Integrating three very different heritage companies into EADS may have been the easy bit. Now the European giant must transform itself into a genuinely global company
Four years ago, it looked little more than a merger of convenience, a marketing alliance that would wallow for years in political bickering and bureaucratic inertia, while presenting a united face to the world. Never mind the nightmare of melding the aerospace interests of a German car company, a Spanish nationalised industry and a part state-owned/part private French conglomerate; what about the difficulties of throwing together into one company hundreds of executives and around 100,000 employees working for dozens of different business units in four countries? If the three companies coming together to create EADS could not decide on one chief executive, chairman or head office, how would they reconcile competing national interests? How would they even agree what language to speak, let alone allocate budgets between the centres?
The cynics have been proved wrong. EADS has consolidated around a conventional management and divisional structure. Its businesses have successfully steered to market a range of products from the Airbus A380 and Airbus Military A400M to the Eurofighter, NH90 helicopter and Meteor missile. EADS has more than doubled its defence orderbook, snatched market leadership in large airliners, and is, according to one of its two chief executives, Rainer Hertrich, pushing to usurp Boeing as the industry's number one.
The creation of EADS encouraged European joint ventures and consortia in which the company had a stake to become legal entities in their own right, most notably Airbus and missile house MBDA. "EADS has been a merger that's worked," says Hertrich, former head of the German partner in EADS, DaimlerChysler Aerospace. "There are still integration problems, but there is now one joint mother company. Look at the stock price, look at how we managed the commercial aircraft crisis, and look at our profitability. We are rather proud of that."
New phase
His fellow chief executive, Frenchman Philippe Camus, says EADS's fourth anniversary this month marks the start of a "new strategic phase" following the teething pains of integration. "Now you will see the true globalisation of EADS," he says. This will mean a greater emphasis on overseas markets. Last year, EADS took the unusual step of appointing an American, Ralph Crosby, on to its executive committee. A seasoned former Northrop Grumman senior executive, his job is to help break EADS into the world's largest defence market, partly by increasing its industrial footprint through acquisitions and partnerships. The company has also made top-level appointments to head its UK and Russian operations, and is targeting opportunities to tie up with technology partners in Asia, including China, India and South Korea.
Hertrich has no doubts that EADS should strive to overtake Boeing. "When you are number two, is there any other target than being number one? We expect a quantum leap in our revenues in the next two to three years to take us to $10 billion in defence revenues," he says. "We have $40 billion already booked. Boeing is only at $44 billion. We are well on track to be the same size of company and we have the best product portfolio in the industry to help us do that."
In terms of products, EADS has a strong hand. Inheriting a portfolio of programmes from its founding companies that ranged from Socata general aviation aircraft to Airbus airliners, the company is a leader or number two in most of its market sectors, says Hertrich. Last year, Airbus overtook Boeing in deliveries; Eurocopter is number one in civil rotorcraft, while its Tiger is a strong competitor to Boeing's Apache attack helicopter. Through its MBDA joint company with BAE Systems and Finmeccanica, it is market leader in cruise missiles and "catching up fast" with the Meteor beyond visual range air-to-air weapon.
Ownership
In military transport, EADS's Spanish business leads the 3-9t segment, while Airbus Military's A400M will shortly compete with Boeing and Lockheed Martin in the heavy sector. The company is also throwing considerable energy into unmanned air vehicles and defence systems integration, but these are in an area where it arguably still struggles. "We are behind the USA in areas such as network-centric, laser-guided bombs, UAVs and stealth technologies," Hertich says. Eurofighter, EADS's main military aircraft venture - in which its German and Spanish arms are partners with BAE and Finmeccanica - is well regarded, but has suffered delays in ordering by the four participating governments.
EADS has a complicated ownership structure, with its shares split between Germany's DaimlerChrysler, a French entity half owned by the state and half by media conglomerate Lagardère, and owners of shares traded on three stock exchanges. The Spanish government also holds a small stake. Structurally, the company is run along conventional lines, with five divisions each based on a particular group of products or market, whose bosses are members of an executive committee headed by Camus and Hertrich. However, the two chairmen, two chief executives and two headquarters are testament to the fact that the company is still a balance between French and German interests. All the speculation is now over whether Lagardère, the French government and DaimlerChrysler will reduce their stakes and release some or all of their shares on to the market. If and when this happens, power will switch to independent shareholders, including institutions, which are less preoccupied with national workshares and retaining technologies within borders, and more with delivering shareholder return.
Hertrich says EADS's multinational character is an advantage and one of the reasons the company has held back from creating a household brand, allowing businesses such as Airbus and Eurocopter to thrive in their own right. "Diversity is one of our strengths," he says. "This does not mean our people have the freedom to do whatever they like in the market, but it means we have kept national and cultural strengths. As long as we all have the same target, we are able to keep the diversity and strength of our brands. We would destroy this by becoming simply EADS."
National politics within EADS "apply to any company supplying a national customer", says Hertrich. There would be potential to introduce efficiencies to the production process if governments did not vie to have prestigious final assembly lines in their country, he says. But providing local employment and transferring technologies is part and parcel of selling military equipment to any country.
Flexible autonomy
It is wrong, Hertich maintains, to think of EADS merely as a conglomerate of independent businesses. "While our businesses have a lot of autonomy, over the past four years we built on our purchasing power, with a lead buyer concept for negotiating a framework purchasing contract for aluminium, for example," he says. But this remains a small head office function, with 20 staff.
According to Nick Fothergill of Banc of America Securities, EADS has been a successful merger, but its good fortunes are largely down to the success of Airbus. "Airbus has been extremely nimble both in terms of its product and its costs and efficiencies," he says. But it has benefited from the fact that the post-11 September downturn hit at a time when, unlike Boeing, it was ramping up from a low base. There are problems with defence, where delays to Eurofighter and sluggish French and German spending on research means there is "little prospect of a turnaround in [the Defence & Security Systems division's] fortunes for some time". EADS's structure still gives investors cause for concern, says Fothergill, "particularly the two chief executives and the fact that Airbus appears to be left largely to itself", making sudden market-sensitive revisions to its production forecasts, and seemingly catching its parent company on the hop. While Camus and Hertrich have been impressive, the time may soon be right for them to be replaced with a "nationally neutral" single chief executive.
EADS has prospered, he believes, "largely because the market has been kind to it. Would that structure survive a more challenging market environment?"
MURDO MORRISON / LONDON
Source: Flight International
