European Defense Industry's Decreasing Competitiveness
17 Sep 2013
By Marco Guilio Barone for International Security Observer (ISO)
This article seeks to tackle how the European defense industry, while prominent and strong, is losing competitiveness in its domestic and international domains, in particular in favor of the United States and rising economies.
In the last three decades European defense industries have been joining forces, affording major relevant programs concerning sea, air and land systems. Programs such as the Eurofighter and FREMM class frigates demonstrate a high level of know-how and relevant production capability. Nonetheless, given the economic depression and the cuts in defense spending among European states, the consequent shortage of funds is deeply affecting research and development (R&D) capabilities[1] . In addition, programs such as the F-35 and the new NATO missile shield, based on the SM-2/SM-3 missile system, seem to drain further European resources towards investments which favor the U.S. industrial base rather than the European one, which is already threatened by the outcomes of the economic depression[2] . While nowadays, R&D is the main booster of new generation equipments, Europe is over-constraining its structural investment in the field. Thus, it is no surprise that the industry’s ability to compete in the long term in international markets will be extremely endangered[3] . On the one hand, some companies are still doing well, compensating for European underinvestment with exports overseas. Electronics, space and civil aviation are still experiencing growing international presence and business development[4] . But, on the other hand, there is a clear lack of new latest generation programs due to decreased defense expenditures, from 251 billion EUR in 2001 to 194 billion EUR in 2012[5] . Furthermore, the current trend is expected to continue in the following years, further diminishing public investment in defense. Such a trend is likely to result, in the midterm, in the shortfall of competitiveness and a reduction both in size and relevance of the European industrial base.
Given such a forecast, it is unlikely that the external market could represent a valid alternative to the narrowing internal one for a long time. In particular, the U.S. is going to become a greater competitor, rather than an ally, to European companies. After boycotting several European products which had already been selected by U.S. armed forces, the U.S. defense industry is disrupting European foreign markets[6] . However, unlike many voices suggest, the U.S. might not be plotting to damage the European industrial system. Rather, U.S. corporations are looking for worldwide opportunities, due to U.S. budget cuts that, in the last few years, have become truly upsetting for some of them. Nevertheless, unlike the European industry, the U.S. is strongly supported by a coherent national strategy and by the capability of politically sustaining the private sector’s efforts in finding new customers and reducing its reliance on national orders at the same time[7] . Europe’s political split makes European industries weaker and often in competition with each other (e.g. Eurofighter vs. Rafale in India, Fincantieri vs. DCNS in Brazil, etc.). In addition, the average limited size of European brands severely affects their capabilities of exploiting economies of scale. Therefore, most European products are often more expensive than their international competitors and, at the same time, unavailable for immediate delivery and/or require prolonged acquisition programs[8] . Thus far, with regards to developing economies such as India, Brazil, Turkey and others, technology transfers and licensed productions represent the “conditio sine qua non” for signing contracts[9] . Hence, in the midterm, Europe might lose its prominence in the field if a new wave of innovation does not come.
The political realm within which European defense industry operates does not help in finding alternative ways of gathering funds and resources needed for succeeding. In particular, there is no shared European view of the defense market and its related dynamics. Moreover, there is no common political agenda for the pursuit of pooling investments and purchases by European states. Accordingly, state ownership of major firms often leads to duplication and therefore inefficiencies across the whole sector[10] .
Public-sector’s influence makes major companies less attractive to the eyes of private investors, who may not want to accept the risk of remaining bridled by political instances, which often drive bigger contracts more than true competition[11] . Also, states have not yet realized that “one size does not fit all”. In the last few years several technology advancements have come from middle sized enterprises rather than from big firms, especially with respect to the growing drone sector (UAVs, UUVs, etc.). Feeding industries because of their size only, instead of focusing on their actual capability of advancing innovation does not boost competitiveness. Perhaps, European states have demonstrated their eagerness to incentivize only those strategies that take into account the economic constraints more than forward-oriented approaches[12] . This makes them blind to the dynamics through which the global defense market is evolving today.
The European Commission, already aware of hard times to come for the European defense industry, has tried to intervene by reshaping the regulatory framework in an attempt that favors an upward spiral of liberalization in order to revive competitiveness[13] . Joint ventures and mergers are likely to be favored in order to share costs and risks amongst the stakeholders, even if such a formula is no longer trusted by many member states due to increasing costs of the latest programs (e.g. Eurofighter, A-400, NH-90), which have grown far beyond the initial expectations. So, despite of growing concern on this issue, just a few structural changes are likely to occur. For now, no credible countermeasure has been planned or implemented at the strategic level. Rather, each company, with only a few exceptions, is trying to survive on its own, without any comprehensive European strategy.
What are the policy options available to the European Union, then? Until member States embrace a broader view on the issue, almost none. Yet, it is worth exploring what the viable pathways towards recovery look like.
