Going Global

DEEDEE DOKE / MUNICH, PARIS, TOULOUSE & LONDON

Eighteen months after its inception, EADS is looking outside Europe in its quest to become a truly global industry player

The end of the beginning of the vast merger integration of European Aeronautic Defence and Space (EADS) came in late November. EADS' leadership gathered in Seville, Spain - for most of them the first reunion since Day One, 10 July 2000, when EADS first hoisted its flag and began operating as an integrated company. As their 23 November meeting convened, many reflected on how far they had come since that day. Now the 41 corporate executives and 139 senior executives were to learn what lay ahead.

"Today we are at a starting point. We have to shift from words to concrete action," co-chief executive officer Rainer Hertrich told the 180-member Top Executive Team (TET) at an afternoon meeting.

Hertrich's comments seemed to reflect the thoughts of many of his top team. In a survey of the Seville participants, an average of 84% said they believed that EADS was "mostly" achieving its four aims of:

full industrial integration; strong positioning to face competition and new challenges; understanding the need to create value for its shareholders; being on the right path to become a global company.

A hardcore average of roughly 10%, however, said EADS was not accomplishing the individual goals. The smallest average percentage of all - ranging from 0.7% to 9.7% on individual questions - believed that EADS had "fully" met its aims.

Eighteen months after EADS officially integrated France's Aerospatiale Matra, Germany's DaimlerChrysler Aerospace and Spain's CASA into one unified company, the financial picture looks bright. Expectations are high that the company will achieve its 20% revenue growth target for 2001. An increase of 15% for the year in earnings before interest and taxes (EBIT) is also believed to be on course, despite the cataclysmic downturn in the aviation industry's fortunes since 11 September.

Organisationally, the company is still undergoing internal transformations - a process that insiders concede will continue for years. The most recent development, for instance, has been the finalised creation of missile concern MBDA by EADS, frequent partner BAE Systems and Italy's Finmeccanica - a business alliance that could soon lead to the addition of EADS-owned German missile company LFK.

Press reports have suggested that the organisation will metamorphosise further with the addition of a "third man" to consolidate the dual-headed leadership of co-chief executives Hertrich and Philippe Camus into one position. However, EADS co-chairman Manfred Bischoff, who represents DaimlerChrysler, has been quoted as saying he foresees "no change in the current EADS corporate governance". Camus has said that "having two chief executives is currently necessary for the success of the integration process and is also required to deal with national customers at the appropriate level".

Global evolution

Culturally, volatile national interests and the vestiges of previous corporate identities continue to flare. Camus has dismissed the question of national interests by saying that some raise such issues "to escape the real problems of management and organisation structure". But EADS, mindful that such dust-ups not only provoke headlines but, more importantly, hamper its ability to close in on its EBIT target, is heavily promoting the goal of evolving into a global and fully integrated company. A frequently repeated theme throughout the most recent EADS vision statement is strength by virtue of its very cultural diversity, both in national and corporate terms, in creating a new international corporate culture.

"You need five to seven years to integrate fully different business cultures," says Bert Stegkemper, the German third of EADS' top level merger integration (MI) team. "Corporate cultural integration needs constant attention. You have to give people time. I think the chief executives decided wisely to give us [the top MI team] two years, then integration is everybody's job. The structure has to make sure the people come together. Everything we build is built in order to survive."

But survival alone is not an acceptable minimum. The financial target most keenly eyed by company officials and external analysts, however, is still three years away. At the end of 2004, the company seeks to achieve a 10% EBIT margin for EADS as a whole and for each business unit within its five divisions: Aeronautics; Airbus; Defence and Civil Systems; Military Transport Aircraft; and Space.

"Of course it will be even more challenging now - there's no doubt about that," says Axel Arendt, EADS chief financial officer, acknowledging the potential damage to be felt from the current economic climate. "It's very difficult to evaluate today. Nobody knows exactly how long this airline crisis will last. But we feel that all the business units and particularly those that are not directly affected by the downturn in civil aeronautics should still should be striving for that goal."

"This company has a target of 10% - not 8% plus synergies," Stegkemper says. "This was a basic understanding and philosophy which we needed to convey. We were not saying, 'If you work with these people, it could bring you €10 million [$9.5 million].' No. We were saying to them, 'You have to deliver €15 million. If you could do it together, perhaps you can get €10 million out of synergies and €5 million out of cost reductions. If you don't work well together, maybe you only get €5 million out of synergies, and you have to deliver €10 million in cost reductions. So decide whether you want to work together.' That's a bit of the leverage that was used to help people understand the process."

