Finmeccanica has a strategy to become a key player in the world’s two biggest defence markets – and has put its money where its mouth is
This time last year, Finmeccanica was trumpeting ambitious plans to expand into international markets. The company earmarked the UK and the USA as crucial targets, to be attacked through the two main strands of its core aerospace and defence businesses – helicopters and defence electronics – while at the same time pushing for a new role as a systems integrator able to compete internationally with prime contractors. A US Coast Guard contract and a UK acquisition indicate this bullish strategy is starting to pay off for the Italian giant.
Key to Finmeccanica’s global strategy are the helicopter and defence-electronics markets, through which the company wants to make its mark as a world-class player. Finmeccanica’s results support this approach: combined, the two sectors account for more than 50% of its aerospace and defence revenue. Both areas have undergone extensive change in recent months.
Finmeccanica sealed its ownership of AgustaWestland in November last year, when it took on from GKN the 50% it did not already own, following an agreement reached in May 2004. The €1.5 billion ($1.82 billion) deal was designed to “internationalise our exposure to defence budgets and to increase selectively the dimensions of our core aerospace and defence business”, says chairman and chief executive Pier Francesco Guarguaglini (see AgustaWestland box P50).
The second vital strand in Finmeccanica’s portfolio – its defence- electronics business – has also undergone extensive restructuring over the past year following the company’s decision to acquire defence-electronics assets from the UK’s BAE Systems. The Italian company has streamlined the sector under three new company names. Selex Sistemi Integrati operates in the air traffic management and air traffic control sectors; Selex Sensors & Airborne Systems – of which BAE still owns 25% – operates in the avionics sector; and Selex Communications is the group’s military and secure communications arm.
Integration plan
The business’s history as part of BAE leaves Selex Sensors & Airborne Systems with a significant foothold in the UK and US markets, says chief executive Giancarlo Grasso. But first on his list of priorities is a three-year integration plan. “We’re working on rationalising technological overlap. A significant task of integration is choosing centres of excellence and making sure technology is used across products.” Grasso does not expect any major changes in production locations.
Giorgio Zappa, chief operating officer of Finmeccanica, highlights the significance of Tranche 2 of the Eurofighter Typhoon programme for the company, as it provides more than 60% of the fighter’s electronic systems. This means the company will play a key role in winning export contracts and further updating of the aircraft and its systems. Finmeccanica retains the option to acquire the remaining 25% of Selex Sensors & Airborne Systems within two years of closing the deal. Grasso does not anticipate this transaction taking place earlier: “There’s no significant reason for compressing this period from my point of view.”
The defence-electronics sector is a key part of Finmeccanica’s push for a larger US footprint, despite the difficulties involved in selling such sensitive products abroad. The Italian company will need “strong links” with US firms to overcome these problems, says Zappa, both through strategic collaborations and acquisitions. To achieve this, he says, “we need to be an investor in the USA – we’re looking for small to medium-sized enterprises with some kind of niche capability”. Finmeccanica is not rushing into anything, but will scrutinise technological capability, size and finances of any potential acquisition. “This kind of decision is not urgent – we’ll do it in the right time,” Zappa says.
Grasso says: “The success of our products with the US Coast Guard is a good start,” adding that the Seaspray radar for the coast guard’s Lockheed Martin HC-130s marks the first instance of a non-US company selling radars to the USA.
Finmeccanica’s recent success in the USA through AgustaWestland is significant for other businesses in the group, says Grasso. Future US programmes, including the Boeing P-8 Multi-mission Maritime Aircraft, could also provide opportunities for the Italian company to increase its US defence-electronics market share. As the USA becomes more important to the Italian group, its victory, as part of a Lockheed-led team, in the VXX presidential helicopter competition is a key milestone (see P50).
Other collaborations on key military programmes will boost Finmeccanica’s US presence – the Italian group is teamed with L-3 to offer its C-27J to the US Army. Alenia Aeronautica chief executive Giovanni Bertolone says a request for proposals is imminent and he is hopeful of a final decision in the middle of next year. Success in the USA would undoubtedly lead to more international orders, and “would allow us to become a global player in the field of selling transport aircraft”, he adds.
