Defense Giants: Europe Reinvents its Defense Industry

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At its inception under the Treaty of Paris in 1951, the European Coal and Steel Community
(ECSC) came into existence with the purpose of pooling war materials at a supranational level to
make war materially impossible between members. In this light, European integration focused on
the armaments industry even before consideration of wider-reaching economic and monetary union.
Today, European defense contractors are integrated more than ever before, as exemplified by BAE
Systems (BAE) and the European Aerospace Defense and Space Company (EADS). This paper
seeks to examine the effect of European integration on European defense companies and their
development and production of major weapons platforms. It will examine how and why European
integration led to differing degrees and strategies of consolidation of defense firms at the national
and the supranational level. This paper will primarily focus on EADS, the largest pan-European
defense firm, and BAE Systems, the European defense firm with the largest transatlantic presence.
Due to the myriad products and services provided by defense companies, this paper will focus on a
single weapons system. Though surely not all elements of the defense industry have undergone the
same internal and external pressures, this paper assumes that the general trends in European military
aerospace (specifically fighter jets) are representative of the wider European defense industry.
European aerospace has experienced greater pressure to integrate due to the higher R&D cost of its
product, but similar price trends in other weapons systems suggest that what happens to aerospace
will likely eventually happen to the rest of the defense industry.
The first portion of this paper will tell the narrative of inter-firm cooperation on defense
projects through the formation of consortiums such as the Panavia Tornado. The second portion will
tell the narrative of the post-Maastricht consolidation that occurred throughout the European defense
industry, eventually resulting in EADS and BAE Systems. The third portion will focus on European
fighter jets through the example of the Eurofighter in order to highlight the ways that consortiums
and consolidation has affected weapons production. With these narratives in place, the forth portion
will analyze the economic nature of military weapons, defense firms, and governments throughout
these narratives. It will highlight the exponentially increasing R&D costs associated with military
weapons platforms, the industry's dependence on defense spending by nation states, and the ensuing
importance of scale. The paper will conclude with a discussion of the way that European integration
has shaped European defense firms and a prognosis of current trends will affect these firms in the
near future.

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Defense Giants: Europe Reinvents its Defense Industry

  1. 1. GEORGETOWN UNIVERSITY DEFENSE GIANTS: EUROPE REINVENTS ITS DEFENSE INDUSTRY GEST 547: THE EUROPEAN ECONOMY DR. HOLGER WOLF BY SEAN P. MCBRIDE WASHINGTON, DC 25 OCTOBER 2009
  2. 2. McBride, 1 1. Introduction At its inception under the Treaty of Paris in 1951, the European Coal and Steel Community (ECSC) came into existence with the purpose of pooling war materials at a supranational level to make war materially impossible between members. In this light, European integration focused on the armaments industry even before consideration of wider-reaching economic and monetary union. Today, European defense contractors are integrated more than ever before, as exemplified by BAE Systems (BAE) and the European Aerospace Defense and Space Company (EADS). This paper seeks to examine the effect of European integration on European defense companies and their development and production of major weapons platforms. It will examine how and why European integration led to differing degrees and strategies of consolidation of defense firms at the national and the supranational level. This paper will primarily focus on EADS, the largest pan-European defense firm, and BAE Systems, the European defense firm with the largest transatlantic presence. Due to the myriad products and services provided by defense companies, this paper will focus on a single weapons system. Though surely not all elements of the defense industry have undergone the same internal and external pressures, this paper assumes that the general trends in European military aerospace (specifically fighter jets) are representative of the wider European defense industry. European aerospace has experienced greater pressure to integrate due to the higher R&D cost of its product, but similar price trends in other weapons systems suggest that what happens to aerospace will likely eventually happen to the rest of the defense industry. The first portion of this paper will tell the narrative of inter-firm cooperation on defense projects through the formation of consortiums such as the Panavia Tornado. The second portion will tell the narrative of the post-Maastricht consolidation that occurred throughout the European defense industry, eventually resulting in EADS and BAE Systems. The third portion will focus on European fighter jets through the example of the Eurofighter in order to highlight the ways that consortiums and consolidation has affected weapons production. With these narratives in place, the forth portion will analyze the economic nature of military weapons, defense firms, and governments throughout these narratives. It will highlight the exponentially increasing R&D costs associated with military weapons platforms, the industry's dependence on defense spending by nation states, and the ensuing importance of scale. The paper will conclude with a discussion of the way that European integration has shaped European defense firms and a prognosis of current trends will affect these firms in the near future.
  3. 3. McBride, 2 2.1 - History of cooperation The formation of the NATO bloc following World War II entailed the dramatic reconstruction of military forces. Due to the clear economic limitations of the European states, the newly-formed NATO Defense Committee recommended the “creation of balanced collective forces, rather than balanced national forces.”1 Nevertheless, this call for collectivization was not heeded, and over the following decades, NATO members developed their own national defense industries for weapons procurement and R&D, resulting in significant duplication of efforts. For example, the 2nd Allied tactical Air Force (consisting of Belgian, British, Dutch, and West German forces) had eleven different types of combat aircraft for five combat missions in the early 1970s.2 Realizing the inefficiency of this system in the face of the ballooning R&D costs to develop new weapons, government officials and defense industry leaders began in the 1960’s to push for closer cooperation. In 1968, the European Defense Ministers of NATO (excepting France and Portugal) began to regularly coordinate with each other, eventually forming the EuroGroup.3 Over the next few years, EuroGroup developed and agreed upon six “Principles of Equipment Collaboration,” which sought to promote communication, collaboration, cooperation, standardization, joint support, and cost controls.4 National policies (excepting most-notably France) during this time period also supported the goals of the EuroGroup, as shown by the West German Defense White Paper of 1971 that judged it “indefensible both from a political and from an economic point of view to develop almost identical weapon systems simultaneously in several allied countries.”5 At this point, the European Community (EC) also began to argue that European states needed to merge their defense industries across borders into pan-European defense market as they has already done with their commercial markets.6 The aims of these moves were largely economic in nature, but political fear of becoming technologically dependant on the United States played a factor as well. Throughout the 1960’s, the US sold $8.0 billion of military hardware to Europe and captured 20% of the European defense market, while it bought only $700 million in return.7 Furthermore, US interest in European hardware mainly centered on the Harrier Jump Jet, which suggested continued US preference for 1 Thomas A. Callaghan Jr., U.S./European Economic Cooperation in Military and Civil Technology (Washington, DC: Georgetown University Center for Strategic and International Studies, 1975), 8. 2 Ibid, 22. 3 Ibid, 77. 4 Ibid 78. 5 Ibid, 39. 6 Ibid, 76. 7 Ibid, 45.
