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Europe's Weapons Makers Launch Operation Market Shield


International Business

EUROPE'S WEAPONS MAKERS LAUNCH OPERATION MARKET SHIELD

Mirage jets roar overhead, rattling the windows of the chalet overlooking Le Bourget airport and drowning out most conversation. But that doesn't stop silver-haired Sir Ralph Robins, chief executive officer of enginemaker Rolls-Royce PLC, from driving home his message. Sitting in the chalet rented for the Paris Air Show, he worries: "Violent changes are taking place in the defense industry."

Indeed, it's a nasty new world for Europe's weapons producers. First, it was the winding down of the cold war, which could prompt NATO countries in Europe to slash defense budgets by as much as 30% to 50% within five years. Now, the gulf war has sparked calls for tough controls on exports to once-promising markets in the Middle East and the Third World. Sales prospects in Western Europe's $150 billion-a-year weapons business are so grim that a third of its 1.5 million workers could be laid off by the mid-1990s.

In response, the industry is already consolidating around a handful of European giants such as General Electric of Britain (GEC), Deutsche Aerospace (DASA) in Germany, and Thomson-CSF in France. Because of exploding costs and shrinking markets, they are under pressure to collaborate on defense programs to serve all Europeans. That's a big change. Formerly, every missile or tank was duplicated in some other nation's arsenal. After existing programs run out, says GEC-Marconi Co. Chairman Sir Geoffrey Pattie, who doubles as a Conservative member of Parliament, "I don't think we'll ever see single-country programs again."

SURVIVAL SKILLS. As a backup, a number of players are shifting from guns to butter. GEC and British Aerospace, France's Thomson-CSF and Aerospatiale, and Germany's DASA are stepping up diversification into civilian markets. In addition to cruise missiles and smart bombs, they're planning to make everything from smart credit cards that use microchips to videophones and other telecommunications gear. Thomson is trying to offset its fast-declining sales of military electronics components in the Middle East by expanding civilian operations in Europe and elsewhere.

But the key to survival is to become part of one of the new groupings. Rolls-Royce's Robins, who heads Europe's largest enginemaker, is proposing a wide range of military projects with France's SNECMA and Turbomecca, FiatAvio of Italy, and Spain's Industria de Turbo Propulsores. "I've always felt there should be a European engine industry," says Robins. Britain's GEC-Marconi is now deepening its missile-making involvement with France's Matra. Another possible missile combine would include DASA, Aerospatiale, and Matra.

GEC and British Aerospace, after linking up several months ago, now are bidding against IBM and British helicopter maker Westland PLC for the management contract of a proposed $5 billion British helicopter program. British Aerospace and Germany's Messerschmitt-Bolkow-Blohm are working with Raytheon Co. of the U. S. to upgrade the Patriot missile. In Europe, the Eurosam consortium of Aerospatiale, Thomson-CSF, Italy's Alenia, and newcomer Inisel of Spain is readying a similar antimissile program for the late 1990s.

The most ambitious of all cooperative deals is the four-nation European Fighter Aircraft, which optimists say could generate total sales of 1,400 throughout the world. The critical issue of support from the German government is unresolved, but backing from the military and DASA should tip the balance in the deal's favor. The new aircraft, however, could be a blow for France's Dassault, a civilian and military jetmaker. It has failed to ring up a sale of its Mirage jet outside France for three years, and its next fighter, the Rafale, won't be out until 1997, when the new European fighter will make its debut.

NATO's plans for a new rapid-deployment force in Europe are likely to spell even more big changes. The force will place a premium on high-tech, high-powered weaponry and mobility. European spending on research and development for defense already is growing at a double-digit clip, pointing to strong growth prospects in high-tech equipment, such as early-warning devices and stealth weaponry. What's more, the new NATO force may push defense manufacturers and their governments to begin standardizing equipment--a key way to save money.

WASHINGTON WOES. All this is stirring fears in the Bush Administration. Officials worry that tight arms markets and the removal of internal trade barriers within the European Community in 1993 could keep in place policies that favor local weapons makers. That would make it tough for U. S. defense contractors to win new European business. At best, says Joel L. Johnson, a Washington lobbyist for U. S. aerospace interests, "we'd be pleased to hold our own in Europe."

Not that there won't be some cross-Atlantic deals. The gulf war showed the need for advanced military airlift capabilities. And discussions are under way between European and U. S. plane builders to come up with a new, jointly developed military cargo aircraft.

Reshaping Europe's defense business promises to be a long process, with many bumps along the way. Often, it may be cheaper for Europeans to buy existing U. S.-made weapons, rather than pour billions into new systems. And as NATO's influence diminishes, the Europeans will have to develop a new political group to coordinate defense planning. But if Europe wants to stay in the defense business, the most important step of all will be to put aside nationalist feelings.Richard A. Melcher in London, with Jonathan B. Levine in Paris and John Templeman in Bonn


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