Strength of euro is driving companies abroad as they come under pressure to cut prices
The continuing strength of the euro against the US dollar may prove fatal to several French aerospace small and medium-sized enterprises (SME) that remain unprotected by currency hedging and under heavy pressure from prime contractors to lower their prices. Some SMEs are relocating out of France and the eurozone in an effort to keep costs down.
Henri Martre, president of the strategic committee of French aerospace industries association GIFAS, says: "The purchasing department of primes is the first place where cost reductions are sought. This is a danger for our SMEs. This issue is a time bomb whose full effects will be felt in three or four years."
Jean-Marie Virepinte, who represents the SMEs within GIFAS, says they are "being put under a great deal of pressure to lower their prices from the primes who themselves need to keep their euro costs down, but the added value of SMEs is 80-85% of their revenues". He says that to try and keep their own costs down, "some SMEs have already moved to Morocco, Tunisia and eastern Europe".
Philippe Camus, president of GIFAS and co-chief executive of EADS, says that even if Europe's aerospace industries are increasingly establishing sales contracts in euros, "that is not the problem. The problem is in costs, which we have in euros, and our competitors outside the eurozone have in dollars."
He adds that although the exchange rate has had a "weak" impact on financial results of the majors, who are all hedged against the dollar for the next two or three years, "the cost will be several billion euros once the hedging arrangements expire".
Dassault chief executive Charles Edelstenne says that when the manufacturer submitted its offer last November in response to Brazil's fighter aircraft tender, "the price we set in euros was exactly the same as it had been 18 months earlier but given the difference in the exchange rate between the real, the euro and the dollar, it would actually cost Brazil 20-30% more". In May 2002 the euro was worth 2.3 Brazilian reals and the dollar 2.5 reals, but by November 2003 the euro was worth 3.5 reals while the dollar was still worth only 2.9 reals. "We cannot take responsibility for the added cost due to exchange rate fluctuations; it would bankrupt our company immediately," Edelstenne says.
Meanwhile, the estimated total sales of France's aerospace industries in 2003 was €25 billion ($30 billion), up from €24.6 billion in 2002. Of this, €16.6 billion (or 66%) was in the civil sector (down from €17.8 billion in 2002), with the remaining €8.5 billion in the military sector, sharply up from the €6.8 billion in 2002.
Exports accounted for €15.5 billion, up from €13.8 billion a year earlier, largely due to a 48% jump in military exports. An estimated €40 billion worth of orders were taken, of which 59% were civil and 41% military.
CHRISTINA MACKENZIE / PARIS
Source: Flight International