Zappa says: “We will continue our proposals to increase our participation in defence electronics in the Joint Strike Fighter [JSF] programme.” He is “optimistic” about the prospects for final assembly of the JSF in Italy. “If you consider the investment of the Italian armed forces in this programme, it seems to me possible that we will be able to push for this request from the Italian government.”
However, the company’s focus on the USA does not mean it is neglecting markets closer to home, Zappa points out.
He maintains that, while Finmeccanica considers its position in Europe to be strong, it has not ruled out involvement in any further consolidation. The group’s deal with Alcatel, leading to the creation of Alcatel Alenia Space and Telespazio in the satellite manufacturing and services sector, created Europe’s largest space operator, but Finmeccanica may not stop there. Rumours of a possible merger between Thales and Finmeccanica, or of a closer strategic partnership in the defence-electronics sector, have rumbled on for months.
Thales talks
Zappa confirms that the Italian giant has been talking to Thales. “We are interested in taking part in the next step in Europe, in the short to medium term,” he says. But ultimately any further progress – and its timescale – will be up to the French government. “Our relationship with Thales is very strong in many programmes,” Zappa says, but he concedes that this could be developed further: “It’s possible to imagine some kind of solution.” One London-based analyst says: “Thales and Finmeccanica makes the most sense, but politically I’m not sure anything will happen in the near term.”
Thales, and the French and UK markets it occupies, are not Finmeccanica’s only European target. Zappa confirms that the company has not ruled out taking a stake in Spanish aerostructures manufacturer Gamesa, through its subsidiary Alenia Aeronautica, and he says other possibilities for investment in Spain are on the cards.
Some progress has been made towards divesting non-core assets, with the decision to deconsolidate part of the Ansaldo rail business. “We’re expecting IPOs on the signalling and systems businesses quite soon and for the other businesses to go over the coming years,” says an analyst.
Finmeccanica has made much of its aim to move up from its former role as a major supplier to prime contractors, and compete more ambitiously with the primes as a systems integrator. Hand in hand with this development of its role comes the increasing importance of technological capability to the group’s strategy.
Grasso also holds the position of chief technology officer for the group as a whole, guiding Finmeccanica’s company-wide R&D strategy. This is unusual, in that a central entity is responsible for technological governance, without carrying out the research itself. This central direction of research allows synergies to be exploited across the various businesses, and increases efficiency by avoiding duplication. “It is an important engine of our company and I hope it will remain so,” Grasso says. Finmeccanica invests 16% of revenues in research and development in the group overall, and almost 20% in its core business areas, putting it at number two in the world in high-tech aerospace and defence investment, according to Massachusetts Institute of Technology rankings. “Research and development is important in the repositioning of the group,” says Grasso.
As part of this, Selex Sistemi Integrati will play a key role as a system integrator for the group, Zappa says. He stresses the company is not interested in becoming a “system of systems” player in the mould of Lockheed or Northrop Grumman – adding that the USA would be a particularly difficult market in which to do this.
Civil investment
Military work makes up over 80% of Finmeccanica’s aerospace and defence turnover, but the company has a role to play in key civil programmes too and is investing to ensure this continues. Alenia plans to have a factory specialising in the manufacture of composite fuselage sections, initially for the Boeing 787, at Grottaglie, in Puglia, by 2006. Alenia has a joint venture – Global Aeronautica – in place with Vought Industries in the USA for work on the 787.
Alenia’s Bertolone says: “We feel in phase with Finmeccanica’s strategy of launching itself on the world stage,” adding that being part of the company’s homogenous brand is an advantage when doing business abroad. Aeronavali is hopeful of success with the Boeing 767 passenger to freighter conversion. Chief executive Agostino Melani says he hopes to have an agreement in principle in place with Boeing by the end of the year: “We’ve not yet signed, but we’re very close to reaching an understanding on the major topics.” Being part of the Finmeccanica group – and brand – provides “great leverage” he adds.
Finmeccanica has set itself the target of aerospace, defence and security sales of €10 billion by 2006, compared with revenues of €9.3 billion last year. The company says it is well on the way to achieving this ahead of schedule in 2005, and its future success will depend largely on its ability to proceed with its ambitious plan.
HELEN MASSY-BERESFORD/MILAN,ROME & NAPLES
Source: Flight International
