Latest developments in the European defence sector

Jorge Diezhandino. MBAP. IE Business School. Assistant Technical Manager at the Spanish Navy’s R&D Centre

5 September 2006

The European defence sector is changing rapidly to meet new security threats and to remain competitive. But Spain has decided against joining the European Defence Equipment Market.

It is all part of Human History

History shows that the concepts of security and defence are inherent in humanity. Not surprisingly, the first literary monument of our civilisation, the Iliad, was based on the bitter reality of the wars in Ancient Greek. Almost three millennia have passed since then and, although the world today holds greater expectations of prosperity, peace and freedom, we still face serious threats. Terrorism, organised crime, regional conflicts, the proliferation of weapons of mass destruction and the erosion of certain states are all a reality. These threats have highlighted the need for us to fight in defence of our safety and democratic values, especially after the brutal events of March 2004 in Madrid and those of July 2005 in London. With these tragedies weighing heavily on our minds it is clear that a strong defence industry in Europe is not only essential for the economy, but also for us if we are to exercise a positive and effective influence on the world.

The making of the European Defence Agency

The future of the Spanish and European defence industry depends significantly on Community decisions in military affairs. Accordingly, Europe is witnessing—through the European Security and Defence Policy--one the most important developments in the last decade in the field of Security and Defence (S&D). At the end of 2003, all the European leaders unanimously approved a policy based on the idea of a macro strategy and encapsulated within the title of European Security Strategy. This document analyses the new challenges we need to tackle in order to achieve a secure Europe in a better world. It also identifies the political and military commitments required to meet these goals.

In July 2004, the European Defence Agency was set up with the goal of meeting Europe’s objectives for the development of its military capacities. The director, Javier Solana, the maximum representative of the EU for Common Foreign and Security Policy, is seeking to lead the member states toward the creation of an authentic European defence market.

Opening the doors on the European defence equipment market

The European defence industry is broken up into national markets, while in the U.S it is concentrated into four large groups: Lockheed Martin, Boeing, Raytheon and Northrop Grumman. Until recently, the activities of the European companies in the sector were limited to each one’s domestic market because the member states--alleging security concerns and in accordance with article 296 of the EU Treaty-- continued to wield control over their defence equipment markets. This type of clause is estimated to protect almost half the European contracts in the sector. Consequently, this has led to a continual break-up of national industries and a loss of competitiveness, especially with regard to American competitors.
However, on May 22 The European Defence Agency (EDA) announced plans for the new `European defence equipment market´, which was launched on July 1.

The idea is to provide access for European companies to different national markets in an effort to boost competitiveness. This market is structured around a code of conduct--a voluntary intergovernmental system whereby the signatory states publish contracts for defence equipment on an electronic bulletin run by the EDA. The system establishes transparent criteria and objectives for the awarding of contracts.

Spain and Hungary Say ‘no’

Of the 25 Member States of the EU, only Spain and Hungary have announced they will not take part in the project, although they have both said they may join in the future. Denmark, which is not part of the EDA, has reserved the right to opt out of certain European defence cooperation programmes.

Though Spain’s decision disappointed the EU, it is worth looking at why the country wants to protect its industry from stronger European powers. Many believe that the Spanish defence industry is extremely small, especially when compared to France, United Kingdom or Germany, and therefore cannot compete. On the other hand, it is difficult to imagine a European country with a defence budget large enough to sustain a flourishing defence industry on its own, which is why many insist that the Spanish sector will only be competitive if it participates in this new converging environment.

Understanding the European and Spanish defence sector in order to predict the future

Let´s remember that the Strategic Defence Review, which came completely into effect in 2002, sought ´the strengthening of the armed forces by rendering them fully professional and providing it with modern weaponry, while advocating a defence culture that corresponds to an advanced society´. The Secretary of State for Defence, Francisco Pardo, continued to show his unconditional support for the national defence industry during his speech in the Senate last March 23. At the same time, he said he shared the European goal of creating a common market, albeit ´always in the interests of Spanish corporations´.

Finally, Spain, in general, has adopted a conservative stance on the issue of European convergence. Defence Minister Jose Antonio Alonso recently explained Spain´s decision not to join the European defence market by saying, ´we must not endanger the consolidation of our sector´. If, as Pascual Montañés explains in his book Inteligencia Política (Political Intelligence), all strategies must be based on a correct adaptation to the environment, it is doubtful that this decision is the wisest.

The size of the corporate defence sector in Spain is increasing for the eighth consecutive year. Turnover is more than €3 billion a year and provides direct employment to more than 23,000 people. Highly qualified personnel carry out most of these jobs, leading to a gradual increase in productivity in recent years. In Spain, there are approximately 150 companies with interests in the sector, including organisations as important as EADS CASA, Navantia and General Dynamics Santa Barbara. In addition to these large companies, there is also a group of healthy, smaller entities with high-level technology, such as Sener, Indra, ITP and Amper.

The sector is consolidated into four basic sub-sectors: the Air Force, the Navy, the Army and electronics-computers. Of the four, the Air Force sub-sector is the only one that has ventured outside of national borders by partaking in the EADS (European Aeronautic Defence and Space Company) consortium. Neither the Navy nor the Army participates in joint programmes, and these two sectors historically have a large capacity for overproduction. EADS is an example of how united European industrial efforts can provide a competitive response to defence needs, enabling progress in their joint construction. If the Navy and Army sectors are capable of following suit, we shall be closer to reaching our shared goal of jointly standing up to common threats.

All indicators point to a sector that is evolving continuously and becoming increasingly important, both politically and socially. International stability, armed conflicts and the fight against terrorism have revealed a global sector that needs to be more dynamic, competitive, innovative and international and endowed with growing capacity. These clear needs have accelerated the reorganisation of the most powerful armed forces in the world. In particular, the Spanish industry must be capable of adapting to this new environment in order to compete over the mid-term in the European market, where both supply and demand tend to converge. Facing this challenge with courage and determination will not only enhance competitiveness, it also will open up new opportunities in international markets. These continual changes and advancements represent both risks and opportunities for the Spanish sector and it is in all our best interest to watch carefully as these events unfold.


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