Julian Moxon/PARIS
It was settled on a Sunday in late July over a bottle of France's best wine and a "piéce de boeuf". At the end of the luncheon, Aerospatiale president Yves Michot and Lagardère co-president Philippe Camus shook hands on a merger that will change forever the face of the French and European aero-space industries.
Whether the gastronomic delights served that day helped the two swallow the pill of reconciliation between old enemies - one France's largest state-owned aerospace company, the other one of its largest private sector space and defence contractors is unknown. At a stroke, however, the move solved a longstanding domestic restructuring issue, while leaving open the question of whether it was a bold enough move to keep France at the centre of the European consolidation process.
The pressure to sort out the tangled mess of European aerospace industries had been building ever since the US aerospace industry began restructuring itself after the end of the Cold War in a process so rapid, and so gargantuan, that it left Europe, its major competitor on the global stage, struggling for breath.
In the short term, European industry was totally unable to answer the challenge. For a business dependent for so long on a staple diet of Government defence contracts - stimulated by the arms race with the Warsaw Pact - and saddled with numerous national industries operating in both the public and private sectors, matching US restructuring was going to take years more than it did across the Atlantic.
UK MODEL
Only in the UK, where the defence industry had largely been sold off under the Thatcher regime during the 1980s, had a rationalisation taken place which positioned it better than in other European nations for what was to come. In France, which hosts the second largest defence industry in Europe (behind the UK), the idea of "selling off the crown jewels" went so against its cultural grain, however, that only in October 1997 (with the long-awaited "pseudo-privatisation" of Thomson-CSF) did the process begin in earnest. Before that, the only major European strategic defence alliances which the French industry had succeeded in forming were between Lagardère's Matra and British Aerospace (Matra BAe Dynamics) and the UK's GEC (Matra Marconi Space), and these had been signed before the restructuring urgency gathered momentum.
France's difficulty in adapting rapidly to the the new situation meant that the European restructuring process was itself stalled. The UK and Germany had made it clear that privatisation of the French defence industry was an essential prerequisite for any meaningful revamping that would include France - which at one point seemed to be faced with being left out of the manoeuvres altogether if its industry failed to take the initiative.
France retorted that the privatisation issue was a "false debate", pointing out that state-owned Aerospatiale was a key part of the Airbus, ATR and Arianespace groups, as well as of helicopter manufacturer Eurocopter.
These alliances were largely in the civil sector, however, and took many years to solidify. In defence aerospace and electronics, France's government-controlled industries were adopting what amounted to a siege mentality against what they believed was a European industry apparently bent on self-destruction, simply to stand up to the USA. "There will be no privatisation of Aerospatiale," said defence minister Alain Richard in July 1997, insisting that the company would "-remain at the centre of the restructuring process", while staying in the public sector.
Movement on a European scale now began to gather momentum. In December 1997, the governments of France, Germany and the UK asked industry to come up with a report on the potential for formation of a unified European aerospace industry. It was duly presented in March. Then, in July, these three countries, plus Italy, Spain and Sweden, signed a letter of intent to co-operate on "creating the most favourable environment possible for the restructuring of the European defence industry". This was hardly likely to change the industrial landscape overnight, being mainly concerned with harmonisation initiatives in areas such as defence procurement. The deal also left unanswered major questions, such as how to consolidate the combat-aircraft sectors of France and the four Eurofighter countries.
DASSAULT MOVE
Paradoxically, however, the company at the very core of the French defence industry - Dassault Aviation - had already seen the writing on the wall and executed a brilliant volte face by strengthening its business-jet division when it became clear that income from its hitherto lucrative combat-aircraft business was set to go into freefall. Not only have Mirage sales stagnated since the major contracts with Taiwan and Qatar, but the new Rafale has yet to secure a long-awaited multi-year procurement order from the French armed forces for 48 aircraft. Unless Farnborough brings relief, the company's farsightedness may prove to have been more prophetic than it seemed at the time.
After two years of tough negotiations, the Government agreed in the second quarter of this year to hand its 46% stake in Dassault Aviation to Aerospatiale. Dassault is already co-operating with BAe on combat-aircraft development, and there has been considerable speculation on the two being at the centre of a UK-led European combat aircraft business. This would effectively satisfy one of BAe's main conditions for giving up its other businesses to the so-called European aerospace grouping - that it would get control of a combat aircraft business with a turnover on the scale of that of Lockheed Martin.
Earlier this year, France also moved on the longstanding problem of what to do with its huge defence electronics industry. Following several false starts, which delayed the process by two years, the Jospin Government approved the handover of 16.36% in Thomson-CSF to Alcatel Alsthom, with a further 6% going to Dassault Industries, in exchange for yielding its Dassault Electronique division to the new entity. Along with the 30% to be floated on the French stock exchange, this left the government with a minority 43% stake in Thomson-CSF and France with a Fr50 billion ($8.3 billion) defence electronics concern which, when the details are settled (there has already been some three months' delay), will create Europe's largest defence electronics company, lagging only behind US giants Lockheed Martin and Raytheon in turnover.
Next, and equally unexpected, was the Michot/Camus deal in which Lagardère would take a 30-33% stake in Aerospatiale, yielding 100% of its Matra Haut Technologies business to the new group, and reducing the Govern-ment's holding to below 50% (about 33%). The deal followed prime minister Jospin's declaration in May that Michot was to be given a mandate "-to conclude strategic alliances in the shortest time, particularly in combat aircraft, missiles and space". In the eyes of the Government, it was also more than enough to prepare the resulting group for further European consolidation, the "pseudo-privatised" Aerospatiale now being at the heart of an enormous Fr80 billion aerospace enterprise.
Two of the questions now being asked, however, is how the missile businesses of the two new supergroups can be reconciled, and how the stated desire to include outside companies can be accommodated.
Much has been said in France about hopes that GEC (which the government barred from the original attempt to sell off Thomson-CSF) will take a stake in the new expanded Thomson-CSFgroup. In March, the government went as far as to authorise the French to look at alliance possibilities with the newly merged Anglo-Italian GEC-Alenia Aerospazio defence electronics concern, its idea apparently being to balance the Matra BAe Dynamics missiles alliance and to provide the basis for a wide-ranging reconciliation between the two.
This has not yet happened, however, and since then the Matra/Aerospatiale deal has been signed, with little further action likely until both of the new groups have finalised the details of their respective structures. Contacts between the main actors are continuing, however, and the Farnborough air show may yet prove the catalyst for further consolidation.
UNIFIED EUROPEAN GOAL
Whether the recent moves in France will lead to the European goal of a unified industry remains to be seen, but it is interesting to note that the actions have been pushed through by a largely new leadership. Michot, for years second in command at Aerospatiale, took over from Louis Gallois in mid-1996, while Thomson-CSF's Denis Ranque replaced Marcel Rouletin January this year (bringing with him a longstanding friendship with new GEC chief George Simpson). Ranque's appointment was also internal, made after 15 years of moving consistently upwards through the ranks.
Camus was made co-president of Lagardère after Noel Forgeard was chosen earlier this year to run Airbus Industrie, leaving Alcatel Alsthom's Serge Tchurk as the only one of the four presidents to have been in his post for more than two years. Tchurk is noted, however, for his "Europeanism" and has played his cards carefully over the years, fighting hard to win the original battle against Lagardère for control of Thomson-CSF.
Source: Flight International