First of all, States should decrease their commitment to big national companies and, rather, pledge funds into those companies which truly demonstrate they can pursue innovation (even if small or medium sized). That said, less State commitment would result into freedom for major industries to decide on their own according to the market, rather than to political considerations. For instance, the failure of EADS-BAE merger is the proof of how counterproductive State intervention can be. In this case, German fear of losing privileges and prominence, because of French leadership in the civil sector and British relevance in the defense sector, dominated the negotiations rather than the broader perspective of a huge European block which would be able to compete in international markets.[14] .
Second, once again, pursuing coordination in defense spending, at the European level, is a viable way of optimizing available resources. This can be done only if at least the biggest members (Germany, France, Italy, and United Kingdom) agree on a shared strategy. For instance, regarding the aerospace sector, both the Rafale and the Eurofighter are excellent fourth generation products, but affording both projects has meant spending more, increasing the unit price and competing on the same limited market of advanced fighters. The same can be said, for example, for programs such as Horizon class and Daring class destroyers in the naval sector, and so forth.
Finally, finding a common European foreign policy pathway would make the defense industry be backed better (at political level), when promoting and selling its products abroad. Besides, implications of the unitary European foreign policy would include shared needs amongst European armed forces – in the long term -and thus concerning procurement and standardization as well. Consequently, common military requirements and operational similarities would encourage further pursuit of mergers and economies of scale within the European defense industry sector.
For additional reading on this topic please see:
A Doable Agenda for the European Defence Council 2013
Armaments Duplication in Europe: A Quantitative Assessment
The Changing European Defence Market
Harmonized EU Arms Exports Policies in Times of Austerity?
[1] Mason, D.“Time to do more together” on defense, says Barroso, Public Service Europe, July 24, 2013.
external pagehttp://www.publicserviceeurope.com/article/3843/time-to-do-more-together-on-defence-says-barroso
[2] European Defense Agency, Meeting future European defence and security challenges requires a strategic approach to the Aeronautics EDTIB, FAS4Europe N.027 Issue 2, February 2012. Executive summary available at
external pagehttp://www.eda.europa.eu/docs/documents/fas-for-europe-executive_summary_issue_2.pdf
[3] Hoyle, C. European Defense Industry Nearing Crisis, Report Warns, Flight International, March 6, 2012.
external pagehttp://www.flightglobal.com/news/articles/european-defence-industry-nearing-crisis-report-warns-369946/
[4] Berteau, D.J. et alii, European Defense Trends 2012 – Budgets, Regulatory Framework, and the Industrial Base, CSIS, pp.34-40.
external pagehttp://csis.org/files/publication/121212_Berteau_EuroDefenseTrends2012_Web.pdf
[5] Mason, D.op. cit.
[6] European Defense Agency, op. cit.
[7] Deloitte, 2013 Global Aerospace and Defense Industry Outlook, pp.6-7.
external pagehttps://www.deloitte.com/assets/Dcom-Iceland/Local%20Assets/Documents/2013GlobalADIndustryOutlook.pdf
[8] Darnis, J.The European Defence Industry’s Future: How European?,Jacques Delors Institute and IAI – Istituto Affari Internazionali, February 13, 2013, pp.2-5.
external pagehttp://www.notre-europe.eu/media/europeandefenceindustry-darnis-ne-jdi-feb13.pdf?pdf=ok
[9] European Commission, Towards a more competitive and efficient European defense and security sector, Draft Communication, Brussels, June 10, 2013.
external pagehttp://www.dwt-sgw.de/fileadmin/redaktion/DWT-Veranstaltungen/DWT/2013/BXL-Veranstaltungen/Draft_Communication_10_Juni.pdf
[10] MollingC. and Brune, S. The Impact of the Financial Crisis on European Defense, Directorate-General for External Policies, European Parliament, 2011, pp. 2, 22-24.
external pagehttp://www.europarl.europa.eu/document/activities/cont/201106/20110623ATT22404/20110623ATT22404EN.pdf
[11] The Economist, Europe’s Defence Industry – A hard pounding this, March 2, 2013.
external pagehttp://www.economist.com/news/business/21572826-falling-defence-budgets-and-excess-capacity-have-put-europes-military-equipment-makers
[12] Barrie, D. Will Europe Ever Build Its Own Fifth Generation Fighter?, Breaking Defense, June 14, 2013.
external pagehttp://breakingdefense.com/2013/06/14/will-europe-ever-build-its-own-fifth-generation-fighter/
[13] European Commission, Towards a more competitive and efficient European defense and security sector, Press Release, Brussels, July 24, 2013.
external pagehttp://europa.eu/rapid/press-release_IP-13-734_en.htm
[14] BBC News Business, BAE-EADS merger canceled amid political impasse, October 10. 2012.
external pagehttp://www.bbc.co.uk/news/business-19897699