IISS/CEPS European Security Forum, Brussels, 25 November 2002

Chairman's Summing-Up

by Klaus Becher

The meeting of the European Security Forum on 25 November 2002 was devoted to the analysis of European and Transatlantic Defence-Industrial Strategies. The main question was if and how an intensified transatlantic approach to defence research & development (R & D) and procurement would be developing or not, and if not, what such a failure to gain some access to US defence dollars for their business would mean for hard-pressed European defence industries.

The overwhelming size of the US defence market and the fragmentation of markets in Europe add aggravating structural dimensions to the difficult business prospects in this sector after years of shrinking or stagnating defence spending in Europe that increasingly leaves European players without the necessary critical mass.

In his presentation, Gordon Adams underlined that the transatlantic gaps in military strategy, capabilities and defence spending were getting wider. In this situation, he was critical of the fact that US attitudes to defence-industrial cooperation were still dominated by the traditional Buy American preference. Adams made the case for more transatlantic cooperation but warned that it was not clear yet if the US, as well as the Europeans, would be prepared to draw the necessary consequences from this compelling case and create the necessary conditions for such cooperation to evolve.

He claimed that not just European nations but even the US, in spite of its huge defence budget, would not be able in the future to afford the required rapid military transformation and modernisation on their own. The desired supply-side competition and multitude of technological approaches would fade away unless it was recreated on the transatlantic level. In addition, both European defence spending and the chance to sell defence-industrial products and services to Europe would shrink even more if European defence firms were not to survive. This required giving them more market access to the US and favouring transatlantic industrial partnerships.

The idea underlying NATO's new Transformation Command conflicted with the existing restrictive technology transfer rules. The joint response force will depend on interoperable C4ISR. This can only be achieved with greater US willingness to share such technologies with European partners, including reforming some of the "black box" restrictions that have plagued transatlantic technology cooperation for decades. The allied transformation command will fail in its mission of integrating transformational technologies into European forces if its US staff cannot exchange views and data on key transformational capabilities, due to US technology transfer restrictions.

Burkard Schmitt explained that there was no "European defence industry" as such. We were instead talking about several different sectors with different structures. Therefore the question if Europe's defence industry would survive had to be posed differently: In which of these sectors would there be survivers, and who? While in the aerospace sector there were some cash-generating programmes in the shorter term, it remained unclear where the money for R & D would come from in the mid- and long term.

Clearly, the low level of defence spending in most European countries was at the heart of the problem, with Germany playing the key role. It was not so much the overall spending level that was to blame but the way how and on what the available funds were spent. Gordon Adams added that above all properly coordinated and strategically targeted R & D programmes would be important to halt the demise of European defence industries.

Burkard Schmitt and Gordon Adams both found that after the end of the cold war, the transatlantic defence-industrial scene was driven by industry-led cooperation under the pressure of globalisation toward transnational industrial consolidation while governments remained "behind the curve" and failed to grasp and match this trend, especially by removing bureaucratic and regulatory obstacles. Reasons cited included the lack of harmonisation of national armaments requirements, the persistence of national defence market protection rules and the traditional desire to minimise reliance on foreign supplies.

In this situation, European defence investment does not render enough value for money. European nations continue to disagree, however, on the strategy to address the problem. On the one side, the UK is determined to always buy the most appropriate equipment even if this often means going to the US, and tries to exploit efficiencies from deregulation, flexibility, smart procurement and public-private partnership models while preserving competition on a transnational level. On the other side, in France and also Germany, to varying degrees, the desire to preserve a national defence-industrial base is still dominant.

The Letter of Intent process in Europe, geared at creating the proper legal and administrative framework for a successful European defence industry after its transnational restructuring, had at first looked encouraging but it does not make good for the absence of actual programmes. In Burkard Schmitt's judgment, the intergovernmental cooperation process in Europe was bound to fail, and an institutional quantum leap was needed. The defence market should be governed by EU Commission rules but the procurement system should be kept flexible, avoiding a large management agency that would be counterproductive.

Some nations hoped that armaments cooperation with the US, even in a junior partner or mere customer role, could help to gain respect and influence in Washington. It was lamentable, though, that such transatlantic cooperation, was pursued on a bilateral basis – inherently weak – and not through European institutions. In this context, Gordon Adams's observation was relevant that even under OCCAR's novel approach to industrial return, there was still no incentive for including additional countries in cooperative projects.

Recent US initiatives that would allow more transatlantic defence-industrial cooperation, including the relaxation of export-control obstacles to defence trade with close allies, equal treatment of qualified foreign-controlled defence firms and harmonisation of related regulations continue to face strong political resistance within the US, both for proliferation fears and national industrial interests. As Gordon Adams stressed, the engagement of BAE Systems in the US was important as an effort to establish bona fides for overseas defence firms in the US with Congress and the Pentagon.