  4. 4. McBride, 3 Britain over France and West Germany. In 1973, Dr. Ludwig Boelkow, head of Messserschmitt- Boelkow-Blohm, told the American Aerospace Industries Association that “European industry and European governments will react against [the US] taking a one-way street… by protecting [the European defense] market.”8 The French General de L’Estoile stated this even more concretely: “We need your A-4 [, but] If we buy it, we will have political problems with out industry unless we can say that the U.S. is buying this or that from us. Is the U.S. prepared to buy something from France?” “Some time ago, we suggested to the U.S. authorities that each government set some dollar goal for military purchases from one another over a period of years. We were told this was impossible. Why?”9 Because the European governments considered their independent defense industries strategic national resources, the first moves towards European cooperation took the form of consortiums formed between national defense companies. The most notable effort was the Multi-Role Combat Aircraft, which began as a UK Staff Requirement in 1969 for a “counter-air strike aircraft,” and grew into a tri-national consortium between British Aerospace (BAe), DaimlerChrysler Aerospace (DASA) of West Germany, and Alenia of Italy.10 Interestingly, Belgium, the Netherlands, and even Canada initially showed interest in this project, but they all decided to instead buy US equipment.11 The primary contention between partners was a preference for a single-seat aircraft by West Germany and a double-seat aircraft by the UK, but this was dropped in favor of unanimous support for the double-seat variation by 1970.12 Production of the aircraft was split between participating states, with the nose and rear fuselage made in Britain, the center fuselage made in West Germany, and the wings made in Italy. Most remarkably, this aircraft was in operational service within 12 years on time and on budget.13 The Panavia consortium exemplified the early push among Europeans for greater cooperation. Nevertheless, this approach had distinct limitations. By maintaining defense firms within national borders, European firms could not achieve the same economies of scale as their much larger American counterparts. This was clearly one of the reasons why Canada, Belgium, and the Netherlands decided to buy American rather than contribute to the European Panavia project. 8 Thomas A. Callaghan Jr., U.S./European Economic Cooperation in Military and Civil Technology (Washington, DC: Georgetown University Center for Strategic and International Studies, 1975), 45. 9 Ibid, 47. 10 “Tornado (BAe)” in GlobalSecurity.org. Available from <http://www.globalsecurity.org/military/world/europe/tornado.htm>; accessed 24 September 2009. 11 “Panavia Tornado IDS” in aeroflight.co.uk. Available from <http://www.aeroflight.co.uk/types/international/panavia/tornado/Tornado_IDS.htm>; accessed 24 September 2009. 12 “Panavia Tornado” in Scramble, the Aviation Magazine. Available from <http://www.scramble.nl/wiki/index.php?title=Panavia_Tornado>; accessed 24 September 2009. 13 “Panavia Tornado IDS” in aeroflight.co.uk. Available from <http://www.aeroflight.co.uk/types/international/panavia/tornado/Tornado_IDS.htm>; accessed 24 September 2009.
  5. 5. McBride, 4 Furthermore, the direct role of European governments in managing these consortiums held potential problems. Though the fight over single or double seat variants of the Tornado was settled quickly, these sorts of specification conflicts threatened to slow production or tear apart the consortium, as later seen in the Eurofighter project. 2.2 – History of Consolidation The end of the Cold War was a dramatic turning point for US and European defense firms. The so-called peace dividend signified a plummet in defense spending, which had dramatic and far- reaching effects for those firms involved. Table 3 shows this dramatic drop quite clearly. Most dramatic was the US drop in defense spending from 5.7% of GDP in 1988 to 3.0% in 1999, which totaled $154.6 billion (in 2005 dollars). This loss of potential revenue led to a significant production overcapacity in Europe and the US. In contrast to the Europeans, the Pentagon addressed this problem rapidly through discussions on a dramatic restructuring of the US defense industrial base. The Pentagon invited the major US defense firms to what was euphemistically called the "Last Supper," during which the government expressed its desire to see consolidation throughout the US defense firms. This development took place over the next few years and resulted in the top 15 defense firms consolidating into 5 major players, as visible in the top US companies on Table 1. US consolidation was not immediately matched by European defense firms. Due to the strong tradition of government or privately-owned national champions, borders initially prevented the Europeans from matching US levels of consolidation. The Europeans had long practiced cooperation via consortiums, but permanent pan-European consolidation was perceived to be a loss of sovereignty. As the Panavia Tornado project hinted at, and the Eurofighter project later exposed, intergovernmental consortiums were plagued by prolonged negotiations on military purpose, cost- sharing, and work-sharing. Some even suggested that the outcome of these consortiums ended up costing more than the purely national alternative.14 Lord Levene, the UK Head of Defense Procurement even jokingly proposed a “rule of thumb under which the costs of a collaborative programme [sic] are calculated by multiplying the initial base cost by the square root of the number of participants.”15 European governments therefore rightfully expressed concern that the large-scale consolidation occurring in the United States could potential wipe out the European defense industry. 14 Thomas A. Callaghan Jr., U.S./European Economic Cooperation in Military and Civil Technology (Washington, DC: Georgetown University Center for Strategic and International Studies, 1975), 63. 15 Assembly of Western European Union. European cooperation on the procurement of defence equipment - Symposium (Munich, West Germany: WEU, 1-2 October 1997), 35.
  6. 6. McBride, 5 Nevertheless, consensus on how to proceed did not develop until after the Treaty of Maastricht’s creation of the Common Foreign & Security Policy (CFSP) in 1992. In light of the convergence of defense policy throughout Europe, member states gradually became more open to the creation of a pan-European defense industry. Following the 1997 Treaty of Amsterdam, the Western European Union held a symposium in response to their growing ties with the wider EU to discuss “European cooperation on the procurement of defence [sic] equipment,” during which the majority of European government officials accepted the need for cross-border consolidation. The chairman of the WEU Technological and Aerospace Committee explained this very clearly with his statement that “if Europe’s defence [sic] industry is to survive we need to join forces.” He further explained that “the necessary restructuring and rationalization cannot be achieved at [the] national level; it can occur only in a European context.”16 Mr. Howe, the Deputy Chief of Procurement Policy, reflected on what the governments would have to do to encourage this European-level restructuring, and concluded that a Europe with “rather less than half the expenditure [of the US] but well over twice as many defence [sic] manufacturers” would have to merge.17 To that end, the European governments would have to quicken the pace of European-level corporate mergers down closer to the US average of approximately 60 days.18 Most dramatically, these sentiments resulted in the British, German, and French governments’ decision in 1997 to pressure their defense industry leaders to “overcome their difficulties and create a pan-European aerospace and defence [sic] company (EADC).” 19 European defense firms had long been aware of the substantial economic benefits of consolidation, which they viewed as a requirement to compete with their large American counterparts. Once assured of their governments’ approval, British Aerospace (BAe) and DaimlerChrysler Aerospace (DASA) began negotiations for a merger based around the two firms’ substantial cooperation in the Airbus consortium, the Panavia Tornado project, and the Eurofighter project. Matters seemed all but finalized in late 1998 when the CEOs of BAe and DASA officially agreed to a merger, which controversially planned to exclude the French state-owned firm Aérospatiale, which they considered “out of step” with their status as private companies.20 Initially, the French seemed to object fearing that the merged company would gain a controlling share of the 16 Assembly of Western European Union. European cooperation on the procurement of defence equipment - Symposium (Munich, West Germany: WEU, 1-2 October 1997), 17. 17 Ibid, 34. 18 Ibid. 19 “GEC spoils Dasa/BAe party?” BBC News Online (Published 20 December 1998). Available from <http://news.bbc.co.uk/2/hi/business/239057.stm>; accessed 2 October 2009. 20 “EUROPE'S DEFENSE INDUSTRY: NO MORE FLYING SOLO?” Business Week Online (Published 21 December 1998). Available from <http://www.businessweek.com/archives/1998/b3609188.arc.htm>; accessed 3 October 2009.
