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Q and A with Armin Papperger

Chairman, Rheinmetall Defence

Dec. 14, 2012 - 08:05AM   |  
By ALBRECHT MULLER   |   Comments
Armin Papperger
Armin Papperger (Rheinmetall Defence)
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At the beginning of 2013, the chairman of Rheinmetall Defence, Armin Papperger, will also become CEO of parent company Rheinmetall, following the retirement of Klaus Eberhardt.

Rheinmetall Defence comprises the military activities of the Rheinmetall group, which includes a civil automotive sector.

One of Papperger’s main goals in the past few years was to push the internationalization of the business through strategic acquisitions and the integration of foreign subsidiaries. Rheinmetall also pursues a hub strategy in key markets with local subsidiaries that can offer the group’s full range of products as domestic suppliers. Increasingly, these companies have their own production capacity, making large local work shares possible. Such hubs are in the U.S., Canada, South Africa, Scandinavia, Australia and the Middle East.

Q. In the first three quarters of 2012, Rheinmetall Defence’s earnings before interest and taxes (EBIT) declined by 17 percent compared with the same period last year, and your increase in sales by 7 percent was only achieved through new acquisitions.

A. It’s true that business in our former units has been difficult lately. And over the next few years, growth will probably be on the slow side. But we’re taking countermeasures. Our Vehicle Systems division is undergoing a program to cut costs and improve competitiveness. We should be back on track there by 2014.

Moreover, we will continue to grow as a result of further acquisitions and joint ventures. This has already been part of our business strategy for the past 12 years. In all, we’ve taken over around 20 companies since 2000, and we’re always on the lookout for new merger and acquisition opportunities. Obviously I can’t give any details, but we are in good discussions.

Last but not least, order intake in our Defence unit went up by 21 percent to well over 1.5 billion euros this year. Sales of Rheinmetall AG as a whole, including our Automotive operations, were up 5 percent during the first nine months of 2012, while EBIT reached 177 million euros.

Q. One of the latest joint ventures, Rheinmetall MAN Military Vehicles, established with German vehicle manufacturer MAN in 2010, will reach the break-even point later than anticipated.

A. There have been time lags in two major projects, one in South Africa and one in Australia. In the latter, we are currently in the final stage of contract negotiations in the Land 121 project. We hope to sign the contract in the first half of 2013. So, no, things aren’t falling into place as quickly as we’d like.

But make no mistake about this: The idea of combining MAN’s automotive expertise with the military experience of Rheinmetall Defence remains a perfectly valid strategy.

Q. Europe is experiencing a financial crisis with budget restraints. What are the possible dangers to your business?

A. The situation is indeed challenging. We can see the effects in a number of different countries. Defense programs are being altered, stretched or even completely canceled purely for budgetary reasons. I see the German defense budget as the least problematic in Europe. There’s a budget plan for the next few years, and the defense minister sees to it that our forces get the money they need.

On the other hand, we’re already benefiting from our strategy of internationalization, setting up hubs and subsidiaries in different countries. Along with a broad product portfolio, this was the only way to go. While Europe remains an important market for us, our business is becoming more and more global. In many areas, orders from Germany amount to just 20 to 25 percent of our total business. In fact, most of our incoming orders these days come from outside of Europe.

Q. In the past, you always said Germany and its military are your home market and reference customer.

A. Germany, Canada, South Africa — these have all become our home markets. For instance, even in Switzerland we are now the main private-sector player in defense, with more than 1,000 employees.

Nonetheless, our roots remain in Germany, and the Bundeswehr is indeed our prime reference customer. Because of the country’s extensive certification process, defense materiel made in Germany enjoys a global reputation for excellence. On the other hand, we also have products now, like the ammunition we make for the U.S. military, that haven’t been introduced in Germany.

The basic ratio of our business has changed fundamentally during the past decade. Including everything produced by our international subsidiaries, exports account for 70 percent of sales. Before, we used to sell 70 percent to the Bundeswehr.

Q. You are quite active in the U.S., where there is a threat of budget sequestration. How are you planning for it?

A. I fully agree that the U.S. market has become more difficult. We’ve seen this ourselves and have already had to adjust our business plans. We won’t be able to achieve such high rates of growth as originally planned. For instance, U.S. budget constraints have already resulted in a fall in production at our ammunition plant in Virginia. As a consequence, we need fewer workers there at the moment. We’re basically adjusting our workforce there month by month.