While the 10% profit margin target has been set by the top management, the project intended to deliver the profits have been "bottom-up" generated. Goals have been committed to and milestones set for each year. An example of a company-wide effort to garner value is taking place in Systems and Defence Electronics, which involves about 6% of EADS' total workforce. A team is in place to identify where resources can be pooled; to then organise and plan their use, which will promote better use of research and technology funding; and increase involvement in international research. "We want to link as much as possible in order to get more performance," says Andreas Loewenstein, the French member of the top MI team.

A common rule for all projects is that results will be measured only where a profit and loss statement is given. "The consequence," Loewenstein says, "is we take into account only 'hard' EBIT effects with a proven causality link."

There has been some benchmarking to gauge synergies within the company, but Loewenstein says that synergy for its own sake may have no real value. "For synergies, you need two people, which means you have two responsible, which means you have nobody responsible. So we are not searching for the tools; we are searching for the results. We are encouraging people to go and work together, but the fact that it might not work is not an excuse for the people to not deliver the value."

EADS will use a new group-wide purchasing strategy involving a lead buyer concept to cut its costs overall as well as streamline its companies' operations. This will be coupled with a group-wide partnership frame for major suppliers. Like Boeing and Bombardier before it, EADS intends to award larger contracts to fewer companies, thereby passing on more responsibility - and risk - to its suppliers. "So we will reduce the supplier number on the one side. On the other side, we are partnering in a group-wide approach, which gives the participating counterpart advantages in the group," says Loewenstein.

Details are vague about the precise extent of the toll that synergies, reorganisations, realignments and so-called "decentralisations" across EADS will take on its workforce. Arendt emphasises that the diversity of work agreements within EADS and its member companies provide a healthy flexibility. They allow, he says, the use of "soft" measures to reduce employment such as shorter work hours or early retirement instead of enforced lay-offs on the scale of those by Boeing. As far as the next six months are concerned, Arendt says only: "At the moment, we are working on those figures and on those schemes. It is a bit difficult to say what the figure will be. Normal fluctuation is 2-3%, so I would say another 1% or 2% by 'soft' schemes."

Common denominator

In terms of its internal financial reoganisation, the company is still refining and improving its systems. A catalyst in the process has been the challenge of reshaping the company's finances and various corporate structures under a single set of accounting rules - the International Accounting Standards. "During the IPO [initial public offering], that was a constraint we had to overcome," says Arendt. "We first had to define what would be the common denominator for the whole company. We had to do all this in a sort of 'crash course'."

Auditors scrutinised EADS' IPOs and awarded acceptable markings, "but clearly indicated that over time some issues would have to be improved which were not yet qualified as sufficient. So it is an ongoing process," Arendt says.

Beginning this year, EADS' quarterly reports will include its EBIT figures. A new internal economic performance management system will be introduced, becoming part of each EADS TET member's personal objectives in 2003. Arendt describes the system as "a cash-orientated, asset-orientated approach". As Camus told the Seville participants: "It is not just another ratio which will be introduced and then forgotten. Every one of you will directly feel its impact in your day-to-day operations a new type of economic behaviour will mark our way of working."

Some business unit managers, concerned about the current financial targets, complain that management fees imposed by the headquarters are too high, and the headquarters staffing too bloated. Headquarters staff numbers have been cut to about half the original 1,100 as the corporate headquarters takes on the role of EADS' "strategic architect". Many of the headquarters staff affected have been redistributed among the business units. As far as the fees are concerned, there is no reduction on the horizon. EADS corporate hopes to soon break even with the fees it receives, and "we are making big efforts to downsize our costs very much. But the system is a logical one and correct one altogether", Arendt says.

The division undergoing the most dramatic organisational realignment is Defence and Civil Systems (DCS), which is now structured around four pillars; Missiles, Systems and Defence Electronics, Telecoms, and Services. In less than a year, six diverse national entities were restructured into four integrated transnational business units. "There was quite a bit of tension and anxiety in our management throughout this process and also some frictions with our national customers," says Thomas Enders, DCS president and member of the EADS executive committee. "But our business situation required us to move forward as fast as possible."