  7. 7. McBride, 6 Airbus consortium, but a statement by the French Prime Minister suggested that France would allow the merger to go ahead.21 Meanwhile, the British firm General Electric Company (GEC) developed its own strategy for consolidation. Financed by a sale of its rail company Alstrom, GEC purchased the US defense electronics group Tractor with the apparent intent of breaking into the US defense market.22 Following this acquisition, GEC announced its intention to split its military arm off into a separate firm called Marconi Electronics Systems (MES), with the likely intent of inducing BAe to merge with it. DASA reacted negatively to this development due to its fear that the combination of BAe and MES would destabilize the balance of British and German partnership, resulting in DASA becoming a German subsidiary of a largely British firm rather than an actual partner in a pan- European venture. A spokesman for DaimlerChrysler announced that “we need European restructuring, not vertical, national integration," and that such a merger "would be an obstacle" to Europe-wide restructuring.23 Forced to choose between vertical British integration and horizontal pan-European integration, BAe decided to first merge with MES to form BAE Systems (BAE) with the intent to restart talks with DASA later.24 Nevertheless, DASA’s chief Manfred Bischoff became furious at the occurrence, and he refused to restart merger talks. The aborted merger between BAE and DASA had a substantial impact on the future of the European defense industry. Scorned by perfidious Albion, the boss of DaimlerChrysler Jürgen Schrempp turned to other European firms for mergers in what became known as Schrempps’ revenge. After merging with the Spanish firm CASA, DASA further announced on October 14, 1999 that it had reached an accord with France’s Lagardère Matra to form what would be called the European Aeronautic, Defense and Space Company (EADS) in an apparent nod to the 1997 WEU call for a pan-European aerospace and defense company (EADC).25 These deliberations occurred behind the back of BAE, and effectively signified a coup de grace to BAE’s ambitions to continental Europe. At its creation, EADS became a pan-European firm both larger than BAE and completely hostile to its interests. France’s Aérospatiale-Matra remained resentful of BAE’s refusal to allow it 21 “BAe in defence merger talks.” BBC News Online (Published 7 December 1998). Available from <http://news.bbc.co.uk/2/hi/business/229590.stm>; accessed 2 October 2009. 22 “City cheers latest GEC deal.” The Independent Online (Published 25 June 1998). Available from <http://www.independent.co.uk/news/business/city-cheers-latest-gec-deal-1167392.html>; accessed 2 October 2009. 23 Burkle, Tom. “Move Could Signal Merger With BAe, Raising Concern at Daimler.” New York Times Online (Published 23 December 1998). Available from <http://www.nytimes.com/1998/12/23/business/worldbusiness/23iht-defense.t_2.html>; accessed 2 October 2009. 24 “Europe gets a defence giant.” The Economist (Published 14 October 1999). Available from <http://www.economist.com/businessfinance/displaystory.cfm?story_id=E1_NQJGDN>; accessed 2 October 2009. 25 “Europe gets a defence giant.” The Economist (Published 14 October 1999). Available from <http://www.economist.com/businessfinance/displaystory.cfm?story_id=E1_NQJGDN>; accessed 2 October 2009.
  8. 8. McBride, 7 to take part in its proposed merger with DASA, and DASA resented BAE for merging with MES against its wishes. As additional European firms expressed greater interest in joining in the pan- European EADS over the Anglo-American BAE, the expansion of BAE onto the continent looked increasingly unlikely. Nevertheless, BAE continued to fight a hectic rearguard battle for continental penetration. The offering of the Italian firm Alenia prompted BAE and EADS to attempt to outbid each other. Eventually EADS succeeded in gaining Alenia, but BAE retaliated by using its minority share to block EADS’ attempt to sell Alenia a 5% stake in Airbus.26 The EADS / BAE drama had significant repercussions for the European Airbus and Eurofighter consortiums. Suddenly, the merger between Lagardère Matra and DASA gave EADS control of 80% of the then-profitable Airbus consortium, which made Airbus its subsidiary in all but name. EADS argued that the managing director of the Airbus Company should also assume the role of boss of the Airbus division of EADS, which prompted BAE to argue against this as a conflict of interest.27 BAE successfully defended impartial leadership, but due to the dominance of EADS, it eventually accepted its new role as junior partner and agreed to allow the Airbus consortium to incorporate. The EADS merger affected the Eurofighter in a very different way. Because Lagardère Matra had previously refused to participate in the Eurofighter project, BAE and EADS remained relatively equal partners. Interestingly, EADS suddenly found itself in the unusual position of having to market two new fighters simultaneously: the Eurofighter Typhoon and the French Rafale. Blocked from its previous continental desires due to the unforgiving nature of DaimlerChysler, BAE began to reevaluate its options. Due to its merger with MES, BAE found itself with a relatively strong transatlantic presence including 18,500 American employees. Notably, when the US approved the merger, it announced that it would now treat BAE’s US subsidiary as American when it comes to defense contracts.28 Memories of the Harrier project suggested that Anglo-American cooperation could become quite lucrative, leading BAE to decide to stand shoulder to shoulder with the Americans. In contrast, American distrust about French (and to a lesser degree German) abilities to keep military secrets prevented the newly-created EADS from penetrating the 26 Harrison, Michael. “Thwarted BAe may block sale of 5% Airbus stake to Alenia.” The Independent Online (Published 15 April 2000). Available from <http://www.independent.co.uk/news/business/news/thwarted-bae-may-block-sale-of-5-airbus-stake-to-alenia- 719483.html>; accessed 3 October 2009. 27 “Flagging out.” The Economist (Published 14 October 1999). Available from <http://www.economist.com/businessfinance/displaystory.cfm?story_id=E1_NGNVRG>; accessed 2 October 2009. 28 “Flagging out.” The Economist (Published 14 October 1999). Available from <http://www.economist.com/businessfinance/displaystory.cfm?story_id=E1_NGNVRG>; accessed 2 October 2009.
