How does EADS plan to transform itself into a global giant? We look at its experiences in four key markets
Few major aerospace companies today would describe themselves as anything other than global organisations. But for some, extending their footprint outside their home markets - with all the cultural and financial obstacles involved - has proved more difficult than they imagined. For EADS, becoming an international company with a significant industrial presence and customer base in Asia and North America is a key part of its gameplan and one that is well on the way to being realised. "We have our European base," declares EADS head of strategy Jean-Louis Gergorin, "but we intend to come out from this base to be a truly global company." EADS will "in 10 to 15 years look very different", adds co-chief executive Rainer Hertrich.
Although heavily skewed by Airbus's international success, more than half of EADS's revenues come from outside Europe. Eurocopter's strong US presence played a major role in taking sales into North America to €8.1 billion in 2003. EADS has had limited success in the US defence and homeland security market with its involvement on the US Coast Guard Deepwater programme and partnerships with Boeing, Lockheed Martin, Northrop Grumman and Raytheon.
The recent appointment of Ralph Crosby as head of EADS North America - with a seat on EADS's executive committee - shows how seriously it views the US market. In Europe, the UK is described by EADS as its "fourth home market" thanks to its considerable industrial presence through Airbus, Astrium and MBDA.
But it is in the rest of the world - Australia, China, India, Japan, Russia and South-East Asia - that EADS sees the biggest growth opportunities. With the rest of the world now worth €8.1 billion or 27% of revenues (the same as North America), the Asia-Pacific element alone is set to grow from 11% in 2003 to 30% by 2015, says EADS. "We need to be more present in fast-growing markets, or we will not increase our market share. We will deal with those countries we expect to be growth drivers in the future," says Hertrich.
But do not expect wholesale acquisitions. EADS tends to increase its overseas footprint through partnerships, with the odd niche purchase thrown in. "We are world champions in co-operation," says Hertrich. Neither is extending its presence abroad to do with outsourcing manufacturing to lower-wage economies. "It's very little to do with labour costs," he says. "It's about market access in protected markets and accessing technology."
Fourth home country
Refer to EADS's three home countries in the vicinity of any EADS senior manager and the emphatic response will be the same: "There are four home nations." The UK may have missed the opportunity to be part of the historic European consolidation that created EADS, but - by virtue of the importance of the UK's defence market and the combined industrial clout of businesses such as Airbus, Astrium, Cogent and MBDA - the country is critical to EADS's fortunes. With 13,000 employees (8,000 of them at Airbus's two plants at Broughton and Filton), UK operations bring in €2.4 billion ($2 billion) revenues - more than 8% of EADS's total.
From his office in EADS's new UK headquarters on London's Strand, Sir Jeremy Blackham is just a few minutes' walk from his former haunts in Whitehall. The former vice-admiral spent the final years of his 41-year naval career - which included a stint in command of aircraft carrier HMS Ark Royal - at the Ministry of Defence, where he was deputy chief of the defence staff responsible for equipment capability. Now - after the statutory 12-month break following retirement and a stint as EADS's military adviser - he is the company's first country president and the face of EADS in the UK defence community.
In a move that mirrors rival Boeing's strategy of luring high-ranking former diplomats, politicians and military officers to become the company's ambassadors-in-chief in strategically important markets, Blackham's appointment is designed to give more punch to the EADS brand among customers and help the various business units knit together. He admits his impression when dealing with EADS businesses as a buyer was that "EADS did not have a well-understood brand".
He says: "It was presenting itself through joint ventures or organisations it had acquired like Astrium or Cogent, which were better known under these brand names. No one quite understood what EADS could do as a combined force."
The way the country procures defence equipment was key to the decision to establish a UK head office alongside the individual business units. The fact that the UK has the "most open procurement system in the world" means lobbyists for suppliers cannot "get to the political level so early", says Blackham. Decisions are more ground-up than they are in EADS's other home markets, with the emphasis on capability rather than high-profile backing of platforms. "This means you have to be involved in the process at an early stage, plugged in and helping to shape the thinking," he says.
Blackham heads an 11-strong team, which includes public relations, business development and lobbying staff. He reports to Jean-Paul Gut, head of EADS's international activities. The office also supports the company's community and sponsorship projects in the UK, including funding for a new technology masters award for students studying for a one-year MSc programme in aerospace. Airtanker, the EADS-led consortium looking to lease Airbus A330 tankers to the MoD under a public finance initiative, could also soon move into an adjacent floor.
