Friday, September 14, 2012

BAE:EADS - Who will prevail ? The Anglo/Saxons or the forces of Mittel Europa ?

The BAE:EADS prospective tie-up has created a useful milestone to stop and think about how the industry structure has evolved and the implications for what might come.

The strategic dilemma for the major US primes is that although European markets are sub-critical, will the BAE:EADS tie-up lead to a more protectionist Europe ? EADS resulted from a Franco:German combine with arguably few defense projects being uniquely attributable as a success of this merger - The gestation of Eurocopter Tiger an unfortunate example.

The United States remains the biggest, hi-tech defense market with scale due to Pentagon spending - even if some form of retrenchment happens in the New Year. The defense industry has consolidated into a small group of Prime contractors with a 2nd tier of international primes operating in niche areas and then a wide 3rd tier of specialist providers of everything else from nails to microprocessors. The downside of this picture is that ever more high-tech equipment and unit prices put American technologies that can be exported at a competitive disadvantage against those of other players.

Should a US prime acquire BAE Systems ? There are product mix benefits across the board and for access to prospective international markets though the inevitable question comes down to at what price. Synergies would exist amongst land systems (particularly for General Dynamics viz. the United Defense capabilities and naval systems), Lockheed Martin (the F-35 supply chain and grabbing a share in Eurofighter) or for Boeing (would add substantially a naval and land systems business if wanted).

In Europe, budget cuts and defense reviews amid the recession have largely been the order of the day. The lack of a European-wide military or defense budget results in defense capabilities remaining at the national level with the associated duplication and inefficiencies associated with monopolistic positions. In this environment the BAE:EADS tie-up could in a decade represent a European platform provider and with European institutions such as OCCAR create some gradual commonality of equipment, which in a generation could lead to a more homogenous equipment capability amongst the armed forces of the nations of Europe. if NATO gave a common military language and procedures then the tie-up could move towards some more substantial commonality of equipment beyond the aerial domain.

Amongst the European Primes, the boardroom of Thales is likely an interesting place to be a fly-on-the-wall. A BAE:EADS tie-up will leave the company, which in the UK had good traction for a period before BAE reasserted itself, in a tenuous strategic position.

Rest of the World: Russia, China, Chile, South Africa, Israel and the rest - providing niche equipments either tailored for operations in the local region or simply cheap and robust variants of former Soviet designs or alternatively cheaper versions of 'mid-tech' weapons from the 1980s and 1990s.

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