  9. 9. McBride, 8 US market, largely due to the 15% share held by the French government.29 BAE’s chairman Sir Richard Evans thus took a Janus-faced approach that simultaneously sought stronger cooperation with US defense firms (first primarily with Boeing but later also with Lockheed Martin), while continuing its cooperation with EADS in the Airbus and Eurofighter consortiums.30 BAE ties to the US became even more important following the September 11th attacks, driving the US to become a larger customer for BAE than the British government.31 Describing the doubling of British arms sales from 1997 to 2002, an industrial analyst wrote “it’s not a trend, it’s a bloody stampede.”32 When Lockheed Martin needed to sell its electronics and communications divisions, BAE quickly bought these components to strengthen its claim to be considered a prime contractor for US projects.33 BAE’s potential admission to this club in many ways depended on its acquisition of the US aerospace company TRW. By losing the merger to Northrop, BAE remained locked outside of the group of top five US defense companies.34 Despite the loss of this merger, BAE continued to expand its American subsidiary, first by partnering with Lockheed Martin on the Joint Strike Fighter contract,35 second by acquiring United Defense Industries, the maker of the Bradley Fighting Vehicle, in 2005, and third by selling its 20% share in Airbus to finance future expansion and distance itself from the Boeing-Airbus conflict.36 While BAE’s American subsidiary continued to grow, BAE encountered trouble in its home market. After becoming years late and millions over budget in submarine and early-warning aircraft projects due to the Ministry of Defense’s (MOD) shift to fixed-price contracts, BAE faced a resentful MOD keen on improving competition. In this light, BAE risked losing a £9 billion contract for new aircraft carriers to the French firm Thale, which had recently improved its British penetration by purchasing the British defense company Racal.37 Though BAE eventually won the overall contract, the MOD chose the Thale design, effectively forcing BAE to accept Thale as a 29 “The French factor.” The Economist (Published 22 June 2000). Available from <http://www.economist.com/businessfinance/displaystory.cfm?story_id=E1_RTPNR>; accessed 2 October 2009. 30 “Sir Janus.” The Economist (Published 21 December 2000). Available from <http://www.economist.com/businessfinance/displaystory.cfm?story_id=E1_QGTTPQ>; accessed 3 October 2009. 31 “The defence industry's new look.” The Economist (Published 4 October 2001). Available from <http://www.economist.com/businessfinance/displaystory.cfm?story_id=E1_RDSRNV>; accessed 3 October 2009. 32 “The war dividend.” The Economist (Published 12 September 2002). Available from <http://www.economist.com/world/britain/displaystory.cfm?story_id=E1_TPNSVQP>; accessed 3 October 2009. 33 “On manoeuvres.” The Economist (Published 4 June 2002). Available from <http://www.economist.com/businessfinance/displaystory.cfm?story_id=E1_TNNTPDV>; accessed 3 October 2009. 34 Ibid. 35 “An industry reinvents itself.” The Economist (Published 18 July 2002). Available from <http://www.economist.com/surveys/displaystory.cfm?story_id=E1_TNNPVRD>; accessed 3 October 2009. 36 “Not in formation.” The Economist (Published 12 April 2006). Available from <http://www.economist.com/businessfinance/displaystory.cfm?story_id=E1_GRDGSVG>; accessed 3 October 2009. 37 “Yo, Americans.” The Economist (Published 23 January 2003). Available from <http://www.economist.com/world/britain/displaystory.cfm?story_id=E1_TVQRVSV>; accessed 3 October 2009.
  10. 10. McBride, 9 supplier. This development represented a serious erosion of BAE’s home market, which dropped BAE’s share prices and therefore hurt its chances of further US expansion. With its interests severely threatened, BAE’s CEO Mike Turner posed the MOD with an ultimatum: either it could abandon its Thatcher-era policies of fixed-price contracts or it could watch BAE become a US firm. Concerned about the complete loss of its defense industrial base, the MOD accepted BAE’s demands and rewrote its defense white paper much more favorably.38 While BAE moved largely in an American direction, EADS followed a largely different course. This was not because of lack of desire to break into the US market, which the head of EADS's defense-systems division described as “the biggest market for the next 50 years.”39 Rather, EADS’s direct ties to European governments largely locked the firm out of the US market due to fears of espionage. Nevertheless, as EADS increasingly began to dominate continental Europe, it began to partner with American firms whenever possible, such as with Northrop Grumman on unmanned aerial vehicles.40 In limited circumstances (such as supplying the US Coast Guard with helicopters), these partnerships resulted in sales within the US.41 In 2003, 1% of EADS’ revenue was from the US, as opposed to 21% of BAE’s.42 This relationship was not one way however, as Boeing had to partner with its rival EADS to have a hand in developing missile defense in Europe.43 As of 2005, the main problem with EADS was its corporate structure. Due to the legacy of its merger between German and French companies, EADS represented a delicate balance between German and French national interests. It was run by two co-executives and two co-chairmen (one German set and one French set), and EADS shares were divided equally with a 22.5% share in French hands (15% of which was the government) and a 22.5% share held by Germany’s DaimlerChrysler.44 This strange structure led to corporate intrigue and gridlock when the French government attempted to achieve preponderance within the firm, first by demanding that the French Mr. Forgeard be made either sole chief executive or be given complete control of Airbus and 38 “The Turner prize.” The Economist (Published 5 January 2006). Available from <http://www.economist.com/world/britain/displaystory.cfm?story_id=E1_VPVJSRJ>; accessed 3 October 2009. 39 “The defence industry's new look.” The Economist (Published 4 October 2001). Available from <http://www.economist.com/businessfinance/displaystory.cfm?story_id=E1_RDSRNV>; accessed 3 October 2009. 40 Ibid. 41 “Getting it together?” The Economist (Published 18 July 2002). Available from <http://www.economist.com/surveys/displaystory.cfm?story_id=E1_TNNPVJQ>; accessed 3 October 2009. 42 “Revamping fortress Europe.” The Economist (Published 19 July 2003). Available from <http://www.economist.com/businessfinance/displaystory.cfm?story_id=E1_TRGSTQP>; accessed 3 October 2009. 43 “Hands across the sea.” The Economist (Published 25 July 2002). Available from <http://www.economist.com/businessfinance/displaystory.cfm?story_id=E1_TNVTNGP>; accessed 3 October 2009. 44 “Taking aim, again.” The Economist (Published 3 March 2005). Available from <http://www.economist.com/businessfinance/displaystory.cfm?story_id=E1_PSNPDJQ>; accessed 3 October 2009.
