“Accord gagnant-gagnant” (win-win deal) tweeted French President Emmanuel Macron as an agreement was finally announced at the end of September over the means to allow Italian shipbuilder Fincantieri to take over STX France after two months of fierce negotiation between Paris and Rome.
Although ostensibly a question of operational control of the formerly Korean-owned STX shipyard, the deal itself has paved the way for the creation of what some are already calling a ‘naval Airbus’, with both governments now committed to looking at the potential for a merger between Fincantieri and France’s Naval Group (formerly DCNS).
They clearly do not intend to waste much time making that happen. According to a joint statement from the two shipbuilders, the goal is to set out “a roadmap detailing the principles of the future alliance” by June 2018. If things go as expected, it will see the birth of a new European giant in the sector soon afterwards, and that could have some major ramifications for both Europe’s own defence landscape and the global naval industry as a whole.
Cooperation between the two companies is nothing new. They have already worked together to design and build the FREMM multi-mission frigate, the Horizon-class air defence destroyer and the MU90/IMPACT advanced lightweight torpedo, under agreements covering a range of related technologies and equipment. In resolving the summer’s dispute over Fincantieri’s acquisition of the STX shipyard in St Nazaire, which saw the French government exercise its pre-emption right and briefly nationalise STX to buy time to protect state interests, that tie has ultimately been cemented even more closely.
The STX deal will see Fincantieri holding a 50% stake, France with 34.34%, Naval Group with10%, STX staff themselves will have a 2% stake and the remaining 3.66% will be held by STX local suppliers. Paris also gets negotiated guarantees on jobs, intellectual property and sensitive technologies, and in return lends Fincantieri a 1% stake to give the Italian state-owned company effective overall control, though with the right to revoke it if commitments are not met. This shared ownership agreement brought to a close weeks of difficult negotiations over the future of the shipyard, which had at times seriously threatened to sour relations between the two countries – with the planned defence merger ultimately becoming the central element that made it possible.
Building a champion
“Well, we are saying to our Italian friends: Let’s also see what we can do in the military sector, particularly in surface warships, and let’s build a great European champion in the naval industry,” said French Economy Minister Bruno Le Maire in the Sunday paper Journal de Dimanche on 30th July. Less than two months later, that deal was done, with the French and Italian governments promising “the creation of a world leader, particularly for complex and high value-added ships, which would be supported by an exceptional technological portfolio” in a joint statement issued on 27th September.
The proposed alliance would be based around each company taking up cross shareholdings of 5–10%, and forming a 50:50 joint venture company to work on R&D and foreign export sales. Just one day after the announcement, a clue came to how that might work, with Naval Group and Fincantieri, both of whom had previously expressed interest in Germany’s tender for MKS-180 warships, bilaterally withdrawing from the competition. Explaining that the rules were too specific to the German market, Naval Group chairman Hervé Guillou said that it was their intent to “make a common offer to other countries soon”. Even ahead of their alliance being formalised, it seems they have already begun to adopt a joint approach to foreign markets.
Changing the European sector
The European defence sector has been flirting with the idea of increased cooperation and restructuring since the turn of the millennium, when the big six defence manufacturing nations signed up to finding a framework to make it happen, but little real progress followed. Nine years later, the European Commission legislated against the preferential treatment of own-nation suppliers in an attempt to make the EU defence market fairer, but in practice, it seems the law is not always applied.
Six years later again, in 2015, the Commission warned that the “inefficiencies of duplication and over-capacity” in Europe’s fragmented defence sector had become simply unaffordable. According to some estimates, this focus on national markets means that some militaries are over-paying by as much as 40% for certain items, while carrying up to 30% manufacturing over-capacity for others – all at a time when the European Institute for Strategic Studies says that actual spending has fallen by around 14% since 2007.
Last Supper for Europe?
The case for consolidating Europe’s fragmented and largely nationally focussed arms market seems clear. As Thomas Homberg, the MD of Germany’s leading missile systems manufacturer, MBDA Deutschland, has put it, in the face of growing global competition it is “the only viable option”. Even so, to date there has still been no European equivalent of the ‘Last Supper’ – the famous meeting of US defence firms convened by then Defence Secretary, Les Aspin, at the end of the Cold War which prompted a feeding frenzy of acquisitions and mergers that would leave just ten companies controlling 60% of the market by the year 2000.
The shift in the American defence manufacturing landscape was swift and politically motivated; by contrast European restructuring is proving to be market-driven and slower, but it does finally seem to be gathering momentum. In 2015, French land weapons company Nexter and Germany’s Krauss-Maffei Wegmann (KMW) merged to form what was then dubbed an ‘Airbus for tanks’. Now, with Fincantieri and Naval Group set to become a so-called ‘naval Airbus’ perhaps the tipping point has at last been reached, and further mergers and buy-ups will follow. Only time will tell if this new naval alliance forms the catalyst for a wholesale restructuring of the European defence sector, but one thing is certain; at the very least, it will have significantly changed the future shape of it.
It might also shake up the global markets. As individual companies, Fincantieri and Naval Group are long-standing rivals, competing to supply essentially the same products to the navies of the world. Post-merger, the new naval prime should be in a position to offer an expanded joint product range for export tenders, and take on the big players from the US, UK, China and Russia.
Arguably the biggest arena for this will be the Asia Pacific, where the defence focus is swinging heavily towards maritime security. According to Deloitte, naval budgets in the region are projected to increase by 60% through 2020, and just 19 Asia Pacific nations will account for nearly a third of the world’s defence spending over the same period. The region also makes up 32% of the global submarine market, which is forecast to grow at a CAGR of 4.74% to reach $36.3bn by the end of 2026, while demand from the emerging Asia Pacific economies is expected to drive a CAGR of around 3% in surface vessels by 2027.
It all adds up to fertile potential ground for a newly merged European player, especially one with the combined experience and reputation of these two. Australia’s big-budget Future Frigates programme, India’s ongoing submarine requirements and the expanding needs of Canada – often forgotten in discussions of Pacific littoral states – could all provide the Fincantieri/Naval Group merger with significant business opportunities right off the bat. Looking beyond these, countries such as Indonesia, Malaysia, Singapore and Vietnam are also looking to beef up the protection of their waters against illegal fishing, piracy and the growing territorial assertiveness of China. They might all find competitively pitched European vessels, backed by established design expertise, very attractive.
If everything pans out the way Paris and Rome are hoping, by the summer of next year, the die should be cast on merging two of Europe’s best shipbuilders into one mega-player, in a rare and remarkable case of turning international discord into international cooperation and success.