It remained to be seen whether the Bush administration would show political leadership on this issue vis-à-vis opposing forces in Congress and elsewhere. The US tendency to distinguish between "good" and "better" allies was bound to create problems for Europe as France and Germany would probably be treated differently than the UK, undermining the basis for multilateralism and transnational companies.

For Europeans, access to US technology is desirable. For European companies, access to a share of the US defence-spending cake is vital. This raises the crucial question: Does the US have an interest in preserving and strengthening European defence-industrial capacities through more intense transatlantic cooperation that benefits Europe? And would Washington actually be willing to sustain the continued existence of a European defence research and development base in Europe?

In assessing the strength of possible political and military motivations on the part of the US in favour of transatlantic defence cooperation, one obvious argument for such a US interest remains that the cohesion of the North-Atlantic alliance would otherwise suffer. However, the need for interoperability as such would not require the nourishing of a European defence industry if the US were willing to sell its cutting-edge products and the Europeans willing to bankroll such purchases in spite of the lack of technological spin-offs, jobs gains and political autonomy usually associated with home-made defence products.

While Burkard Schmitt believed that there was no need for the US to cooperate for industrial, budgetary or technological reasons, Gordon Adams suggested that there were actually some, though not many network-centric warfare technologies in Europe that would indeed provide attractive opportunities for partnering if existing mistrust of Europe and European technology in the US defence establishment could be overcome and Europeans showed enough flexibility to take advantage of the chances offered in the process of network-centric transformation. The US offer to cooperate on missile defence, however, was purely driven by the political desire to offer incentives for allied political support.

The Russian speaker, Ruslan Pukhov, director of the Moscow-based Centre for Analyses of Strategies and Technologies, did not submit a written paper. In his oral remarks, he underlined that Russia had inherited 80 percent of the Soviet Union's defence industry while 20 percent were now outside the country. This provided Russia with a full, autonomous spectrum of R & D and production capacities. The sector was characterised, however, by pervasive duplication and redundancy and until 2 years ago the traditional preference for state-run enterprises over more competitive private ones had still been dominant.

After 10 years of rather plan-less restructuring and privatisation, there was still no encompassing vision. The government had decided, though, that in the further course of restructuring it would want to create 10-20 defence holding firms as stock companies with 51 percent state ownership. The war in Chechnya had determined the priorities for production but also given new impulses for research and development due to increased demand for new equipment such as UAVs, night-vision equipment and joint C3I assets.

With regard to international arms cooperation, Russia had a choice between East and West, and it was likely that both orientations would continue to coexist. In the past, Russia's international defence-cooperation projects had been failures, mainly because they had been driven by political, not economic rationales. There was now noticeable Indian and Chinese influence based on their desire to use the existing, still superior Russian design and development capabilities, e.g. in the Su-30 and Su-27 programmes. For example, India would pay for the R & D in such programmes, while Russia would keep the intellectual property and also buy the resulting products for itself.

There was also cooperation with EADS, mainly for the manufacturing of spare parts and fuselage components. The experience was that more ambitious programmes such as the Russian/Ukrainian alternative to the A400M did not go though. This had created the feeling in Russia that cooperation in areas more sensitive than transport, such as missile defence, would also be unlikely to materialise. European cooperation partners, in particular, were seen as no help to Russia in the defence-industrial sector since they had insufficient budgets.

For Russia's defence trade, the most attractive niche was to sell to customers who could or would not buy US or European products, such as the Chinese. Only few such customers however provided economically rewarding markets. Iran, where Russia was risking US ire, was also not paying well. In airlift services, Russians and Ukrainians now held 50 percent of the world market with the old An-124, good for another 15 years. There would be no new Russian heavy transport plane.

The discussion that followed the introductory speakers' remarks, with participation of EU Commission, EU Military Staff and NATO International Staff officials, touched on a number of interesting issues. One US participant asked why there was not more of an effort among Europeans to "just do it" and concentrate on important niches where the US wasn't ready to share its technology even with close allies, such as JDAMs and UAVs. One reason cited why this strategy wasn't being pursued was that the big European firms were above all focussing their efforts on keeping their role as systems integrators.

There was also some discussion of the motivations behind US companies' purchases of smaller European firms. Opinions differed whether this was just "cherry-picking" made easy by the strong US market power or whether it was part of a deliberate strategic approach for global control of certain strategic technologies. While in many cases, good business opportunities were simply taken, in some cases, including the purchase of German cutting-edge submarine manufacturer HDW, there were most likely other, more strategic considerations involved.

On the main questions raised during the meeting in the context of transatlantic defence cooperation, a certain degree of consensus was forming: