Briefing for '98: Defence plays catch-up

European defence companies are scrambling to catch up with their American rivals which are putting the final touches to a whirlwind consolidation that has reshaped their industry.

Compared with the US, now dominated by three major groups, Europe remains fragmented. Ten major European aircraft and helicopter makers compete with just five in the US. Four tank makers in Europe rival one in the US. Europe supports 11 missile makers against the US's five - all on combined annual European defence spending of $130bn (pounds 78m) a year, half the Pentagon's budget.

"The message is to rationalise or die: it's as blunt as that," said UK Defence Secretary George Robertson. "The US has shown us the future and our industry must respond or, at best, stagnate. At worst, European players will be off the field."

If they can't respond, they risk becoming subcontractors to one of the US giants - Boeing, which in August bought McDonnell Douglas; Lockheed Martin, which is buying Northrop Grumman; or Raytheon, which capped the US consolidation with its $9.5bn purchase of Hughes from General Motors.

So worried have politicians become that early in December Prime Minister Tony Blair, President Jacques Chirac of France and Chancellor Helmut Kohl of Germany issued an unusual joint statement ordering their defence industries to adopt, by 31 March, a "clear plan" to create pan-European linkups.

Still, analysts are sceptical that even this high-profile ultimatum will help cut through the bickering over leadership and ownership of any cross- border combinations. Political leaders themselves, particularly those in France, so far haven't had the

stomach to lose national control of their defence industries.

Europe's defence sector has taken only a few small steps towards cross- border partnerships, such as the satellite joint venture between France's Matra and Britain's GEC-Marconi, and a missiles business run by Matra and British Aerospace.

"I don't see any of the big boys putting together any high-profile mergers next year," said Chris Partridge, aerospace specialist with Deutsche Morgan Grenfell.

One idea widely accepted by both industry and government is that Europe's civil airplane maker, Airbus Industrie, could serve as a model for a pan- European consolidation that could include everything from helicopters to missiles to tanks.

Aerospatiale, Daimler-Benz Aerospace and British Aerospace - the three main partners in Airbus, which also includes Spain's Construcciones Aeronauticas - are also three of Europe's leading defence companies.

Building Airbus as the platform could take several years, and while that is happening, analysts believe, a good deal of further consolidation will have to take place along national lines.

In France, where the state owns the majority of military enterprises, government leaders only now appear to be getting the process under way after two abortive attempts to auction off state-controlled Thomson-CSF, Europe's largest defence electronics company.

The government elected in June cancelled the sale, but gave consolidation a push by giving minority stakes in Thomson to Alcatel Alsthom and Dassault in exchange for their moving defence assets into Thomson.

In 1998 the French government is likely to try to bring together Aerospatiale and Dassault Aviation. State-owned Aerospatiale makes aircraft, missiles, satellites, helicopters and rocket launchers; Dassault makes fighter aircraft and business jets. France has been looking for ways to merge the two.

Britain could see further consolidation along national lines as well. Speculation has swirled since 1991 that GEC and BAe, the largest UK defence contractors, would form a link. The two had talks late last year and in 1993.

GEC, which makes military electronics, had been keen to merge its Marconi defence business with its bigger rival, Thomson-CSF. But after the French government blocked that avenue, opting instead to build a single national defence company, British firms may have to do the same.

"You could see BAe and GEC getting together," said Zafar Khan, an analyst with SGST Securities. "It's very much up in the air with all these groupings."