  11. 11. McBride, 10 Eurocopter, and later by pressuring EADS to merge with the French firm Thales.45 The German shareholders blocked both of these attempts at French predominance within the company. Tensions between Mr. Forgeard and his German counterpart Mr. Enders erupted after EADS’ announcement of major delays hurt the value of its stock. Mr. Forgeard blamed a factory in Hamburg for the delay, and Mr. Enders shot back that it was “inopportune” for Mr. Forgeard to sell a large amount of his personally-owned EADS stock shortly before the delays were announced (indeed French regulators began investigating charges of insider trading).46 An aerospace analyst described the EADS stock as at a permanent discount “because keeping the balance of power is the firm's priority above and beyond everything else.”47 In July of 2006, the fortunes of EADS improved. Due to the serious delays of Airbus, Mr. Forgeard and the German head of Airbus were removed, and two weeks later, Angela Merkel and Nicolas Sarkozy met and reduced the management of EADS to a single chairman and a single chief executive in order to clarify the chain of command and improve the running of the company.48 The formation of BAE and EADS represented two diametrically opposed strategies for European defense consolidation. BAE represented the option of merging into a large transatlantic champion that represented nearly the sum total of the British defense industrial plant. EADS represented the cross-border merging of different European national champions into a large pan- European defense firm. Over time, this difference became even more pronounced, as BAE further distanced itself from continental consolidation in favor of developing closer ties with the US defense industry, as exemplified by BAE’s role in the Joint Strike Fighter (JSF) project. Table 1 demonstrates the importance of BAE’s US subsidiary, which represents $15 billion, or half of BAE’s revenue. Interestingly, this subsidiary by itself sells more weapons than any other European defense firm. To meet the costs of transatlantic expansion, BAE liquidated much of its assets in the European defense market by selling EADS its 25% share in Astrium in 2003 and its 20% share in Airbus in 2006.49 This greatly made EADS the face of the continental defense industry, and BAE the face of transatlantic Anglo-American defense cooperation. 45 “Who’s in charge?” The Economist (Published 9 June 2005). Available from <http://www.economist.com/businessfinance/displaystory.cfm?story_id=E1_QDGGVNS>; accessed 3 October 2009. 46 “Forgeard's forward defence” The Economist (Published 22 June 2006). Available from <http://www.economist.com/businessfinance/displaystory.cfm?story_id=E1_SDJPTQR>; accessed 3 October 2009. 47 Ibid. 48 “Reducing the EADS count” The Economist (Published 16 July 2007). Available from <http://www.economist.com/businessfinance/displaystory.cfm?story_id=E1_JQJRTRJ>; accessed 3 October 2009. 49 “Changing places” The Economist (Published 26 October 2006). Available from <http://www.economist.com/world/britain/displaystory.cfm?story_id=E1_RDJTPTR>; accessed 3 October 2009.
  12. 12. McBride, 11 2.3 – History of the Eurofighter project The Eurofighter project is the most ambitious pan-European armaments program to date. What began in 1971 as a British request for a new aircraft grew dramatically into a pan-European project. Currently, the British, German, Italian, Spanish, and Austrian Air Forces field this aircraft, making the Eurofighter Typhoon the most successful pan-European attempt at researching, developing, and producing a fighter jet without US participation. Furthermore, the Eurofighter continues to be a joint project between EADS and BAE (unlike Airbus), allowing it to best represent the pan-European transformation of national defense firms in Europe. While the Eurofighter exemplifies many of the advantages of pan-European cooperation, the narrative of its development in many ways forms a comedy of errors that exposes the myriad difficulties and setbacks that characterize cooperative efforts in strategic industries. The Royal Air Force began to consider a new fighter jet with the publication of Air Staff Target 396.50 After the successful Panavia Tornado project, Britain decided to explore the development of this new fighter with France and West Germany, but the project fell through after the commissioned study failed to meet the French desire for carrier compatibility.51 Britain, France and West Germany then attempted a second joint program in 1979, but this too failed due to differing national specifications.52 Due to the difficulty of cooperating with France, Britain formed the Agile Combat Aircraft (ACA) program with Italy and West Germany in an attempt to recreate their previous success with the Panavia Tornado. However, Italy and Germany failed to secure funding, which forced Britain to move forward alone in developing and testing an experimental aircraft.53 The eventual success of this British endeavor later prompted Italy, Britain, France, West Germany, and Spain to again attempt to cooperate in 1983, but France again withdrew, leaving the remaining countries to collaboratively form the Eurofighter project.54 Unlike the previous failures, the new Eurofigher consortium successfully developed common operational requirements by 1988, and signed engine and sensor development contracts with the newly-formed EuroJet Turbo GmbH and EuroRadar GmbH on November 23, 1988.55 50 “Eurofighter Typhoon History” in Typhoon.Starstreak.net. Available from <http://typhoon.starstreak.net/history.html>; accessed 12 October 2009. 51 Ibid. 52 Ibid. 53 Ibid. 54 “Eurofighter GmbH EF-2000 Typhoon” in Scramble, the Aviation Magazine. Available from <http://www.scramble.nl/wiki/index.php?title=Eurofighter_GmbH_EF-2000_Typhoon>; accessed 12 October 2009. 55 Ibid.
  13. 13. McBride, 12 By the early 1990s, the Eurofighter project was again at risk of falling apart. The end of the Cold War began to cast doubts on the efficacy of the new fighter jet. Furthermore, German unification proved quite expensive for the West German government. Under these two constraints, Helmut Kohl made an election promise to cancel the Eurofighter, which later resulted in the German Defense Minister Volker Rühe’s attempt to fully withdraw from the program.56 In light of the previous German R&D investment in the project, the German government eventually agreed to continue participation on the condition that the consortium reevaluate the Eurofighter to help the German government cut aircraft cost by 30%. Though Germany eventually dropped these demands, Helmut Kohl’s actions caused a three year delay in, which resulted in the project moving forward under the name Eurofighter 2000 to reflect the new anticipated date of delivery. Nevertheless, technical and political problems continued to delay the Eurofighter. Due to problems with the flight software, the first test flight of a barebones Eurofighter was delayed until March 27, 1994.57 In the following years, trial flights gradually added experimental components to prepare the Eurofighter for production. Furthermore, German financial difficulties continued to suggest that it may decide not to purchase any fighters, which delayed negotiations to begin the production phase. Finally in early 1998, Germany, Britain, Italy, and Spain signed contracts worth over $60 billion for the production of 620 Eurofighters.58 Due to these numerous delays, the first production Eurofighter flew about six years behind schedule on February 13, 2003.59 Even more significant was that the German Luftwaffe did not receive its first Eurofighters until July 2006. As of August 2009, the Luftwaffe had received 38 fighters, but 14 of them had to be immediately sent back for repairs.60 These numerous returns reflected the safety concerns that arose after simultaneous dual engine failure caused one of the developmental Eurofighters to crash in Spain on November 21, 2002.61 In addition, cost overruns severely upset the participating governments. In Germany, the defense ministry announced that the budgeted €14.7 billion would only buy 143 Eurofighters, 37 less than originally budgeted, and €3 56 “Eurofighter Typhoon History” in Typhoon.Starstreak.net. Available from <http://typhoon.starstreak.net/history.html>; accessed 12 October 2009. 57 “Eurofighter Typhoon” in Targetlock.org.uk. Available from <http://www.targetlock.org.uk/typhoon/development.html>; accessed 13 October 2009. 58 “Eurofighter Contracts Signed.” BBC News Online (Published 30 January 1998). Available from <http://news.bbc.co.uk/2/hi/europe/52066.stm>; accessed 12 October 2009. 59 “Eurofighter GmbH EF-2000 Typhoon” in Scramble, the Aviation Magazine. Available from <http://www.scramble.nl/wiki/index.php?title=Eurofighter_GmbH_EF-2000_Typhoon>; accessed 12 October 2009. 60 “German Military frustrated with EADS.” Business week Online (Published 6 August 2009). Available from <http://www.businessweek.com/globalbiz/content/aug2009/gb2009086_977202_page_2.htm>; accessed 12 October 2009. 61 “Eurofighter Typhoon” in Targetlock.org.uk. Available from <http://www.targetlock.org.uk/typhoon/development.html>; accessed 13 October 2009.