At the same time, things seem to be looking up thanks to the [Common Remotely Operated Weapon Station] deal with Kongsberg, which is worth $100 million over the next five years. Rheinmetall is participating here in a major procurement project for the U.S. military, in which we’re supplying high-value electro-optical components for a large number of remote-control weapon stations.

With four plants in North America, we will continue to make a big effort in the market there.

Q. What areas of the globe have the best potential for you as future markets?

A. Australia is a very important market with good opportunities for us. With Rheinmetall Australia now in place, we have already established a hub there, comprising a vehicle company and a simulation technology unit. We are also working hard to get into the weapons and ammunition business.

But we’re also looking for business opportunities in Asia now, which is certainly a growth market, and the Middle East and South America, in Saudi Arabia and Brazil, for example. Including exports, we’re active in around 85 countries worldwide each year.

Q. When it comes to exports, an increasing number of countries demand on-site production, or offsets businesses.

A. That’s true, and we definitely try to put part of the value-added chain in countries that place multiple orders with us. Our corporate strategy calls for keeping 25 to 50 percent of production in our European factories, with the rest going to customer countries. Otherwise, you won’t get any orders today. However, thanks to our international hub strategy and subsidiaries, in many countries we’re still able to produce a lot of content at our own sites.

In this context, it’s important to remember the German government’s policy of not asking for offset business. As a key local player, we could, of course, play a major part if a German ministry placed orders with a foreign company including an obligation for offsets.

Q. Your divisions and subsidiaries invest up to 10 percent of their sales into research and development. Where are your future growth strands?

A. I can only name a few. We invest a lot in simulation and combat training centers, which has become one of our core competencies. We are growing very fast in this area. Apart from Germany, we already have two important customers: Russia and a country in the Middle East.

Our new stationary Mantis air defense system is unique, especially its capability against small targets, like mortar shells. Although the results are confidential, I can tell you the qualification tests conducted by the German military have shown that it’s extraordinarily accurate. The Bundeswehr, our first Mantis customer, has just taken formal delivery of the system. We’re working on a mobile version that can be fired from trucks, by the way.

Another source of growth will certainly be the Gladius soldier system we have developed for the German military. At the moment, we’re trying to drum up business in other countries.

Q. What do you think about the need for consolidation in the land systems market in Europe? Your national natural partner — German tank manufacturer Krauss-Maffei Wegmann — always rejects such a project.

A. Rheinmetall has repeatedly said that it wants to be a major player in Europe. We want to be a company that can easily carry out orders worth several billion euros.

The decision on whether to merge always depends on both partners. If one partner says no, it makes no sense to repeat it on a daily basis. We have now gone the international route. By the way, our joint venture with MAN led to a national consolidation in the market for military trucks.

Q. Are you talking to French companies?

A. At the European level, Germany and France are two important players that could do a better job of cooperating in the defense sector. Over the past decade, we have held talks with French companies like Nexter. Basically speaking, we’re always open to suggestions, especially if a reasonable business model exists and the governments are willing to go along with it. I’m sure we will see consolidation of this kind in Europe in the long run.

Q. You provide and maintain three Heron-type UAVs for the Bundeswehr in Afghanistan. Is this maintenance business another possible growth strand for you?

A. Without a doubt, this is one of the markets of the future. We will definitely try to expand our business in this area, including at the international level. By providing the German Air Force with a Heron-type UAV, we really have opened a new chapter in our relationship with the Bundeswehr. Today, we operate these aircraft through our consortium with Cassidian.

However, in this particular field, the business concepts are not that simple. Especially in the service sector, many countries already have their own capacities. We have set up a service center in Singapore and also want to build one in Australia, hopefully in connection with a successful Land 121 deal.

———

Company profile

• Headquarters: Düsseldorf, Germany

• 2011 sales: 4.45 billion euros ($5.8 billion), including 2.14 billion euros for Rheinmetall Defence

• Employees: 21,794 (as of Oct. 31), including 9,699 with Rheinmetall Defence

Source: Defense News research

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