major German player which, thanks to its technological excellence, will probably assume the leadership of restructuring on a European scale. Due to its activities in the field of tanks, vehicles, canons and electronics, Rheinmetall will doubtless be the central focus of these developments. 2 FAZ, 28.5.1999, S. 16. 5 Since its reconstruction began, the German armaments industry has remained largely private. The exception has been the major stake held by certain Lander (Bavaria, Hamburg, Bremen) in the capital of MBB, but this participation carne to an end following the acquisition of MBB by Daimler-Benz (except for Hamburg, see below). On a federal scale, the State has never been a shareholder in the defence industry. 3 The decision not to become involved as an industrial player reflected a widely held view in German society, but it was also intended to make it easier to transfer technology towards civil industry. From the 1950s and 60s onwards, the idea was to combine the defence and civil industries for the benefit of the economy overall. Today, the influence of this idea is manifested in several characteristics of the defence industry structure : firstly, the majority of the main arms manufacturers also boast considerable civil activity. Even during the cold war, very few major defence companies generated more than 30% of their turnover with military activity. Only a few medium-sized industries (such as Wegmann and Diehl) and a good number of sub-contractors and suppliers are less diversified. Secondly, the main players in the German armaments industry are all part of major industrial groups which are most active in the civil sector. This is the case both for territorial armaments (e.g. Roehling), naval construction (Thyssen) and aeronautics (Daimler9hrysler). Thirdly, armaments companies have developed the same mode of governance as firms in other sectors. Legally, the majority are limited liability companies (GmbH), but there are also a few public limited companies (AG). While the structure and operation of AG companies are predominantly governed by law, the GmbH companies have a fair degree of freedom regarding their internal organisation. At the risk of generalising, certain characteristics can be highlighted, which are true for all companies : a) Participation of salaried employees in managing companies : Large German compan1es (more than 500 employees) have dual leadership. There 1s a Supervisory Board and a Board of Directors consisting of the company directors. The supervisory board monitors the management's activities and for certain important decisions 3 Up until 1992, the Federal State did however hold an indirect share of 20% via the Kreditanstalt fiir Wiederautbau (KA W) in Deutsche Airbus GmbH. 6 holds a power of veto. The two boards are independent of each other because it is impossible for one person to be on both at the same time. In companies of more than 2000 employees, the supervisory board consists half of employees (personnel and union representatives), and half is appointed during the shareholders' general meeting. Nonetheless, the presence of employees on the supervisory board is tempered by the fact that the Chair of the board is always a shareholder representative and his or her vote is decisive in the event of a controversial decision.4 Nonetheless, employees are very much involved in the decision making process, both via the supervisory board and the board of directors.