Is the structure of the French industry set for another major change, 10 years after the last big privatisation round?

Ten years ago, in the second great round of privatisation's, 21 state-owned companies were earmarked for sale by the French government. Of these, only two aerospace companies - Snecma and Air France - remain under state control. Snecma is set for privatisation early next year.

The event will mark a watershed for an industry that has often struggled to retain its identity while facing up to the need to form international partnerships. While the perception may be that it has resisted this need, the fact is that it was French companies Aerospatiale and Thomson CSF that provided the seedcorn for the formation of EADS and Thales, multinational groups that now stand up to the US giants wherever there are global competitions.

Many in the industry believe privatisation and globalisation are closely linked. Guy Rupied, managing director of French industry association GIFAS, says: "The only way forward is to support international alliances, of which EADS is a prime example." Snecma's chairman and chief executive Jean-Paul B‚chat agrees. "We believe in partnerships," he says, adding: "Don't forget we have 50% of the most successful partnership ever, with General Electric on the CFM56. With 14,000 engines delivered and a few thousand more to go, it is still building momentum."

Snecma is 97% owned by the French state and represents the government's last significant controlling stake in an aerospace industry which as recently as 1982 was 80% state-controlled. The French government retains an indirect 15% holding in the Franco-German giant EADS and has retained a stake in Thales.

"The French state has been clear that we are one of the companies where they will keep a golden share," says Thales chief operating officer John Hughes. "The government is still an important customer, but remains just that - not a controlling influence." But the dramatic changes among industry leaders mask the fact that, among smaller suppliers, there has been far less change. Olivier Gorge is deputy managing director of GIFAS, with responsibility for small and medium-sized enterprises. "Most of them are family-owned…not much has changed in their ownership in the last 10 years," he says. "Very few have been bought by larger companies and we are trying to start moves to consolidation."

GIFAS is trying to encourage the small and medium-sized enterprises to look outside France for partners. "It's best to be present in Germany, the UK and France to deal directly with Airbus - it is more useful to have access to Airbus in all three countries," Gorge says. Joint ventures or mergers will allow the smaller French companies to reach a far wider range of customers, if their owners can be persuaded to pursue them.

One important problem that French manufacturers face in Europe is not the crisis in commercial aviation - which is, after all, only temporary - but the fragmentation of a potentially huge military market between dozens of national governments. Manufacturing a military aircraft to the demands of only one country limits the market, as Dassault has found with the Rafale, which entered service with the French navy last year aboard the aircraft carrier Charles de Gaulle.

Rival fighters

The Rafale is the crown jewel of French military aviation and was intended to rival other new-generation fighters such as the Eurofighter Typhoon. But in reality it represents the last glimmer of the century-old independent French aircraft industry which, inexorably, has been forced to the conclusion that it can survive only by joining international alliances and mergers.

"Nobody doubts that Dassault is one of the best aircraft manufacturers in the world," says Rupied. "The problem is one of budget, not industry. Originally, it was planned to have several hundred [Rafales] in service by the end of the century. Now it is 2003, and there is one squadron. Technologically it is a success, but the French government could not respect the dates of the launch schedule, and it is delayed again while they think about the upgrade." Funding for the F2 version of Rafale has still not been secured, causing B‚chat some concern: "The Rafale situation is not idyllic," he says.

Rupied points out that multinational projects have several customers, meaning that they are not vulnerable to a single funding decision, and also provide economies of scale. "Compare Rafale to Eurofighter, which expects to produce 700-800 aircraft. Only 300 Rafales are planned. Obviously Eurofighter is better from an economic point of view."

If dealing with only one customer means small numbers and uneconomically high prices, trying to deal with several also has pitfalls. "The Eurocopter Tiger is a good and bad example of an international project," Rupied adds. "It was very difficult to agree on the operational requirement, but it was designed by a single company [rather than a consortium]." He concludes that international projects are the only way forward: "If we do not co-operate we will disappear. Individual markets are too small."

Dassault and Thales typify two ways of dealing with the French defence industry's other problem: competition from the USA. As a supplier based in several countries, Thales has fewer problems than French-based original equipment manufacturer (OEM) Dassault.

Without the close alliance that exists, for example, between the UK and US governments, French industrialists often talk in terms of rivalry, not co-operation, with their US counterparts. Suppliers such as Thales may be able to win military contracts against US companies, even in the USA, such as its recent success with the Top Owl helmet-mounted display for the US Marine Corps, but at the OEM level at which Dassault operates, the picture is different.

