Modernise or die, arms makers told

RUSSELL HOTTEN

Yesterday's news from France should not only make pan-European restructuring of the defence industry easier, it will make some alliances inevitable.

As a British industry executive said yesterday: "It's amazing what's coming out of France. We need time to fully digest what is happening before we try and predict what the consequences will be. But it will certainly precipitate change throughout Europe."

France is not alone in having a defence industry that needs major restructuring. All over Europe arms companies, private and state-owned, have been saying the same thing: consolidate or die. Cross-border mergers and closer co- operation are the way forward but attempts by defence industrialists to forge alliances have been hindered by their political masters.

The decline in armaments spending and the rapid consolidation of the American industry sent shock waves through European companies, which were slow to respond. The message was hammered home yesterday by Volker Ruhe, the Germany Defence Minister, at a meeting with his British counterpart, Michael Portillo, in London. "Britain, France and Germany are the major players in the defence industry [in Europe]," said Mr Ruhe. "Either we co-operate or we will not be there in one decade or two decades. We change the situation ... or we perish."

The US merger between Lockheed and Martin Marietta, creating a company with $30bn (pounds 20bn) in turnover, was a pivotal moment in the campaign to rationalise Europe's defence industry. A European Union report last month said US defence companies increased their share of the world export market from a third in 1993 to 50 per cent last year.

In France, change has been slow because politicians have been reluctant to allow market forces into such a sensitive area. In Britain, the Government has consistently upset its European partners and companies such as British Aerospace by buying US arms.

Last week the Ministry of Defence appeared to shift its procurement policy when it said that greater weight should be given to a buy-Europe policy. Bonn has also sounded positive about a joint approach to streamlining Europe's defence companies. Now Paris has agreed to open up its secretive and protected industry. A defence analyst said yesterday: "It all helps pave the way towards a huge restructuring. And it is a very long time overdue."

Mr Portillo said Britain was keen to join the European Armaments Agency and to participate in a project with France and Germany to build 1,000 multi-role armoured vehicles. Britain's GEC is already linked in a joint venture with Thomson to produce a radar for the Eurofighter. But Lord Weinstock, GEC's managing director, has failed to forge a closer alliance with all Thomson's operations. GEC is also a 50-50 partner with Thomson in a sonar project.

BAe's attempts to forge a missiles alliance with France's Matra have been stalled by Britain's refusal to agree to buy the weapon. Yesterday's French move will not necessarily break the deadlock but comments from both sides about closer co-operation will not harm the progress.

France is undergoing what the British industry suffered in the 1980s and early 1990s. BAe, bundled up into a rag-bag of defence operations in 1980 and privatised, spent the rest of the decade trying to restructure. Plessey succumbed to a takeover by GEC, while bits of Ferranti were sold or closed. Famous warship builders also closed.