US threat to Euro defence firms

October 16, 1998

Europe's defence industries are heading for their second big post-cold war shakeout in the face of stiffening competition from firms in the United States, according to a report for Brussels by a group of defence experts led by academics at Manchester University.

The report warns that defence firms and their suppliers face "major structural, organisational and technological changes" over the coming years.

Philip Gummett, professor of government and technology policy at Manchester and co-author of the report, said this week's news of a merger between British Aerospace and Germany's Dasa was a case in point.

He said: "The situation is not stable, either firms restructure massively on a pan-European basis or they face going out of business. The alternative, when the going gets tough, as it will, is being bailed out by national government, but this is unlikely and quite tricky, raising issues of competition and state subsidy."

Professor Gummett said that if the BAe-Dasa merger is eventually finalised, it will herald a big shakeout of the industry. The key question is whether France's Aerospatiale will also be joining up: "It would be bizarre if it did not. The company is moving towards privatisation but there is a lot of uncertainty about what role the French government might still have after having 'privatised' Aerospatiale."

The report says in the first major post-cold war shock for the industry in the early 1990s, defence orders fell and there was drop in employment, with many small and medium-sized enterprises going out of business. The situation stabilised but there is a fresh bout of upheaval on its way.

Europe's defence-related industries provide direct employment for 811,000 people, but their indirect support for employment means this figure could be as high as 1.5 million.

The Manchester study recommends a host of initiatives to support the industry and help it to compete more effectively against US companies.

These include establishing a "European Defence Observatory", a body to monitor restructuring, its implications for Europe's technological capability and its impact on the development of dual-use technologies for both civilian and defence sectors. The European Commission should explore creating a special funding stream to help small and medium-sized defence firms carry out more civilian work and provide more support for research programmes aimed at developing dual-use technologies.

The report is based on studies in eight countries and interviews with officials in 21 large defence firms and trade organisations as well as 24 government departments and public agencies. Collaborators on the study included academics in France, Germany, Italy and Sweden.

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