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Aviation History
1995
1995 - 0026.PDF
BUSINESS Louis Gallois "Our real challenge is to cope with cost structures and size which are being imposed on us by the new US mega-firm." tion continues. In the past, belonging to a large parent group provided a certain degree of security, but gave no definitive advantage over smaller niche competitors, at least in areas such as defence electronics. That could change as the emerging giants begin to husband their resources, believes Bollinger. Opportunities to pool skills, programme risks, supplier bases and production processes could provide an edge which is unavailable to small competitors. In short, the giants will become smarter, more capable and, ultimately, more profitable, rather than simply larger. Lockheed Martin, for example, will emerge wirJi a combined research-and-development budget of $750 million — a figure larger than the turnovers of most of its small rivals. Tellep has made it clear that the aim will be to maintain this level of spending, but make it more effective. The two merger partners have already shown diemselves adept at spreading less tangi ble assets, such as best practice and know-how, throughout their expanding groups. Bollinger identifies Martin Marietta's absorption of GE Aerospace as a prime example. Both companies gained, with GE managers rising through the enlarged group's ranks and bringing new ways of doing business in rJieir wake. Consolidators are already rewarded with enhanced margins and shareholder value. In future, the prospect is that they will increas ingly set the pace on price and technology for contract competitions. The acquisition and subsequent rationalisa tion of the GD missiles business by Hughes Aircraft is a case in point. That produced utili sation gains of 35% to 85% and cost savings of 35%, allowing Hughes to boast that it had paid off the $450 million acquisition price, through higher margins, within just 18 months. The combined operation also went on to gain market share in the air-to-air sector and has become the single source for the Toma hawk cruise missile leaving MDG in the cold. It will be another year or two before Lockheed Martin begins to reap the full bene fits of combined operations. Augustine and Tellep admit that there is little room to start serious integration on existing programmes, even where both companies have a major workshare, such as on the F-22. The next round of development programmes and con tract competitions could be a different story. TRANSATLANTIC ALLIANCES Although this restructuring of the US defence aerospace base has until now largely been a domestic affair, as the end-game gathers pace there is a growing evidence that it could begin to spill across the Atlantic. "We believe that die next step is to look out side the USA," says Bollinger, although he admits that die shift to trans-national mergers may prove a longer-term trend. There is little doubt that the major US contractors have developed an appetite for consolidation which will prove increasingly complicated to fulfil without looking beyond die USA. The post-Gold-War shift in world politics could support die trend. Both the USA and Europe are now focused on the new threat of containing small, and often unpredictable, regional conflicts around the world. That requires new common capabilities which will be difficult for any single country to develop in the current climate of budget cuts. Whether transatlantic mergers and acquisi tions prove to be the solution is still highly speculative, dependent in part on the intrica cies of European politics. Summing up at the European Aerospace Forum 94, Ian Godden of OC&C Strategy Consultants, painted two potential visions for the future of the European airframe primes. "If the Governments of Europe can foster agreement within Europe, then the objective is to create two strong defence contractors of equivalent size to Lockheed Martin," he says. Despite the growing number of collaborative European programmes, that is still a big "if. The alternative, Godden believes, is a "real risk of fragmentation", as the major European aerospace nations go their own way. The UK and Italian industries already face a choice of whether to deepen links within Europe or to secure their survival by turning to outsiders from the USA or beyond. There is much talk around the bazaars, cer tainly in the USA, over the logic of future US- UK links, based around the existing defence ties between the two countries. Even then, the alliance would have to be of the order of a link between BAe and MDC to create the neces sary scale to match a Lockheed Martin. Such a deal is not impossibly large. After all, it was BAe's current chairman Bob Bauman, who, in a former role, secured the giant transatlantic pharmaceuticals merger between SmithKline and Beecham. The UK industry appears instead to be lean ing towards a more European future, but as Godden says, the issue could ultimately come down to which deals offer company sharehold ers the best financial rewards. He adds that a transatlantic tie-up could cre ate a "trojan horse" for US companies to gain a foothold in Europe, in the same way that Japanese car makers used UK plants and co operation as springboard into the region. If fragmentation does take hold, then Godden believes that Germany could be tempted to cultivate its neighbours in Eastern Europe and the former Soviet Union. "The German aerospace industry is and will remain embedded in the European aerospace indus try," stressed Manfred Bischoff, chairman of what is now Daimler-Benz Aerospace, speak ing at the Paris conference. He does add, how ever, that some limited co-operation with die former Soviet states could be pursued in defence and space. Meanwhile, die French defence industry could probably muster sufficient critical mass by a consolidation within the largely state-owned national industry. Alternatively, the individual players could look outside France to join with one or other of the emerging power blocs. Aerospatiale chairman Louis Gallois does not exclude internal French consolidation, but stresses that the real future lies with "intensi fied European integration" as a response to the threat of US "mega-conglomerates". So, for the present, Europe seems tempera mentally inclined to pursue consensus, but, as the industry knows only too well, situations can change radically. It only takes one tele phone call. ^ 24 FLIGHT INTERNATIONAL 4 - 10 January 1995
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