JUSTIN WASTNAGE / BERLIN, HAMBURG AND MUNICH
Are Germans - traditionally proud and protective of their industrial base - finally coming to terms with European consolidation?There is a cliché that Germans are more industrious than people of other nations. Klaus Heinemann, a managing director at Deutsche VerkehrsBank, says the notion is just that: a cliché. "Germans," he says, "are no more intrinsically better organised than the French or Italians." It is good management that has powered industry in Germany so far, he adds.
German companies have traditionally concentrated on quality and design, sometimes at the expense of product marketing. The uncertain future of Fairchild Dornier is an example of this imbalance. The German-US company says the 728, its 70-seater narrowbody, is the most advanced regional jet around.
This may be true. Yet it took Fairchild Dornier a long time to accommodate users' feedback, which involved doing away with side-sticks in favour of a conventional mounted control yoke and supplying a grab handle to ensure access to the seats at the request of pilots; moving cabin windows to eye-level and resizing overhead bins to fit multiple wheeled holdalls to please passengers; and installing a conveyor belt and last-minute secondary hold for baggage handlers. This delay was such that two major competitors not only introduced regional jet families into the market, but achieved critical mass.
Indeed, it was the arrival of Fairchild executives which finally halted product refinement and set off actual production. In Fairchild Dornier's case, it may be too late, but the general trend has been for German companies to form and benefit from multinational ventures.
Most significant, says Heinemann, has been the creation of the EADS, formed from the merger of DaimlerChrysler Aerospace (DASA) and France's Aérospatiale Matra and CASA of Spain. EADS as an integrated company was, however, the logical conclusion of industry consolidation in Europe which started in the 1960s. Even at the time of merger, 75% of DASA's profits came from joint ventures.
First, weaker aerospace companies were allowed to fail or merge, a process culminating in the creation of single national champions in countries across Europe. In Germany, a variety of aeronautical and space activities were brought together to create Deutsche Aerospace in 1989, and a spate of acquisitions and mergers followed, most notably Dornier folding 57.6% of its shares (along with 87.5% of its voting rights) into the new venture.
These new companies created transnational joint ventures for specific projects; the Panavia Tornado fighter, for example, or European Space Agency launch vehicles and satellites. This co-operation was born out of two factors: increasing European political co-operation and growing recognition among European governments that no one national firm could compete with its US counterparts.
Maze of connections
Relational charts of the European aerospace industry from the early 1990s were labyrinthine. Collaborations at various levels on different projects meant a maze of connections. This complex matrix caused severe handicaps in terms of speed of response to the market. While not an immediate issue with military projects, since defence ministries were still prepared to pay a premium for locally produced aircraft, Europe's most ambitious venture - Airbus airliners (owned and produced by the UK's BAE Systems and EADS) - brought the need for process integration into sharp focus.
Airbus became a single integrated company last year, in an attempt to overcome national politics, as the organisation competed with Boeing on the global stage. Stuart Mann, project marketing director at Airbus for the A320 family, says that over the past two years the company's character has changed, and it finally feels like one company. "Over the past decade, I have gone through the mental process and I no longer consider myself a BAE employee, but rather an Airbus one," he says. Furthermore, Airbus says, national sentiment is not relevant to BAE and EADS shareholders who, since flotation, now control the fate of the company.
But not everyone is happy. The German capitalist system, according to the Frankfurter Allgemeine Zeitung newspaper, places more emphasis on corporations' impact on the community. Some fear this to be under threat by "Anglo-Saxon" mergers.
Heinemann disagrees, saying that the internationalisation of German industry can only be for the good, and that further freedom for EADS from all national interests, including Germany's, has to be afforded if the company is to reap fully the benefits of integration.
Ordinary Germans are doubtful too. Manufacturing is important to them, both psychologically and economically. The idea of the country losing its manufacturing base, which accounts for a large percentage of its exports, is unthinkable to most Germans. Airbus alone employs 16,600 people across five sites, around half of the total employed in Germany on aerospace projects. Consequently, governments feel compelled to resist changes in ownership of manufacturing concerns. With the creation of EADS, many expressed concern that DASA would become just a subcontractor to Aérospatiale, as McDonnell Douglas lost out to Boeing - and such fears have resulted in complex rules maintaining the balance of power between the company's two biggest shareholders.
Two chief executives (one French, one German), officially work in two headquarters (one in Munich, one in Paris) and a rigidly enforced workshare agreement states that production must fall broadly in line with each nation's shareholdings. "If a future chief executive comes from Germany, France, China or the Moon, no-one should care," says Heinemann. "The only deciding factor should be commercial," he says.
After EADS, engines manufacturer MTU Aero Engines is the most important aerospace entity in Germany. The company is managed directly by DaimlerChrysler. Until the European engine manufacturers come good on their constant promises to consolidate further, MTU is forced to form and reform alliances and consortia for each new project.
To power the Airbus Military Company A400M, for example, MTU is working with ITP, Rolls-Royce and Snecma on a three-shaft design. Another joint venture, MTR, formed with MTU, R-R and France's Turbomeca, has developed the MTR390.In this sense, MTU's future, like other German players, lies squarely with European co-operation.
Overseas doubts
But when consolidation occurs, MTU would like to do the bidding, expressing an interest in acquiring Italy's FiatAvio or Volvo Aero of Sweden, rather than be snapped up by France's Snecma or R-R.
