The turn of the year has been a busy period for Rheinmetall. The German company is engaging in a series of talks for joint ventures and investments to rapidly impose itself at the centre of the European land defence industrial base. However, Rheinmetall’s activities might be motivated more by a survivability dilemma than a genuinely expansionist strategy, according to analysis by GlobalData.
The first issue is that the European landscape is not favourable to the highly fragmented land systems industry. Expenditures are meagre. States are still reluctant to pool resources and pursue common projects. Land weapons are considered as less of a priority than aerospace and naval projects in the minds of many European leaders, leaving the land industry to push its own development.
Rheinmetall is trying to circumvent the problem through acquisitions and investments, de facto pooling the resources of several European champions of the land defence industry.
Rheinmetall’s recent expansion efforts
A first step was taken in November 2018 when the Rheinmetall board confirmed it was negotiating with Wegmann Unternehmens-Holding regarding the acquisition of its majority stake in Krauss-Maffei Wegmann (KMW). Rheinmetall and KMW, the two main German land contractors, are already cooperating in emblematic programmes, such as the Leopard II main battle tank and the Boxer IFV, giving some rationale to a rapprochement.
But perhaps more importantly, the acquisition of KMW would open the gates of KNDS to Rheinmetall. KNDS, also known as KMW+NEXTER Defence Systems, is the result of a 2015 merger between KMW and the main French land system contractor, Nexter. This merger was motivated at the time by a combination of European integration momentum and economic necessities.
The fact that Nexter and KMW were roughly equal in terms of revenues and industrial output made the deal politically acceptable for both governments. The acquisition of KMW by Rheinmetall, which is almost three times bigger than the two other companies together, would shift the weight to the German side. The French Government already expressed reserves regarding the deal.
Despite the predictable wariness of EU policymakers, always reluctant to let the market disturb the Union’s balance of power, such a deal would make sense from an industrial perspective. The European armoured vehicle market is set to reach a dismal $5.5bn in 2019 and is not expected to go beyond $6bn over the forecast period of 2018-2028. With a sluggish home market and increasing international competition, the consolidation of the European land defence industry is becoming a matter of survival.
This was largely acknowledged by Rheinmetall in its last annual report published for FY2017, which states that consolidation “may occur as a result of targeted acquisitions of products and/or technology or on the basis of company acquisitions which allow more rapid regional market access”.
Surviving in an unstable political arena
Retrospectively, these market conditions largely explain another recent move of Rheinmetall in the European defence landscape: the takeover of BAE Systems Land UK announced by the company in January 2019. Seemingly oblivious of ongoing Brexit negotiations, Rheinmetall decided to create a 55/45 joint venture with the land business unit of BAE Systems, giving in practice full control of the England-based business to the German company.
The takeover of BAE Systems Land UK was a long time coming, as the British company suffered numerous setbacks since the opening to competition of its home market, starting with General Dynamics winning the Future Rapid Effect System tender in 2010. Rheinmetall itself had a role in BAE’s troubles, beating the company on its own turf in March 2018 for the next Mechanised Infantry Vehicle with the Boxer. Rheinmetall is also emerging as a favorite in the Challenger 2 Life Extension Project, where it is competing against a consortium led by BAE Systems and Leonardo.
By consolidating its activities with those of BAE Systems Land UK, Rheinmetall is both expecting to absorb the talent and expertise of a direct rival and to keep a strong foot in post-Brexit UK. The company is, in fact, pursuing a European consolidation of land defence activities without clear support from the political class.
Arguably, Rheinmetall has few other choices than expanding if it wants to stay relevant. According to the company’s own figures, land systems represented more than 50% of its revenues in 2017, compared to 20% for General Dynamics and 15% for BAE Systems. Recent quarterly results also suggest a slowdown of defence-related sales and disappointing operating earnings.
In other words, Rheinmetall is too small and too reliant on its domestic land defence market. Acquiring competitors will allow the company to scale up, but the lack of political support still plays against its long-term interests. When German news magazine Der Spiegel reported in January 2019 that Germany was planning to stop arms exports to Saudi Arabia after the killing of journalist Jamal Khashoggi, the same source indicated that Rheinmetall might sue its government for subsequent losses. The situation echoes the declaration of Tom Enders, CEO of Airbus, addressing last October the same complaint to Germany as the country is jointly developing a next-generation aircraft with France.
Rheinmetall’s position is, however, more precarious than Airbus’s from a political and financial perspective, which would explain a possible court action. Reshaping the European land defence industry is proving a real challenge for the German company, not least due to political reasons.
–Comment and analysis provided by GlobalData.