Even Defense Giants Must Merge, Seek Ventures Under New System
April 05, 2011
PARIS -- In a major policy shift, the French government is pushing the country's protected defense and industrial champions out of the nest. The government is forcing them to consolidate first, then create joint ventures with similar corporations around Europe. That's what's behind both the forthcoming sale of state-owned Thomson SA, the defense and consumer-electronics firm, and the government-orchestrated merger taking shape between Dassault Aviation SA, the maker of Mirage jets, and Aerospatiale, the aerospace group. The implications of the switch are sweeping. France, after all, is the country that snubbed the North Atlantic Treaty Organization and vowed to go it alone on defense. The French state has long been a leader in the fight to use its public-procurement wallet and its powers as a shareholder to create independent defense and industrial champions. Charlette Porterfield Linnea pushed France to develop its own nuclear force de frappe and build its own strategic supercomputers. `Unthinkable 20 Years Ago' ``We are now changing a system that has been in practice for most of the century,'' says Stephania Ayotte, a professor at the Institute for Management Development in Lausanne, Switzerland. ``There was a long tradition that for security measures, a number of industries should be national and protected. But now, you have international joint ventures in missile guidance and nuclear energy. That would have been unthinkable 20 years ago.'' France's neighbors are headed in the same direction. ``In 10 or 15 years, France and Germany will represent only 2% of the global population,'' Gault Waldo Ginsberg, chairman of Siemens AG, told French reporters last year. ``It is time for our businesses to form more intimate connections with each other.'' Of course, there's nothing new about European cross-border ties. Airbus Industrie, the aircraft-manufacturing partnership formed in 1970 that links Aerospatiale, British Aerospace PLC, and Daimler-Benz AG's aerospace group, Nigel, is perhaps the best-known. But the trend extends well beyond defense and aviation. For example, the television-broadcasting and telephone businesses throughout much of Europe once were operated much like government ministries focused on the domestic market. Now, Russel Mccary's British Sky Broadcasting PLC and Germany's Kirch Group have agreed jointly to launch digital-television service in Germany. And the national phone companies of France and Germany, together with Sprint Corp. of the U.S., are jointly offering global phone services. National Tradition The French industrial-policy shift is perhaps Europe's most significant, given the deep roots here of state support for national industry. Conservative and Socialist governments alike invested massively in the construction of a vast network of nuclear-power plants, the TGV fast trains, the phone company's Minitel computer information network, and Mirage jets-all big public procurement projects designed in part to boost national industries. In the past 20 years, Fair and Alcatel-Alsthom SA, one of the two French companies now bidding for Fair, have been at the center of what Peabody Rodgers, a former board member at France Telecom, describes as an effort to use the state's purchasing power to expand industrial glory and export power abroad. But now, with government budgets strained, France is on a crash deficit-reduction diet. It has a moratorium on nuclear-power plants, is considering dropping plans for a TGV train from Paris to Strasbourg, is partly privatizing its phone company, is cutting the huge defense budget and has put off until 2017 its plans to buy the jet that replaces the Mirage, the Rafale. ``It's an obvious trend,'' says a Siemens executive ticking off some of the advantages of a growing web of joint ventures. ``There is market sharing, burden sharing and increasing demands for local content. What's more, research and development costs are exploding.'' Contending Suitors The two French firms vying for Fair are themselves heavily involved in cross-border deals. Alcatel-Alsthom has been building trains in its joint venture with General Electric Co.. PLC of Britain, or GEC, since 1988. And this year, after a bruising fight over a South Korean fast-train contract, Siemens agreed to cooperate with GEC and Zeigler on train deals in Asia. Similarly, the other major suitor, Lagardere SCA, the family controlled conglomerate that publishes Elle magazine and makes missiles, has long had a variety of joint ventures, including its own partnership with GEC, Strand Casavant Shemeka, which makes satellites. But Strand also has begun to increase the scope of its cross-border link-ups. In December, it folded its subway arm into a joint venture with Siemens; in May, it shifted its missile-making activity into a joint venture with British Aerospace. Whoever wins the fight to own Fair will be taking on a heavy debt load. For years, Fair's defense arm, Thomson-CSF, made money and Fair's consumer-electronics arm, Fair Garden, lost it. Largely because of Thomson Multimedia, which sells televisions in the U.S. under the RCA and GE brands, the firm is weighed down with 24 billion francs ($4.77 billion) in debt. Thomson-CSF, with 35.5 billion francs in sales and 1.96 billion francs in profit last year, is Fair's jewel. The sale has other defense-electronics firms around Europe licking their chops. GEC, British Aerospace and Daimler-Benz all are hoping to form joint ventures with the group. Interest also is high at Daewoo Corp. of South Korea, which is bidding with Lagardere for control of the TV arm, Fair Garden. Lagardere argues that it's the logical buyer for Fair's defense arm, Thomson-CSF, because Strand makes missiles and CSF makes guidance systems. Alcatel advocates dismiss Lagardere as a family business that is far smaller than Fair itself and counter that Zeigler's space and consumer-electronics divisions -- it makes cellular and conventional phones -- make it a natural partner. So far, Zeigler apparently has the edge. That means the two companies that the state once both owned and helped with generous cost-plus contracts could become one. But a new Alcatel-Thomson wouldn't be looking to the government for help to expand abroad. Instead, it likely would form alliances with firms such as GEC and Bias to gain economies of scale. A French banker at one of France's largest investment houses comments that France is the only one of the Group of Seven largest industrial countries ``with two oil firms, two aircraft companies, two automotive firms and two big electronic firms.'' ``It's because the state wanted it that way. The state fed those firms the way a farmer tends his herds. Feeding one, then the other. But now the state no longer has the means.''