  14. 14. McBride, 13 billion more would be needed to make up this shortfall.62 A UK parliamentary report complained that though the Typhoon was approved in 1987 to be delivered in 1998 at the unit cost of £17.4 billion, the first craft was delivered four and a half years late in June 2003 with a price tag £2.3 billion more than originally approved.63 Because of this delay, the UK Ministry of Defense announced that the Typhoon was finally operational on June 29, 2007.64 Despite these numerous problems, the Eurofighter project represents a mixed success. Cost overruns and delays are typical for the contracts of nearly all military aircraft. As table 2 shows, the Eurofighter Typhoon was quite economical compared to comparable aircraft. Furthermore, additional countries not involved in Eurofighter development expressed interest in importing the craft. Austria agreed to buy 18 Typhoons on July 1, 2003, and Saudi Arabia agreed to buy 72 on August 28, 2006 (though this has since been linked to bribery).65 Additionally, BAE Systems announced that “Greece, Switzerland, India, Turkey, and Japan” all expressed interest in the craft as well.66 The Eurofighter Typhoon thus presents a mixed picture of the advantages and disadvantages that will likely continue to characterize pan-European defense efforts. 2.1 – Economic Analysis of the Product The products produced by the arms industry are myriad, and an attempt to form a general definition of the tools of national defense is a full-length paper topic in its own right. This paper simplifies the situation by focusing on the European aerospace industry and example of the Eurofighter in order to establish the trends that affect the European defense industry as a whole. In the modern age, weapon systems constantly undergo rapid technological change and improvement. This is clearly visible in fighter aircraft, where constant technological advance culminates in a new generation of aircraft every few decades. Each new generation is fundamentally superior to its predecessor to such a degree that a Eurofighter can outperform a Tornado in nearly every circumstance, just as a Tornado can outperform a Spitfire in every circumstance. Similarly, the research and development of each new generation of fighter aircraft is more expensive in real terms than its predecessor. Due to this rapidly increasing R&D cost, the real unit production cost of 62 “German Military frustrated with EADS.” BusinessWeek Online (Published 6 August 2009). Available from <http://www.businessweek.com/globalbiz/content/aug2009/gb2009086_977202_page_2.htm>; accessed 12 October 2009. 63 UK Parliament. Select Committee on Public Accounts Forty-Third Report (London, UK, 21 October 2004). Available from <http://www.publications.parliament.uk/pa/cm200304/cmselect/cmpubacc/383/38305.htm#note12>; accessed 11 October 2009 64 UK Ministry of Defence. Typhoon launches operationally for the first time (London, UK: MOD, 21 August 2007). Available from <http://www.mod.uk/DefenceInternet/DefenceNews/MilitaryOperations/TyphoonLaunchesOperationallyForTheFirstTime.htm>; accessed 12 October 2009 65 “Eurofighter GmbH EF-2000 Typhoon” in Scramble, the Aviation Magazine. Available from <http://www.scramble.nl/wiki/index.php?title=Eurofighter_GmbH_EF-2000_Typhoon>; accessed 12 October 2009. 66 “Typhoon” in BAE Systems. Available from <http://www.baesystems.com/ProductsServices/autoGen_106920114440.html>; accessed 12 October 2009.
  15. 15. McBride, 14 combat aircraft rises around 10% each year (doubling around every seven years), as seen in Table 2.67 Though this exponential rise in R&D suggests an eventual effective plateau for military hardware, there are several things that can be done to make these weapons systems more affordable. Generally, R&D is the largest cost of military weapons, providing substantial potential for increased efficiency through to economies of scale and the experience curve. Through economy of scale, splitting the research costs over a greater number of units lowers the average cost. For example, increase from the minimum efficient scale to ideal level cuts around 20% from the average cost of combat aircraft.68 Through the learning curve, the production costs of a weapon decrease the more times that it is produced. Reports on the European aerospace industry suggest that its labor efficiency curve is around 85-90% for combat aircraft, meaning that unit costs drop by 10-15% for every doubling of output.69 Within Europe, the substantial benefits of these economic factors are the primary force driving both the formation of consortiums and the later post-Maastricht consolidation of defense firms along European lines. The German government judged it “indefensible both from a political and from an economic point of view to develop almost identical weapon systems simultaneously in several allied countries” because doing so would fail to capitalize on these economic benefits.70 By virtue of the larger US defense market, US defense firms have been able to domestically capitalize on these benefits. In contrast, substantially smaller European defense budgets made it impossible to achieve these efficiencies at the national level. Italy’s Finmeccanica largely represents the maximum consolidation possible at the national level, yet as seen on table 1, this firm is miniscule compared to the five consolidated US firms. Despite these potential methods for lowering unit cost, the increase in R&D costs in real terms poses significant problems. First is the risk associated with developing these weapons, as the development of fighter aircraft can easily take 15 years. If at any point during this development, the buyer decided to change its mind and not buy the weapon, the R&D costs are effectively wasted. This was essentially the situation of Helmut Kohl. Though he wanted to withdraw from the Eurofighter project to help offset the costs of unification, the investment that Germany had already made in terms of R&D made it too expensive and wasteful to do so. If Germany had withdrawn, the 67 Todd Sandler and Keith Hartley, ed., Handbook of Defense Economics: Volume 2 Defense in a Globalized World (London: Elsevier, 2007), 1152. 68 Ibid, 1149. 69 Ibid, 1150. 70 Ibid, 39.