Dassault chairman and chief executive officer Charles Edelstenne finds the Rafale competing not only against European rivals such as the Saab/BAE Systems Gripen and Typhoon, but also against US aircraft such as Boeing's F-15 and F/A-18 and Lockheed Martin's F-16 - and, in a few years' time, its F-35 Joint Strike Fighter. Here US geopolitical strength puts Dassault at a real disadvantage, he says: "You can't argue with the political weight of the USA when the US wants to get the market."

In the recent F-X fighter competition in South Korea, for example, "we were the number one, but in the end it was a political issue". He adds: "Our market is to be the alternative to the US offering. Some countries do not want to buy American."

Thales's Hughes says: "I don't think people tag us as French or even European. We compete on quality in the eyes of Boeing or Airbus. It's not becoming notably easier or more difficult to get military work in the USA…our chance of becoming, say, a major supplier on the Joint Strike Fighter is close to zero, but I think there is a gradual opening of the door. I'm impressed by US manufacturers resisting the pressure for more Buy American laws."

Single European policy

US aerospace research and development spending dwarfs that of Europe, a situation that has led UK executives like BAE Systems' chief executive Mike Turner to see a US merger as the only way of accessing advanced US technology. Faced with the same issue, French manufacturers react differently. "The UK is in a different position to the rest of Europe," says Rupied. "It is very difficult for us to get at the defence market in the USA. The only solution is to facilitate the creation of a single European defence policy and a single defence market."

Many, in any case, are confident that the imbalance will not be permanent. Rising military spending is exacerbating the US deficit, and may be difficult to sustain in periods of economic downturn and without a clear and continuing threat. "There is enormous pressure on them," says Hughes. "As the only superpower, their willingness to fund defence will be called into question. Over time people will relax and become less willing to support the expenditure."

At least as serious a problem for European industry is the steady fall in the US dollar, which has lost 20% of its value relative to the euro since 2001. This has been a severe blow to industries who pay labour costs in euros but must export in dollars. "Many of our efforts to increase productivity have been spoiled by the dollar rate," Rupied says.

Shifting production outside the euro zone - consisting of Western Europe, minus Scandinavia and the UK - may seem like a drastic option, but it may bring other advantages. Wages are lower in eastern Europe and North Africa, although that is countered by the fact that the most widely spoken second languages in eastern Europe are English, German and Russian - French is comparatively rare. The cost of translation often outweighs the comparatively small wage advantage.

In North Africa, however, in the more advanced states of Morocco and Tunisia - both former French colonies - French is widely spoken, with the result that, "our companies prefer to look south than east", Gorge says. In addition, European Union schemes train engineers and scientists in France before returning them to North Africa with a good grasp of both the language and the working environment - an advantage for France. In terms of distance, too, "it is not far from Toulouse to Tangiers", Gorge points out: "Certainly not further than it would be to Warsaw or Budapest."

Russia is another possibility, says Rupied. "They have excellent technology, research and creativity, but the problem is that their economy and industry are still based on the centralised Soviet Union model." There is room for co-operation, for example on the Sukhoi Russian Regional Jet, for which Snecma is building the engine. "We will see more and more joint ventures in this area." In general, however, design will remain under French control.

On the high-technology side, Hughes points out that most potential partner countries are unable to provide the support that, for example, avionics manufacturing requires. "It needs the information technology infrastructure to provide traceability of each component," he says. "Outsourcing is easy if you are producing telephones or computers, but in avionics lifespans are longer and the need for rigour is greater."

Focus on Toulouse

While the largest portion of the French industry is still based near Paris, suppliers of all sizes are starting to congregate around Toulouse, closer to Airbus, and more may follow. Paris may be slightly more expensive, but the difference is nowhere near as great as between London and the rest of the UK. Gorge says that in France "Airbus is the centre of the industry. Directly or indirectly, companies are either suppliers or indirect suppliers to Airbus or Snecma." Other enterprises may follow their customers to the USA to be closer to Boeing, or to Canada's Bombardier, Hughes says.

French companies are increasingly joining pan-European groups as the government takes a more hands-off approach to an industry once protected as a vital national asset, allowing manufacturing and even design to shift outside the country.

The emergence of OCCAR, the European procurement agency, has been welcomed as part of a general move towards a European defence structure that will ensure future programmes are locked into a firmer procurement base.

Meanwhile, on the civil side, the changes in Airbus's manufacturing structure are pushing the smaller companies to take consolidation with non-French concerns more seriously. The French industry has been through a period of major upheaval as it has adapted to global realities, and is arguably now in better shape to weather the future than some of its contemporaries.

Source: Flight International