Focus for growth

EADS is directing particular focus on growth within its Systems and Defence Electronics sector, where some activities are admittedly still of sub-critical size. "We know we need to grow, we need to acquire, we need to establish new partnerships," says Hugues de Galzain, vice-president, integration and industrial restructuring, DCS. "And we have organised our division to best prepare for acquisitions and partnerships in different areas."

Services, which EADS expects to have generated c210 million in revenues in 2001, will include test solutions, system engineering services and outsourced services in the defence sector. "Most of the ministries of defence are outsourcing activities they don't see as core - training, for example. We think a company like EADS has to be present in that sector," says de Galzain. "We want to be there with solutions. The most advanced country in this area is the UK, and our idea is to be pro-active, knowing that the French, German and Spanish governments are eventually going to follow similar routes."

In telecommunications, EADS owns 60% of EDSN (EADS Defence and Security Networks) - its joint venture with Nortel Networks France - and secure communication links appears to be ripe for growth. "We want to capitalise on the huge investments that have been made in the last few years in the civil telecoms sector, and develop secure applications and networks for the military, de Galzain says. Specially developed technologies are "very expensive", he adds, "and we know the militaries have insufficient budgets for that. The idea here is that, through the venture with Nortel, we can have access to newly developed technologies and we apply and adapt these technologies to military and other security requirements."

Cryptography purchase

In addition to Nortel's contributions, EADS has cast its net further still. This autumn, it bought fast-developing UK company Cogent, a cryptography specialist. "We expect that due to recent events, we'll have more markets for this," de Galzain says of its defence telecom activities. EDSN's sales target is c1 billion by 2004.

Among DCS' top 50 major MI projects, some of the most significant are in missiles. They include rationalising the workflow between France and Germany, optimising purchasing activities and co-ordinating R&D efforts. Another high-level priority is fully integrating the two former French missile companies (Aerospatiale-Matra Missiles and MBD France) into the single company MBDA France. The finalisation of the overall MBDA corporate structure was required before these previously fierce competitors could be integrated. Says de Galzain: "The main value drivers here will be site consolidation and structure optimisation."

In the Systems and Defence Electronics field, significant impact is also expected from the creation of its four separate operational units, allowing central functions to be reduced and optimised. In addition, there are plans to create a management structure to co-ordinate R&D efforts. "Through this, we hope to 'create value' in subcontracting less outside and by avoiding duplication of efforts inside," says an EADS source.

A major hurdle for most defence R&D issues, however, is their political sensitivity among national governments as well as the European Commission. These sensitivities inevitably slow progress, and the situation is unlikely to change soon. "We still have domestic defence markets, which are quite conservative. What we are trying to do is rationalise the European market, and this will come, but it takes time," says the source.

On the space front, the path toward internal consolidation has been bumpy, and a final solution still has not been put in place - although space was the first building block in the Lagardère Group and DaimlerChrysler's march toward transnational consolidation in the European aerospace industry. An EADS insider described the status of space activity consolidation as "a challenging situation" in which "sensitive national issues" playa key role.

While the creation of EADS and Astrium took place within two weeks of each other, decisions were taken early on to get the overall organisational structures in place before fine-tuning any realignment in the space realm. EADS' momentum overtook the reorganisation of the space units, which has become a more complex task, given conflicting national interests over securing space technology.

Still under consideration is a proposal announced last March to form two separate divisions: one aimed at consolidating EADS launch vehicles activities and one essentially for satellites, which would include the three national Astrium units. "Or should we put everything under one roof?" another EADS insider asks.

EADS, nevertheless, contends that "integration is fully achievable and under way", and, further, that it will soon respond to "the clear signal from the European Space Agency ministers' conference in Edinburgh for an enlarged responsibility in space".

"But first we need to discuss a solution with unions and workers' representatives - a prerequisite before we can go public with the first step," the insider says. "We need to take a step-by-step approach to accomplish the consolidation."

Within its aeronautics division, EADS believes that real progress has been achieved in reorganising its previous passenger-to-freight conversion businesses and creating specialists Sogerma and EFW. Aeronautics has also been involved with Airbus and EADS Military Transport Aircraft to benchmark processes throughout their aerostructures activities and develop improvements. Working groups are determining how the best practices can be adopted throughout six aerostructure specialities, with implementation expected to start this month.

