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Fixing Europe's Fractured Defense Industry (Int'l Edition)


International -- European Business: EUROPE

FIXING EUROPE'S FRACTURED DEFENSE INDUSTRY (int'l edition)

A common procurement agency could end enormous waste

At long last, Europe is taking a fledgling step toward changing the way its coddled arms makers do business. After a year of negotiations, France, Germany, Britain, and Italy launched a common arms procurement agency, the Organization for Common Cooperation in Armaments (OCCAR) in mid-November. The Bonn-based agency aims to eliminate the costly duplication in Europe's defense research and development and award contracts for Europe's next generation of weapons systems to the most competitive bidders.

CLEAR-CUT. That would mark a major departure from European defense policies up to now. Each of the EU's 15 governments issues its own

specifications and buys mainly from its own manufacturers. With multiple models of tanks, engines, and other weapons, Europe's defense costs run as much as 40% higher than in the U.S. While a recent round of privatizations is nudging Europe's defense manufacturers to scale back overlapping operations, OCCAR could lead to a more clear-cut division of labor over time. For example, some experts believe military aircraft production would tend to be concentrated in Britain, while satellites and missiles would be mainly produced in France and tanks and submarines in Germany.

To be effective, OCCAR must avoid doling out projects to support redundant national defense champions. Instead, it should encourage free-market competition for bids. "The market should decide who is good at what," says Digby Waller, a senior researcher at the Institute for Strategic Studies in London. The agency's hands will be tied, however, unless Europe's leaders reconcile differences in their defense priorities and vest the agency with the power to make procurement decisions. "We will all be losers if we don't get our act together," says Holger Mey, director of the Siegburg (Germany)-based Institute for Strategic Analysis.

Until now, most of Europe's collaborative efforts have proved to be disasters. Horrendous cost overruns have plagued the four-country Eurofighter largely because no company was given the responsibility for completing development on time and within a budget. In mid-November, Germany again postponed a decision to fund construction of the jet, assuring further cost increases in the $71 billion venture. Meanwhile, neither Aerospatiale nor Deutsche Aerospace has cut its production capacities or costs as a result of their Eurocopter joint venture, which lost $786 million last year.

If OCCAR succeeds, it will help sharpen Europe's competitive edge in producing future weapons systems. While France wants the agency to "buy European," it will work best if it plays European contractors off U.S. and Asian rivals. Over time, that just might bolster Europe's share in crucial export markets--and save thousands of otherwise doomed jobs.By Gail Edmondson in Paris


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