A new form of arms race has begun in earnest: the race for global domination in aerospace and defence production. America's Boeing and Lockheed Martin were already ahead of the pack if you combine their respective sales in commercial and military aerospace, electronics, defence systems, missiles and space. Take away the civil component of both entities, however, and the new British Aerospace is only a photograph finish away from nudging the number one global defence contractor slot.
After Marconi, mergers with its continental counterparts are the next priority with the eventual creation of a pan-European aerospace and defence company (EADC) the next step towards the creation of a truly global aerospace and defence company. New BAe, if the shareholders go along with the idea, will already have 15,000 workers across France, Germany, Italy and Sweden excluding the 70,000 in the UK before any further Euro-mergers happen. Outside Europe, it has roots in Australia following BAe's purchases of the former state-owned defence group Australian Defence Industries and Siemens Plessey Australia and merging them with its home-grown BAe Australia. Next on the cards is buying equity in the soon-to-be-privatised South African aerospace and defence group, Denel.
But even without any further merger or acquisition activity, new BAe already will have a geographic spread of sales spanning the world with 22% of its £12.4 billion ($20.4 billion) turnover generated by businesses in the USA, 15% from those in continental Europe, 10% from the Asia Pacific and 17% from its UK home base. The rest is generated from lucrative defence contracts in Saudi Arabia and other Gulf states. Working to create the much-touted EADC will preoccupy new BAe's board once the necessary shareholder and regulatory approvals are cleared for the new company. Beyond that, the sights are set firmly on finding an American partner for the EADC to forge a transatlantic aerospace and defence powerhouse.
Scepticism that neither goal is now achievable given the sheer dominance in Europe of the new British "monster", as some described the new BAe, may be well-founded. But the fact is, that, like it or not, consolidation and rationalisation of the defence and aerospace industry on an international scale is the only long term solution if competitiveness, increased investment in advanced technology and success on global markets is to be assured.
The USA took this on board some years back when the government prompted the wave of national consolidation of its aerospace and defence industry, the fruits of which now see the likes of Boeing, Lockheed Martin and Raytheon. The drive since then has been towards the internationalisation of these companies through joint production partnerships, co-development, subcontracting, joint ventures and equity stakes with groups across the globe. Lockheed Martin now has 18% of its sales overseas compared with 5% in 1990. High level negotiations are under way with Japan's top technology groups while strategic links with Europe's aerospace and defence contractors is now a top priority and the subject of scrutiny by a new task force on "globalisation and national security."
The logic of globalisation is clear. Companies need to build global networks to tap into centres of excellence as well as to win exports. As domestic markets shrink, companies must be willing and able to serve global markets. Financially, partners are also essential to maximise the contribution to fixed costs such as R&D and manufacturing. Customer needs, moreover, are converging. All want the best products at the best possible price. A third factor is that operating globally spreads technology. The race then is to ensure customer needs are met no matter what the source of technology.
The relentless globalisation of aerospace and defence production will not go away. The task is not to dwell on issues of control or nationality but on how to create successful, properly managed, partnerships or whichever term most appropriately fits the endeavour, to build and maintain the alliances a global market demands.
Source: Flight International