  16. 16. McBride, 15 sole utility it would have derived from its previous investment in the Eurofighter would have been the components that it could use in its own cheaper craft (this was indeed the plan), and the positive spillovers that the Eurofighter research could have for other industries (e.g. the automotive industry). Second, because of the difficulty of projecting R&D cost, defense firms are notorious for delays and cost escalations. For example, the Eurofighter Typhoon exceeded cost by 14% and arrived 54 months late (not counting the massive delays due to political difficulties). The costs overruns significantly affect economies of scale, as the buyer’s budget rarely is able to increase in line with cost. Thus, the buyers are forced to buy fewer products to compensate for the higher R&D cost, which hurts economy of scale. A key example of this is the German defense ministry’s announcement that the budgeted €14.7 billion would only buy 143 Eurofighters and €3 billion more would be needed to make up the resulting shortfall of 37 fighters.71 Thus, the German government originally anticipated paying €14.7 billion for 180 aircraft, yielding a price €81.7 million per Eurofighter. The cost overrun instead resulted in a price of €102.8 million per Eurofighter. By spending €3 billion more, Germany could cut this price to €98.3 million. In comparison to other fighters, this cost roughly equals that of the French Rafale M and is double that of the Swedish Gripen.72 Nevertheless, aircraft price is typically related to weight, and the fact that the Gripen weighs about half as much as the Eurofighter yields a comparable ratio of cost to weight. 2.2 – Economic Analysis of the Customers In order to understand the shapes and forms of defense firms, one must understand the actors that purchase these products. For the most part, states are both the primary purchasers of armaments and the key regulators of the defense industry. Defense purchases are facilitated through their defense departments in order to equip their implements of national defense. National policy determines the perceived threats to national security, which is then translated into operational needs by the professionals in the defense community. Defense firms therefore exist to provide the armaments that the defense community forecasts are needed to maintain national defense. This economic relationship between defense firms and governments is quite symbiotic. Defense firms must meet the needs of their customer governments, and the governments are subject to the risk that defense firms may overrun cost or time constraints. 71 “German Military frustrated with EADS.” BusinessWeek Online (Published 6 August 2009). Available from <http://www.businessweek.com/globalbiz/content/aug2009/gb2009086_977202_page_2.htm>; accessed 12 October 2009. 72 “Sticker Shock: Estimating the Real Cost of Modern Fighter Aircraft.” Defense Aerospace (Publisher 12 July 2006), Available from <http://www.defense-aerospace.com/dae/articles/communiques/FighterCostFinalJuly06.pdf>; accessed 14 October 2009.
  17. 17. McBride, 16 Because national defense markets are monopsonies, states largely determine the size and structure of their national defense firms. They can crucially force or block mergers, and their volition is required for either foreign firms to compete in the domestic market or for domestic firms to compete in foreign markets. Thus, even though US defense firms sell many of their products to foreign governments, they do so only with the permission of the US government, providing the national government with the power to unilaterally determine the structure of its defense firms. To a lesser degree, the EU was able to force pan-European consolidation by the cooperation of its member states. EADS was precisely the sort of firm envisioned by European leaders at the 1997 WEU conference, although BAe’s decision to turn away from DASA largely went against the intention of the British government. Because the defense industry is characterized by governmental monopsony or oligopsony on one side and monopoly or oligopoly on the other, economic activity in this arena resembles game theory, which necessitates that governments actively structure the market to ensure efficiency through consolidation without eliminating competition. Taxpayers’ concerns about economic efficiency and over-profitability constantly threaten to trigger a scandal, such as Helmut Kohl’s pledge to withdraw from the Eurofighter project. In larger national defense markets, governments typically award contracts to one of several competing national defense firms, while in smaller national defense markets, governments typically work with a single defense firm that can be either state-owned or private. The US is the best example of the larger-scale defense market, in which numerous US firms historically compete for the myriad defense contracts. The European countries prior to the formation of EADS are examples of smaller defense markets, as Finmeccanica and Aérospatiale-Matra both dominated their national defense markets and had direct ties to their national governments. In order for European countries to allow competition, they must most likely allow a foreign defense firm to compete against their domestic firm. This is precisely what the UK government did for its aircraft carrier contract when it allowed Thale to compete against BAE Systems. From the perspective of the British government, this action turned what otherwise would have been the monopoly of BAE into an oligopoly of BAE and Thale. From the perspective of Thale, the UK MOD opened up the British market to a firm that typically can only compete in the French defense market, thus transforming the typical monopsony of France into the oligopsony of France and Britain. Nonetheless, the French government could have acted to prevent Thale from competing for the British contract if it felt that the contract could have somehow hurt its national interests. Similarly, by treating the US subsidiary of BAE Systems as an American firm, BAE
  18. 18. McBride, 17 Systems has the potential to sell to both the US DOD and the UK MOD. The consolidation of EADS changes the relationship of defense firms to states in several elements. From the perspective of EADS, the firm suddenly has permanent access to all of the pooled defense markets of its constituent parts. From the perspective of the national governments, EADS potentially stands for a loss of competition, as Germany can no longer have DASA compete against Aerospatiale for contracts. However, continental European states on the whole did not typically allow for true foreign competition against their domestic firms in the first place. Thus the most significant change is the erosion of the state monopsonies, which limits the degree to which each individual state can unilaterally influence a pan-European firm like EADS. Nevertheless, all of these defense firms (including the subsidiaries of EADS) have retained significant ties to their “home market.” This is most clearly shown by BAE Systems, as even though it increasingly penetrated the US market, its competition against Thale for the British aircraft carrier contract signified a mortal threat. The British government had both the ability to block BAE from merging with a US firm (thereby putting it at a disadvantage in competition with the US national giants), and the ability to threaten BAE’s primacy in the British market by allowing foreign competition. Similarly, through EADS is truly a pan-European firm, its various national subsidiaries still remain quite beholden to their respective national governments. These competing forces are the reason for EADS substantial management issues. When the French government used its shares in EADS to try to enhance French control of the firm through Mr. Forgeard, disagreement broke out along the lines of the national subsidiaries. This mirrors the potential for chaos that characterized the Eurofighter consortium. Because European defense procurement remains largely the domain of the EU member states, cooperation requires the continued volition of all states involved. France was able to cause a leadership crisis in EADS just as Helmut Kohl was able to threaten the entire Eurofighter project. Sarkozy and Merkel’s decision to eliminate the dual German-French leadership of EADS eliminated some of the propensity for conflict along national lines, but the determination of EADS leadership will continue to be an intergovernmental struggle along national lines. The only possible elimination of this struggle would be further consolidation of defense procurement within the EU, but due to the loss of sovereignty this would entail, this is an unlikely possibility. 3 – Conclusion European defense firms have significantly changed in the past several decades, highlighting their flexibility in the face of declining defense budgets and European integration. Massive US
  19. 19. McBride, 18 consolidation following the end of the Cold War placed European defense firms at a comparative disadvantage of overcapacity. In many ways, the traditional European view of defense industry as a national strategic asset seemed to augur that national defense firms in Europe would never achieve the efficiencies found on the other side of the Atlantic. Cooperative efforts such as the Panavia Tornado and the Eurofighter Typhoon represented early efforts at achieving greater efficiencies, but as the early history of the Eurofighter showed, these efforts were structurally difficult to begin and maintain. The Treaties of Maastricht and Amsterdam solved this problem by pointing the way towards a pan-European consolidation of defense firms. As the drama between BAe and DASA shows, European intergovernmental cooperation could not force consolidation quite like in the US. The leadership of these firms caused consolidation to move in a way that European (especially British) leaders did not anticipate. The result has been the formation of two diametrically opposed visions of consolidation. BAE Systems in many ways mirrors the more general political situation of the UK as Anglo- Saxon and transatlantic. This firm takes a Janus-faced approach that looks towards the US on one side and towards continental Europe on the other. Standing shoulder-to-shoulder with the Americans, BAE’s US subsidiary is its most profitable venture. BAE Systems is also a defense company that spans the full spectrum of military weapons systems. It is deeply tied to the US wars in Afghanistan and Iraq, producing the Bradley fighting vehicle that shuttles around combat soldiers. In contrast, EADS mirrors France and Germany in numerous ways. Coinciding with the transatlantic rift over the Iraq war, EADS association with anti-US countries limits its ability to tap into the US defense market. The result is that defense contracts form a much smaller proportion of its profits. EADS’ dominance of Airbus puts the company at further odds with the US, who has historically sided with Boeing in trade disputes (though it is now considering buying Airbus tanker aircraft for the Air Force). EADS is also a strictly aerospace company to a much higher degree than BAE Systems. In many ways, these two firms represent different visions of European integration. BAE Systems represents the transatlantic consolidation that was supported by NATO throughout the Cold War. EADS instead represents a greater departure from the transatlantic defense community towards defense consolidation within the EU. Indeed, both firms cooperation in the Airbus and Eurofighter consortiums show that these generalizations can only be taken so far, but it is significant that BAE Systems sold its shares in Airbus and has partnered in the US Joint Strike Fighter project.
