All eyes turn to British Aerospace and Marconi: Peter Rodgers looks at the impact of US rationalisation on Europe's industry

THE LOCKHEED Martin merger will renew speculation about a link-up between British Aerospace and GEC's Marconi subsidiary, Britain's pre-eminent defence electronics company.

Lord Weinstock, managing director of GEC, has made no secret of his belief that this most frequently rumoured of deals still represents the most logical step for the British defence industry.

But British Aerospace publicly ruled out any merger in February, saying the way forward was through joint ventures. There has been no revival of talks between the two companies, but while GEC seems in no mood to take the initiative, British Aerospace would be pushing at an open door if it changed its mind.

The latest US deal can be compared, structurally at least, to Lord Weinstock's ambitions for the British defence industry. Lockheed, an aircraft builder, is merging with Martin Marietta, more focused on electronic systems for the aerospace industry, to produce a company that can undertake big defence projects from beginning to end.

Defence specialists were yesterday playing down the immediate impact of the wave of US rationalisation on the European industry. There is no single market in defence, national governments remain highly sensitive customers and defence companies are as bound up with politics as they ever were.

That has led most defence companies to accept what Lord Weinstock has described as the second-best solution - alliances and joint ventures rather than mergers. US defence industry analysts expect an eventual knock- on effect on European companies, but believe this will take time. Tom McNaugher, senior fellow at the Brookings Institute, said the contraction in the US would leave American defence companies more competitive.

That will particularly affect Britain, the second-biggest defence exporter last year, with 19 per cent of the market compared with the US's 49 per cent, Russia's 11.5, Germany's 4 per cent and France's 2.7 per cent.

Mr McNaugher said consolidation was a purely domestic US affair now, but he expected further pressure to internationalise the industry if the revival of defence procurement spending promised by the Clinton administration failed to materialise in a couple of years' time.

Richard Bitzinger, an analyst at the Defence Industry Project in Washington, said what Americans were going through now European companies experienced at a national level in the 1970s and 1980s. Industries consolidated into national champions such as BAe and Dassault.

The US defence market was twice as big as Europe's and had room for more companies than in individual European states.

But he believed that, as the US market consolidated and the European market regionalised, co- operation would become harder. Defence procurement could become a case of 'fortress America and fortress Europe'.

In Britain and the rest of Europe there is concern among defence companies that concentration in the US could close up the American market to them, according to Adrian Kendry, defence economics specialist of the University of the West of England in Bristol. He called for a two-pronged British approach, developing direct co-operation with US firms while the Government continued to support European initiatives such as the Future Large Aircraft Project.

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