Magazine article National Defense

European Firms Energizing U.S. Defense Market: Industry Executives Predict EADS Will in Time Win More Pentagon Contracts

Magazine article National Defense

European Firms Energizing U.S. Defense Market: Industry Executives Predict EADS Will in Time Win More Pentagon Contracts

Article excerpt

As more European defense firms establish a presence in the United States and begin to forge ties with the Pentagon, industry executives and analysts predict that these companies will help invigorate the market by challenging the dominant players in the U.S. defense business.

Among the companies seeking to gain a foothold in the U.S. market is the European Aeronautic Defense and Space Company. Rolls Royce, Thales and MBDA also have a recognizable presence in the United States, while the U.K.-based giant BAE Systems already has established itself as a major defense contractor in North America, by acquiring U.S. firms and competing successfully in large defense programs.

The added competition from across the Atlantic, experts said, is exactly what the U.S. defense market needs.

For military and political reasons, the United States cannot afford to shut the European firms out of the U.S. market, said Frank Cevasco, vice president of Hicks and Associates and a former assistant deputy undersecretary of defense for international development and production programs.

"If the U.S. government is perceived as being even more protectionist [than it is now], I fear that we will get an even bigger reaction from the European companies," he told National Defense. "They can harm us much more than we can hurt them."

The United States has the largest share--65 percent--of the world's arms exports market. Europe has 23 percent. "If we put their 23 percent at risk, our 65 percent is put at risk," Cevasco said.

U.S. defense companies increasingly are becoming dependent on export sales to generate new growth, he said. Therefore, "there has to be a perception of a suitable level of a reciprocal access in the U.S." Today, he said, 10-30 percent of the revenue for U.S. defense comes from exports.

"U.S. companies are sitting on the largest defense market in the world, and yet, if you look at their marketing and revenue generation plans from 10-15 years ago, you find that exports were an aside to them--a gratuitous note. It was not part of their business base, it was not important," he noted.

Collectively, the United States and Europe have 87 percent of the defense market, he said. "We have to do a very graceful dance with one another," said Cevasco. "In facilitating EADS to work here, while they may take away some work from U.S. companies, it may strengthen their power to get goods back in Western Europe."

The presence of European competitors could be a healthy development for the defense industry, given that many sectors of the U.S. market have been reduced to single suppliers. "It could be argued that there is a utility for the Department of Defense of having more than one alternative as a source, to be able to introduce competition into the acquisition process," he said. "As long as there is enough work to go around, this could be a good thing."

Market Share

The EADS conglomerate was created in July 2000 from the mergers of German DaimlerChrysler Aerospace AG, the French Aerospatiale Matra and CASA of Spain. In 2001, EADS' revenues reached 30.8 billion euros.

Approximately 80 percent of these revenues come from the civilian aerospace market and 20 percent from the military sector. EADS officials said that the immediate goal is to alter the company's current 20-80 split between military and civil revenues to 30-70. They want the company to become less dependent on the financially strapped commercial aerospace industry.

EADS chief executive Rainer Hertrich wants to raise defense revenues from the current level of $6 billion to $9 billion by 2004.

"The U.S. operation of EADS is pretty tiny," said Cevasco.

If the company wants to increase its market share, it will have to offer better products and better prices to the Pentagon. "If they cant compete, they won't get bigger," he said.

Gregory Bradford, president of EADS Inc. …

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