Blackham says EADS UK complements rather than duplicates the efforts of sales teams at the likes of MBDA, Cogent and the Milton Keynes-based EADS Defence Systems & Electronics. "Our main job is to support the business units, especially when the customer is more interested in an integrated system," says Blackham. "It is incumbent upon us to demonstrate to the business units that we can add value to their activities. It must work because they come to us. We are building a team which is well plugged into the MoD."
Waiting for Putin
In Russia, EADS is heavily engaged in the age-old Western practice of Kremlin watching, and Moscow's shifting aerospace policy has forced the company to be more cautious than it would like.
Recent changes in the Putin administration have prolonged the uncertainty, almost certainly killing off the much-vaunted idea of a Russian "united aircraft company", but still not generating a definitive strategy.
EADS Russia chairman and chief executive is Vadim Vlasov, formerly deputy head of Siemens' operations in the country and a Russian who well understands the problems facing his compatriots. "Russia has tremendous overcapacity, but there are no simple decisions," he says. "It is impossible to simply say there are six manufacturing plants so you should close five. In many cases there are towns around these plants with 10-15,000 people working there with their families. You cannot just close them if you have one-third or half of the city employment there."
In practice, regional governments vociferously lobby Moscow which, in turn, is trying to build a healthy industry while avoiding social unrest.
Vlasov says: "There is no simple strategy for EADS. One extreme would be to buy one of the enterprises and the other extreme is to wait another three years until Russian industry reorganises itself because it is clear that this cannot go on for ever. But the reality is in between."
Placing work in Russia and forming working partnerships is a key part of EADS's and Airbus's long-term Russian sales effort.
"Russia is a huge market. Maybe it is not fully developed, but it is huge and the economy is very promising," says Vlasov.
EADS's and Airbus's primary relationships are respectively with aircraft manufacturer Irkut and investment house Kaskol. With Kaskol, Airbus has created the Moscow-based ECAR engineering research centre intended to employ about 100 engineers by year-end. Vlasov says: "The advantage of Kaskol providing the engineering head count for ECAR is that it does not associate with any of the design houses. We did not want to make a joint venture with any one design bureau. It would create jealousy and we did not have enough information to know who to go with.
"Russian industry is organised around brands, but Kaskol is a strong company that is just managing its shareholdings in its helicopter plant, and the Sokol plant, [landing-gear maker] Hydromash and so on.
"It is difficult to say if they will succeed or not. It is a difficult model because you have to keep day-to-day control of all these companies and it takes a lot of effort. But we are very excited by the energy of [Kaskol chairman] Sergei Nedoroslev."
Airbus will source about $10 million worth of work from Russia this year, but aims to quadruple that.
Irkut is best known as a manufacturer of Sukhoi fighters and this year acquired Yakovlev, with its Yak-130 trainer, funding the deal with a pioneering initial public offering (IPO) in Moscow. In the short term, however, it is the Beriev Be-200 jet-powered water-bomber that is spearheading the collaboration.
The pair are forming a joint venture - EADS Irkut Seaplane - to handle marketing, certification and the leasing mechanisms now seen as the most probable way of placing the aircraft abroad.
Russia's emergency situations ministry Emercom has made proposals to several European governments to form a "pan-European agency" to deal with large fires using its two in-service Be-200s and six more on order. Meanwhile, EADS and Irkut are still trying to launch the Rolls-Royce BR715-powered version in the USA and southern Europe in particular.
Vlasov says: "The problems are classical. We need firm orders and a business case in terms of rate of return. It is clear that we will easily sell 20 aircraft, but then we have to work hard to sell more." He stresses, however, that none of this rules out collaboration with other Russian manufacturers.
"For historical reasons, it happens that we developed a rather deep co-operation with [Irkut]," he says. "But our intention is to keep a fruitful co-operation with others."
Nevertheless, the possibility of an initially small equity stake in the company is under consideration once the "freeze" period following the IPO ends.
Ever diplomatic, Vlasov says: "We appreciate government advice. We do not need permission to acquire stock but we definitely ask for what we call their 'blessing'."
Down the line there are other possibilities. Russia's ever-closer relationship with Europe on space programmes, notably on Galileo, provides opportunities for EADS, and a return to the helicopter arena is being explored following the dissolution of Euromil last year.
Vlasov says: "There may be a niche for VIP helicopters. The first foreign cars that appeared in Russia were not budget class, they were things like Mercedes. Russia has capabilities in transport and hard-working helicopters, but for private customers there is a niche of light-medium Eurocopter products."
Growing up down under
EADS has seen explosive growth in its Australian operations over the past three years on the back of its successful 2001 bid for the Australian Army's A$1.89 billion ($2.67 billion) armed reconnaissance helicopter (ARH) project. In March, the company was selected as preferred supplier of new A330 multirole tanker transports for the Royal Australian Air Force with contract negotiations for the A$1.7 billion project now under way.
EADS operates in Australia through Australian Aerospace, a wholly owned subsidiary of Eurocopter established in June 2001 after the takeover of the military assets of the former Saab-owned Hawker Pacific.
The deal gave EADS an established military support business as Hawker Pacific held extensive support contracts with the Australian Department of Defence for military aircraft. These included depot-level maintenance for the RAAF's Lockheed Martin P-3C Orion maritime-patrol aircraft, de Havilland Canada DHC-4 Caribous and Dassault Falcon 900s.
Hawker Pacific was also prime contractor for the Royal New Zealand Air Force's P-3K re-winging project and a major subcontractor on the Royal Malaysian Air Force's Beech Super King Air B200T maritime-surveillance aircraft programme.
Before the creation of Australian Aerospace, Eurocopter was represented in Australia through Eurocopter International Pacific. Both subsidiaries continued to operate separately for 18 months after June 2001, but merged under the Australian Aerospace name in 1 January 2003, reporting back to EADS via Eurocopter. Annual revenues of A$270 million were declared by the subsidiary in February this year. EADS says its acquisition of Hawker Pacific and basic development costs for Australian Aerospace since 2001, in terms of acquisition and expansion of the company, now total A$15 million.
New facilities developed at Brisbane to support assembly of Tiger ARHs are valued at $7.1 million, with the first aircraft deliveries from that facility set for December. Plant and equipment held by the company are valued at around A$13 million, with A$2.1 million-worth of new expenditure being proposed under existing contracts.
When it was established in 2001, existing EADS representation and the Hawker Pacific deal gave it a workforce of 45 full-time personnel, says Australian Aerospace. That total is expected to reach more than 400 by the end of 2004, based on existing contracts in the military and civil rotary and fixed-wing markets.
Australian Aerospace managing director Joseph Saporito says further growth is likely, with the RAAF Airbus A330-200 tanker contract producing 100 more positions. He says there is a "long-term policy to develop industry in Australia for Eurocopter and EADS", with this heavily focused on the helicopter.
Australian Aerospace is heading Eurocopter's bid for the Australian Defence Force's Project Air 9000 helicopter rationalisation project, a decision on which is now imminent. Saporito says, if that bid is successful, new industry investment by EADS into Australia could reach A$60 million and create at least another 400 new full-time jobs.
Eurocopter is offering its MRH90 version of the NH90, with Australian Aerospace expected to be the support centre for future sales of the helicopter in the Asia-Pacific region if successful in the Air 9000 competition. Establishment of an Asia Pacific centre of excellence for aerospace composites is also under consideration.
Coming to America
Ralph Crosby, chief executive of EADS North America, has been heard to describe the task he faces in establishing the European aerospace giant in the US defence market as "pushing a rock up a hill". Two years after its creation, the North American company is showing signs of gaining momentum in its uphill push to be taken seriously.
EADS-NA's first task was to consolidate and integrate all US operations under a holding company with its own chief executive and chief financial officers and a credible board. That has been achieved, says Crosby. "The 11 different operating entities are now wholly owned subsidiaries of EADS North America."
Those entities are varied and include American Eurocopter (AEC) ; airliner component-repair business Barfield and heavy- maintenance centre EADS Aeroframe Services; environmental-control specialist Fairchild Controls; test equipment builder TYX; and the US sales and support arms of military-transport maker EADS Casa and general-aviation manufacturer EADS Socata.
The relationship with American Eurocopter, well established in the USA but with strong product-development links back to Europe, is slightly different. AEC is a limited-liability company in which EADS-NA has majority interest, says Crosby.
EADS-NA is also the face the European giant presents to US government customers, principally the Departments of Defense and Homeland Security (DoD and DHS). When it comes to bidding for business, "leadership of the capture teams belongs to EADS North America", says Crosby. "We then populate the teams from Europe, using the IPT [integrated product team] approach."
Any foreign company serious about doing business with the DoD needs a special security agreement (SSA), which tightly restricts access to technical data considered sensitive. Both BAE North America and Rolls-Royce North America have SSAs that cover all of their activities in the USA, but compared with them, EADS is a newcomer to the game. The company has formed a subordinated holding company, EADS North America Defense, to handle DoD contracts.
Two entities already operate under the defence company's umbrella, and more will be moved under its SSA as required. "We are taking a practical approach and migrating as the need arises," says Crosby. "We have bid several programmes under the SSA, so we have a standing with the DoD." An SSA requires a separate US-only board and Crosby, a US citizen who sits on EADS's executive board, says he is in the process of joining the board of the defence company.
A major task for Crosby is to establish EADS's "citizenship" in the USA so that the North American company will be considered on equal terms with other US firms, including BAE. "We are making major progress," he says. "At a general level, people in the US government, DHS acquisition and the US Air Force refer to us as a viable competitor. That is very valuable to us."
Crosby has to base his assessment on "solid anecdotal information" because EADS has yet to make a major breakthrough into the US defence market. He uses the USAF's aerial-refuelling requirement to illustrate the company's progress. Two years ago, EADS's offer of Airbus A330-based tankers was rejected because the company did not have proven aerial-refuelling experience.
"Since then, we have really come along," says Crosby. "We have won two tanker competitions and we are developing a [refuelling] boom." If, as looks increasingly likely, the USAF abandons plans to lease Boeing KC-767s and launches a conventional competitive procurement, "we should be able to participate", he adds.
Another "very substantial" piece of the citizenship puzzle is EADS's role on the US Coast Guard's Deepwater re-equipment programme. Prime contractors Lockheed Martin and Northrop Grumman selected EADS Casa's CN-235 for Deepwater, and an initial $87.4 million contract was signed in February for two maritime-patrol aircraft (MPA) to be delivered in 2006, with an option for six more towards a potential requirement for up to 35.
Question marks have appeared over the eventual size of the Deepwater order, as the Coast Guard tries to balance its requirements between the light CN-235 and larger Lockheed Martin C-130J. "They are in the final stages of putting a strategy together, but it is clear the CN-235 is the Coast Guard's aircraft of choice for MPA," says Crosby. The Coast Guard is moving towards placing a third aircraft under contract, he adds. "They also have some C-130Js, and they need some more. The question is how many of each. There will be more of each, and substantially more CN-235s."
EADS, meanwhile, is establishing a delivery and support centre for Coast Guard CN-235s at Mobile, Alabama. This will be a software centre of excellence responsible for future upgrades to the aircraft, as well as training, says Crosby.
The Mobile site would also support theC-295, if EADS succeeds in its bid to sell the larger transport to the US Army, which has a stated requirement for 128 aircraft. Crosby argues the C-295 satisfies the army's requirement at "substantially lower acquisition and operating costs" than the rival Lockheed Martin/Alenia C-27J.
The Mobile site is an example of EADS North America's strategy of "insourcing" work to build its US citizenship. Another is the new Eurocopter plant in Columbus, Mississippi, which will formally open in September and begin assembly next year of AS350 helicopters for the US homeland security and law enforcement market. Columbus is also likely to play a role in EADS's other major Deepwater programme, re-engining of the Coast Guard's Eurocopter HH-65 Dolphin helicopters.
EADS is promising to locate final assembly of its products in the USA in an effort to win larger contracts. Potentially these include the C-295; the NH90 helicopter, for which Northrop Grumman would act as US prime contractor; and the A330 tanker, which Crosby acknowledges will need to be US-primed to stand any chance of success.
EADS-NA's own ambitions of becoming a US prime contractor are longer term, and likely to be achieved through acquisition, the route taken by BAE.
"The defence company is structured to enable us to acquire a broad range of businesses," says Crosby. "To begin with they will be small, and niche." He says EADS will stay away from companies doing highly classified work, at least initially.
"We have got to establish credibility by making small acquisitions, but we will not take our eye off the ball when it comes to mid-size companies," says Crosby. Putting the EADS name over the door of a US defence business will be a major step forward for the company. "There are a number of things we are looking at actively," he says. "You will see something by the end of the year."
MURDO MORRISON / LONDON, KIERAN DALY / MOSCOW, PETER LA FRANCHI / CANBERRA, GRAHAM WARWICK / WASHINGTON DC
Source: Flight International
