Aerospatiale, Dasa, CASA and British Aerospace delivered to the governments of France, Germany, Spain and the UK last week their promised thoughts on how they might achieve global competitiveness in the next century. It is now up to those European governments to decide whether the central plank of the industry's report - their desire to merge into a single unified European Aerospace and Defence Company (EADC) - is acceptable and how they (the governments) can make that dream possible.
In taking on that responsibility, those governments will have to be brave enough to look to the USA to see at how the implications of widespread "horizontal" and "vertical" consolidation of the aerospace and defence industries are coming home to roost.
For the US Government to get cold feet over the prospect of a powerhouse such as a Lockheed Martin/Northrop Grumman combination in a national market still large enough to sustain long term competition - and big competition at that - is perhaps understandable, even if the concern has come rather late. Europe should absorb that lesson, and ensure that the desired end result (and the bottom-line implications for everyone) of pan-European industrial consolidation have been agreed to before the politicking over a complicated Euro-style marriage of monoliths starts.
For starters, national politicians and the European Union anti-trust regulators need to lay down the limits of acceptable horizontal and vertical integration before consolidation talks begin in earnest. They need to agree how much competition is enough. Does one European and one US manufacturer of "X" constitute acceptable competition or should there still be competition within Europe? Is Europe's market big enough to justify intra-European competition?
If the US regulators had agreed on these issues to begin with, the impending courtroom battle with Lockheed Martin could have been avoided and Northrop Grumman would not be left so spectacularly in the cold. The Lockheed Martin/ Northrop Grumman merger foundered on a combination of horizontal and vertical integration - especially the vertical. Horizontal integration and the resulting reduction or removal of competition has not halted previous mergers: there is now only one US airliner manufacturer (Boeing/McDonnell Douglas), and one air-to-air missile-maker Raytheon/ Hughes/TI). Vertical integration has not been a major concern for US anti-trust regulators either. Lockheed's mergers with Martin Marietta and then with Loral were approved even though they brought key electronics suppliers under control of an airframe manufacturer. Lockheed Martin can rightly argue that the rules seem to have been changed. Horizontally, the merger does nothing not already permitted, and vertically, only adds to what existed within the group.
The European Commission is keen to assist in the consolidation of the EU's aerospace and defence industries and wants to eliminate the distortions in the European market. However, who is to say that the EU will not cry "enough" one day, and leave a major player potentially crippled, as could happen to Northrop Grumman, simply because its was the last in a long line of mergers, and not the first?
As Europe's governments ponder the EADC concept they must look farther ahead and more broadly than their US counterpart needs to. Europe buys three times as much aerospace and defence equipment from the USA as it does from itself, so the issue for Europe is not what sort of integrated company it should be striving for, but what precisely such a grouping will be doing once it has consolidated? Given current skills shortages, exacerbated by the long-lead times of programmes, budgetary cutbacks and the cyclical nature of the aerospace and defence business, its future is all but certain. Standing together offers a stronger future than standing alone - but that applies to its governments as well as to the company. If the end game is for European companies to link up with, and compete with, their US peers they will have to be governed by similar or compatible rules. Only Europe's governments can make that happen.
Source: Flight International