The lack of movement may reflect foreign investors' doubts about Germany's labour market. Foreign companies are attracted by Germany's high level of skilled workers, trained by a handful of technical universities or brought up through government-sponsored apprenticeship schemes. But high skill levels come at a high price and the latest Organisation for Economic Cooperation and Development revenue statistics report points to high taxes and red tape for the country's relatively low direct foreign investment.
Fairchild Dornier's plant outside Munich has borrowed techniques from BMW and other automotive firms and mass automation of the manufacturing process as a solution to the problem of high-wage levels. The country is also cursed with the highest jobless total in Europe at 4 million, but despite this, German industry faces another problem in the shape of the unions. This year, the biggest union in the aerospace industry, IG Metall, is threatening industrial action if its 6.5% pay claim is not met. This could drive up inflation, says the European Central Bank, and push the country's economy further into deficit.
Another solution has been to shift parts of production to its neighbours. Under communist rule, the Soviet Union divided aircraft production between Warsaw Pact countries. East Germany was considered too unsafe to house any aircraft production and consequently, following reunification, the German federal government launched a raft of schemes to attract aerospace and other high-technology companies to the new eastern states.
Financial persuasion
Markus Wagner, managing director of Aquila, says that he decided to establish his two-seat trainer aircraft facility outside Berlin in the state of Brandenburg because of just such financial persuasion. "In 1995, under the establishment of the technically-oriented businesses project, the government would match your investment," he says. Rolls-Royce and MTU have facilities nearby and CargoLifter's heavy-lift airship is the state's leading project.
Across the eastern part of Germany, aerospace is taking hold. In buying up the old East German Elbe aircraft factory EFW, EADS became the largest employer in Dresden. Meanwhile Thielert has the backing of the south-eastern state of Saxony for its plan to produce diesel engines for general aviation applications.
Across Germany's eastern border, nations have pushed their own aerospace industry into offset deals when acquiring Western aircraft to meet NATO membership requirements. The Saab/BAE Systems Gripen has already scored successes in the Czech Republic and Hungary and is thought to be the leading contender to win an Austrian fighter competition now under way. It is also in a competition in Poland.
Civil aerospace projects too have prospered in central Europe. Czech aerospace manufacturer Aero Vodochody formed a joint venture with Taiwan's Aerospace Industrial Development Corporation to produce Ibis Ae-270 turboprop corporate aircraft, while Romaero in Romania is increasing production of B-N Group's Islander and Defender utility aircraft.
But the region still produces Soviet-era aircraft, which have increasingly dwindling markets, and attempts to fit ageing airframes with Western avionics and engines will fail too, says Heinemann. In its place, central European facilities have scooped up lucrative subcontracting roles. In the Czech Republic, foreign-owned companies account for nearly half of Czech exports. Germany invests twice as much outside its borders as France does. Much of this investment is taking place in its near neighbours, the former communist states of central Europe.
To Germany's south, too, aerospace companies have taken advantage of new markets: sales of Austrian Diamond's Katana light aircraft have boomed since the creation of the European Joint Aviation Authorities' very light aircraft category 10 years ago, while Pilatus in neighbouring Switzerland has captured much of the growing corporate turbine market with its PC-12. Both have benefited from proximity to Bavaria, Germany's southern-most state and home not only to Fairchild Dornier, but also EADS Military Aircraft, Eurocopter and Zeppelin manufacturer ZF. Bavaria's state premier, Edmund Stoiber, now running for federal chancellor, is keen to emphasise the continuing economic growth of his home state compared to the rest of Germany.
Despite a brief period of rapid growth immediately after reunification, gross domestic product grew slowly in Germany over the 10 years to 2001 at an average of 1.5% a year. In 2001 it grew by only 0.6%, the lowest rate in the European Union, and this year seems set only to match that figure.
Despite forecasts from the International Monetary Fund that the worst is over and that the German economy could grow by up to 2.5% next year, the opposition points to the weak economy as a key failing of the current government.
This weakness, however, matters much less now that the German aerospace as an independent entity has almost disappeared. For Airbus production, for example, EADS benefits from Germany's currency union with France and Spain. Savings in exchange rates alone will help the company - but the real benefits will come from increased productivity and more accurate forecasting.
With BAE Systems remaining outside the Eurozone for at least the near future, Airbus also benefits from the dollar-sterling axis. Although sterling is considered by most analysts to be overvalued against the euro, were the UK's currency to fall against both the euro and the dollar, Airbus would have to question the continued feasibility of producing wings outside the Eurozone, says Heinemann.
Worker mobility
The greatest challenge for Germany, too, comes from Europe, for as its companies are defined in the European context, it will be hampered by the lack of true worker mobility. Pension schemes and social security programmes will have to be harmonised, for "although income and payroll tax rates vary between California and Washington, as they do between France and Germany, it is still easier from an administrative point of view for Boeing to move an employee from Long Beach to Seattle than it is for Airbus to move one from Bordeaux to Hamburg," Heinemann adds.
And so, while low administrative hurdles remain, German aerospace, like Germany itself, has shown that it can benefit from taking the pragmatic view. As the German economy starts to pick up over the next few months, the consolidation of European industry could resume, most probably with engine manufacturers.
Germany is also expected to resolve its budgetary problems which are preventing it from firmly committing to the A400M. There may be grumbles from some quarters in Germany about the "loss" of a national aerospace industry, but by being a smaller cog in a larger wheel, the country stands to gain enormously.
Source: Flight International
