EADS is resolved to boost the defence share of its business from 20% to 30% over the next few years, pointing to a strong orderbook and opportunities to exploit its system integration skills
Airbus may be responsible for most of the revenue and profits, space the "turnaround" story and Eurocopter the poster child of its transatlantic success, but it is the fortunes of EADS's defence business that are at the heart of the company's efforts to transform itself from a European leader - with a captive market in its home countries - into a genuine global player, able to compete on an even footing with its US rivals.
Just over a fifth of EADS's revenues - €7 billion ($8.4 billion) - come from defence. But - thanks to emerging products such as the A400M military transport, Eurocopter Tiger attack helicopter, Eurofighter, Meteor missile and Airbus tankers - it claims the industry's second biggest defence orderbook at €46 billion (behind Lockheed Martin at €66 billion and ahead of both BAE Systems and Boeing at €39 billion and €34 billion, respectively). This figure doubled over 2003, boosted by the €20 billion A400M order, and deals with Austria for Eurofighters and Greece for NH90 helicopters. When these orders begin feeding through to the production line in the next few years, EADS expects defence sales to grow to 30% of revenues.
As with many of its other businesses, EADS inherited a hotch-potch of heritage defence companies when it was formed in 2000, most of them focused on their national customer. "We started with something not in the best shape. It took us a year to create an integrated defence company," says Stefan Zoller, chief executive of the Defence and Communications Systems unit. "We expected a Franco-German battle, but the predominant clash was not between countries - it was between the corporate legacy cultures of Matra and Aerospatiale, which had a privately owned and state-owned legacy."
Major programmes
However, several of the major businesses and programmes - such as MBDA predecessor Matra BAe Dynamics, Eurofighter, the A400M and the Tiger and NH90 military helicopters - were already operating as transnational consortia or joint ventures. There was a move to merge some of the fledgling EADS's military aircraft businesses with those of Finmeccanica's Alenia Aerospazio to create the would-be European Military Aircraft Company, but it came to nothing.
From this rather confusing portfolio, EADS took two attempts to come up with a structure for its defence businesses that it was happy with. By far the largest non-Airbus part of the Spanish Casa business - its transport aircraft - was given a division of its own, Military Transport Aircraft, under EADS Casa president Francisco Fernandez Sainz . This division is also responsible for military versions of Airbus aircraft, although the A400M comes under the Airbus Military Company, which is majority controlled by Airbus, but in which Belgian and Turkish aerospace concerns, as well as EADS itself, have minority stakes. Military space programmes are run by the business units of the Space division, and Eurocopter, within the Aeronautics division, is responsible for the Tiger and NH90. The rest of the defence activities are rolled into the newly enlarged Defence and Security Systems (DSS) division under Tom Enders. Military aircraft - EADS's share in the Eurofighter programme and the fledgling Mako trainer aircraft - had until last year been part of the Aeronautics division. The leaders of all the defence businesses meet monthly under the guise of the defence strategy co-ordination group, chaired by head of strategic co-ordination Jean-Louis Gergorin. "We try to look at everything from a customer point of view rather than from the perspective of our own divisions," says Enders. "The customer doesn't care about our internal boundaries."
Enhanced solutions
DSS has revenues of around €5.2 billion and 24,000 employees and has five business units: Missiles (MBDA, in which EADS has a 37.5% stake and the 100%-owned German LFK); the Defence Electronics sensors and avionics business; Military Aircraft; systems house Defence & Communications Systems (DCS); and Services, which provides third-party maintenance and other expertise to the military. "It's a chain of businesses which build on each other and put us into a lead position for systems integration," says Enders.
Although platforms are the immediately recognisable part of EADS's defence business - EADS brochures and presentations display the range of aircraft, spacecraft and missiles the company offers - the aim of the Defence & Security Systems division is to provide "integrated and network-enhanced solutions" to customers. "We created DCS," says Enders, "because we needed to focus our particular expertise in systems architecture into one unit that was platform neutral."
This is why, with unmanned air vehicles, for instance, EADS has chosen not to develop its own aircraft, but instead to partner Northrop Grumman on a version of the Global Hawk, the Eurohawk, and Israel Aircraft Industries on its Eagle medium-altitude long-endurance UAV. "We didn't want to reinvent the wheel. So we went for the two companies that had the most extensive experience operating UAVs worldwide," he says.
Enders sees an eventual need for UAVs not just in the military sphere, but as commercial freighters. "It's as much an emotional barrier as a technological one," he says, using the analogy of his grandmother, a generation ago, being terrified of stepping into an elevator that did not have an attendant. On the defence side, the evolution of UAVs from surveillance aircraft, through flying combat missions and eventually to air-to-air missions is a "question of bandwidth", he says. "That amount of bandwidth is not available, but this is coming fast. So we are talking about considerable investments."
EADS DSS is also partnered with Northrop Grumman - as well as Thales and three other companies - in the TIPS consortium that won the NATO Alliance Ground Surveillance programme in April, and with Lockheed Martin in MEADS International, which is developing the German-Italian-USA air-defence system. Transatlantic tie-ups are vital for EADS if it is to crack the US defence market, a market in which, so far, it has had limited success (although its Airbus tanker bid to the US Air Force would be a major breakthrough if it was accepted). "The USA only represents around 5% of our revenues at present," says Enders, "but it's the largest defence market and will be for decades, so it's worth breaking into, if only on a marginal basis. We have some advantages on platforms - Airbus, Eurocopter, transport aircraft - but less on the system level. Ralph Crosby [EADS North America chief executive] has a great team working on the long-haul strategy. BAE are big in the US now, but remember it took them 15 years. Our great advantage is our visibility, with Airbus and Eurocopter, in the civil market, but we'll only make progress if we can establish a significant industrial footprint, either through acquisition or partnerships."
Facing frustrations
One of Enders' biggest frustrations is the stubborn refusal by European governments, including EADS's home countries, to give up their sovereign rights on defence. "It's difficult if I want to bring our German military know-how into a French project," says Enders. "We organised ourselves as cross-border, but we can only move so far without the customer reorganising and this is still not happening."
The creation of the European Defence Agency as a pan-European procurement body will only have a limited effect, says Enders. "Nations don't have any appetite for giving up their sovereign defence interests. That is constraining synergies inherent within EADS. Opportunities for rationalisation and centres of competence are severely restricted. In a perfect world we wouldn't need to duplicate resources. Being an optimist, I believe that we will be able to allieviate some of these challenges." National sensitivities have helped delay a merger flagged since the creation of MBDA as an integrated company three years ago - with German missile house LFK. MBDA's other owners, BAE Systems and Finmeccanica, have yet to agree terms to amalgamate EADS-owned LFK, although MBDA chief executive Marwan Lahoud admits: "Strategically, everyone agrees that it doesn't make sense to have EADS holding shares in two different missile interests."
The Eurofighter remains another bugbear - or at least the four nations' delay in signing up to the second production tranche and the now serious doubts over whether Tranche 3 will be signed. The uncertainties are harming the aircraft's export prospects, says Enders, who warned last month that suppliers were facing having to halt production lines if supply agreements for Tranche 2 were not agreed very soon.
MURDO MORRISON / MUNICH
Source: Flight International