Competence centres

While newly integrating under a single stakeholder, Eurocopter is in the process of separating some operations. Instead of being capable of building a full helicopter in both France and Germany, competence centres being established will now have responsibility for portions of an aircraft. The best helicopter possible must be a joint effort - putting behind the company previous competition between French and German sites and claims of superiority. "They've had some demanding milestones and they are on track," says Spanish MI team member and former deputy CASA chairman Carlos Navarro. "There is not so much pressure on short-term results, which would in the long term destroy the real integration."

While divisional MI teams are, at the moment, set to stay in place for some time, the top EADS MI team will wind down in March, months earlier than originally planned. "You cannot run people too long," says Loewenstein. "People must learn how to live. You get the processes running, and then you have to get out. Things are going well - reasonably well in all areas, very well in some areas. With regard to value creation, we discovered that initially it is going better than expected. With regard to human resources, the only difficulty we have is managing the different tax, social security and labour laws in all EADS home countries."

The emphasis from the start had to be on building EADS as an entirely new organisation with no room for the "I swallow you, you swallow me" mentality typical of US mergers. "The culture of how to handle communications, how to come to a decision - which was linked to company procedures - was something we had to reinvent," says Stegkemper.

Corporate culture

"We believe that corporate cultures are more dominant in our day-to-day work than national cultures. So finding the right approach to a new issue like merger integration was crucial to our success," he continues. "If our approach to merger integration had been perceived as prototypical Dasa, CASA or Aerospatiale Matra, we would have faced right from the start an emotional 'I don't like that'. Therefore, we have tried to find a common way which all people can agree to and is beneficial."

English is the corporate language, but within its confines, certain words have become part of an EADS lexicon and others banned from use because of their connotation in the other languages. "Compromise", for instance, is frowned upon because, to the native French speaker, it connotes giving up or in. Instead, the favoured term for a mutually agreed answer is "solution".

A DCS source attributes a key initial disconnection between the French and Germans to a difference in problem-solving techniques: "The Germans will start developing a process to come to a solution. The French will think of a solution and then how to realise it. Now that we are all starting to realise this difference, it is our chance to make use of both approaches. It sounds easier than it is, but as we move ahead, I would say we are all becoming more French or more German."

It has been at EADS' upper levels of management that the least acceptance has been found, according to EADS sources. Elsewhere, the workforce was used to working across borders before the merger integration.

A broader blend

But the course being set for EADS is to embrace much more than its Franco-German-Spanish core. Future success in defence fields, essential because of the cyclical nature of the airliner manufacturing business, depends upon it. To date, 40% of EADS' sales are in Europe, 25% to the USA, 25% in Asia and the remaining 10% to a mix of other regions - a strong start, to be sure, but not yet reflecting the broader blend to which the company aspires.

The workforce mix reflects another globalisation target. In the two chief executives' Seville talk, Camus noted that EADS employs less than 3% of its workforce outside Europe, in comparison with frequent partner and competitor BAE Systems, with more than 20% of its workforce non- European. "Let us be clear, EADS is not - yet - a global company to be strong in defence activities, we have to change our industrial organisation, to open ourselves more to the world. The key for success in this area is to become multi-domestic," Camus said.

Camus predicted that the TET will eventually include significant numbers of Americans and Asians, and, he noted, "despite the 'E' in our company's name, there will not be only European positioning in the future. Our European tradition must become the springboard to global success and cannot be an obstacle to our international industrial development."

As a result, he said, human resources targets, management policies and the company culture will change.

Diversification of the company's products and services, also essential to EADS' future success, is already occurring. A week after 11 September, when EADS announced its half-year results, the two chief executives unveiled plans to develop new technologies and products to meet expanding aviation security needs. At Seville, those plans were confirmed. Working groups have been set up to address:

security for commercial air transport; homeland defence; information dominance; interoperability and secure communication.

Other initiatives will involve new services packages. "Watch the air traffic management challenge, watch the aircraft safety issue," Camus suggested.

For the top MI team, the new year will mark the start of new roles in the company they helped to create. The three joke that they saw more of each other than they saw of their wives since integration began. Stegkemper says he underestimated the job's complexity and size, but he took it on to develop new methods of dealing with issues that had previously hampered his ability to get things done at Airbus. "You have sleepless nights," Loewenstein says. "On those nights, you have different phases - enthusiasm and where you feel very tired. And you feel very small for this big job. Then you feel that it is a unique challenge in your life."

Source: Flight International