  20. 20. McBride, 19 Table 1 shows that BAE Systems and EADS sell about half as many arms as Boeing, which suggests that further consolidation is likely in Europe. Indeed, Thale, Finmeccanica, and Saab are potential acquisitions which would seem to fit best in EADS, although BAE Systems will likely compete for them if they become available. BAE Systems is also in an unusual position due to its US business. It has previously expressed the possibilities of becoming a US firm or merging with one of the US giants. Both of these options would have serious consequences. If BAE Systems were to become American, it is unclear how that would affect its British business. The ongoing trends of European defense consolidation likely will be determined by the forces of European integration. If European integration leads to a stronger Common Foreign and Security Policy (CFSP) at the expense of NATO, then the European defense market would remain quite distinct from the US, and BAE Systems would find it increasingly difficult to maintain its Janus-faced posture. This would either result in BAE becoming a US firm or maintaining its position as a British firm that increasing dissolves its links with the continent (which would only be possible if the UK opts out of CFSP). With BAE locked out of the continent, EADS would then further consolidate its continental holdings and dominate the defense contracts associated with CFSP. In contrast, if the EU continues to place emphasis on NATO, then the defense market would likely become increasingly transatlantic. BAE Systems would be the greatest beneficiary of this outcome due to its transatlantic ties, and EADS would try to follow suit by breaking into the US market. Most likely, projects would increasingly be cooperative efforts between European and American firms. In the medium term, European defense firms will continue to struggle with the ongoing changes on the European political landscape. Unless defense procurement becomes an EU issue, European defense firms will continue to find themselves pulled in different directions by national governments trying to further their national interest. This clearly was a factor when the French attempted to gain control of EADS, and when the Germans attempted to pressure the Eurofighter consortium to lower cost. In both of these situations, the pan-European organizations split into their national elements. Nevertheless, the Eurofighter project demonstrates that, despite all of the problems inherent with pan-European cooperation, greater economic efficiency is possible. In this way, the consolidation of European defense firms exactly mirrors both the single market and the European Union.
  21. 21. McBride, 20 Bibliography Anthony, Ian, Agnes Courades Allebeck, and Herbert Wulf. West European Arms Productions: Structural Changes in the New Political Environment. Stockholm: Stockholm International Peace Research Institute, 1990. Assembly of Western European Union. European cooperation on the procurement of defence equipment: Symposium. Munich: 1-2 October 1997. Bialos, Jeffrey P. and Stuart L. Koehl, ed. European Defense Research & Development: New Visions & Prospects for Cooperative Engagement. Washington, D.C.: Center for Transatlantic Relations - Johns Hopkins University, 2004. Callaghan, Thomas A. U.S. / European Economic Cooperation in Military and Civil Technology. Washington, D.C.: The Center for Strategic and International Studies - Georgetown University, 1975. Guay, Terrence R. The Transatlantic Defense Industrial Base: Restructuring Scenarios and their Implications. Washington DC: Strategic Studies Institute, 2005. Hess, Romanoff and H.P. Romanoff. Aircraft Airframe Cost Estimating Relationships: Study Approach and Conclusions. Santa Monica: RAND Corporation, 1987. Hitch, Charles J, and Roland N. McKean. The Economics of Defense in the Nuclear Age. New York: Atheneum, 1966. Kelleher, Catherine McArdle and Gale A. Mattox, ed. Evolving European Defense Policies. Lexington: Lexington Books, 1987. Markusen, Ann R, and Sean S. Costigan, ed. Arming the Future: A Defense Industry for the 21st Century. New York: Council of Foreign Relations Press, 1999. Sandler, Todd and Keith Hartley, ed. Handbook of Defense Economics: Volume 2 Defense in a Globalized World. London: Elsevier, 2007.
  22. 22. McBride, 21 Table 1 Top 10 arms companies (sales in US$ millions adjusted for current prices and exchange rates) 1990 2007 Company Arms sales Arms share in total sales (%) Company Arms sales Arms share in total sales (%) McDonnell- Douglas 9890 55 Boeing 30480 46 General Dynamics 8300 82 BAE Systems (UK) 29850 95 British Aerospace (UK) (i) 7520 40 Lockheed Martin 29400 70 Lockheed 7500 75 Northrop Grumman 24600 77 General Motors 7380 6 General Dynamics 21520 79 General Electric 6450 11 Raytheon 19540 92 Raytheon 5500 57 BAE Systems Inc. (ii) 14910 100 Thomson CSF (F) 5250 77 EADS (EU) 13100 24 Boeing 5100 18 L-3 Communications 11240 81 Northrop 4980 86 Finmeccancia (It) 9850 54 Thales (F) 9350 56 Notes: (i) Country codes for non-US firms are indicated as follows: UK – United Kingdom, F – France, EU – European Union, and It - Italy (ii) BAE Systems Inc is the US subsidiary of BAE Systems. This component is already included in the data for BAE Systems, but shown separately to emphasize the importance of this sector to BAE. Source: SIPRI (1990, 2007).
  23. 23. McBride, 22 Table 2 Comparative Unit Costs over Time Source: Todd Sandler and Keith Hartley, ed., Handbook of Defense Economics: Volume 2 Defense in a Globalized World (London: Elsevier, 2007), 1153.
  24. 24. McBride, 23 Table 3 Defense Spending as a share of GDP 0 1 2 3 4 5 6 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 Year ShareofGDP(%) USA Germany France UK Italy Source: SIPRI (1990, 2007).

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