PARIS — France should draw up a long-term defense industrial strategy based on key competencies and operational capabilities, and reduce stakes in companies to hold only a “golden share,” according to a wide-ranging think tank report on defense policy.
“Defense Without the Cosmetics: a Platform of Proposals for Defense and National Security” is a 62-page “blue paper” study, an unofficial report on policy issues, by think tank Center for Strategic and Prospective Study (CEPS), due to be published in January. An early copy was made available to Defense News.
A government panel also is drawing up an official defense and national security white paper, expected to be released in January.
A Nov. 15 Franco-German seminar held in Berlin by French think tank Institute for International and Strategic Relations and the Institute for International and Security Affairs, found that bilateral defense relations were undermined by a lack of confidence between the two countries.
The CEPS report called for a “coherent and responsible” defense policy not limited to cost reduction but one with the courage to rethink the missions and formats, with an eye to efficiency.
Choices need to be made and priorities set, the report said, rather than continuing the indiscriminate “sprinkling of funding” that has been imposed on the military, which has not satisfied and is no longer tenable.
On French industrial policy, the CEPS report pointed out the contradictions of state ownership and the need to break the deadlock that has paralyzed the defense sector.
France suffers from a “conflicted” role as the state holds stakes directly or indirectly in the large defense companies — 100 percent of land systems specialist Nexter, 65 percent in naval company DCNS, 30 percent in aero-engine and equipment maker Safran, 27 percent in electronics company Thales, and 15 percent in aerospace group EADS, which, in turn, owns 46 percent of Dassault Aviation, builder of the Rafale fighter.
Despite the state shareholding, the government is powerless to push the companies into consolidation moves, the report said.
For instance, the Délégation Générale de l’Armement procurement office in 2010 froze orders for Thales and Safran to pressure them to consolidate by exchanging assets. But the state, a shareholder in both companies, could not act against its interests as investor, which, in this case, would knowing-ly destroy shareholder value.
“The ‘blockade’ on orders was lifted after six months,” the report said.
And when the boards of directors of Safran and Thales discussed an asset swap of avionics against optronics, government officials from the Defense Ministry and the state holding company Agence des Participations de l’Etat had to leave the room, particularly when it came to valuations. The government was under a conflict of interest as both buyer and seller, and the law required the officials to vacate the boardroom.
A Ministry’s Dilemma
The Defense Ministry is confronted by a number of roles, according to the report: As shareholder, it is bound to boost the value of the companies; regional development; equipping the armed forces, which can be done by buying off the shelf or cheaply; pure research, research and development, and maintenance of know-how.
“There, brilliantly in a nutshell, is the deadlock which has confronted all intentions on industrial policy for at least a decade,” the report said.
For industrial policy, the CEPS report recommended the state sell as quickly as possible all shares in defense companies and only hold the minimum golden share to preserve strategic interests; define a policy of maintaining strategic competencies and operational capabilities, as part of a global strategy of 10 to 20 years; and the state should think in a hands-off manner, rather than try to micro manage industry, CEPS Chief Executive Loic Tribot La Spiere said in an interview.
“For a country like France, which has the ambition but perhaps lacks the means to maintain a national industry in a few key sectors, the road ahead is difficult to find, all the more so as it is tied up with the European dimension, which is still in the embryonic phase. The risk is to lose on both fronts,” the report said.
On state ownership, the recent agreement on governance at EADS shows an evolution in thinking, a consultant said.
Under the reforms, the government gives up veto powers, sensitive capabilities such as nuclear launchers are ringfenced and the board of directors will have more independent seats, the consultant said.
These moves show less state interference although there are informal networks of influence, and the government weighs as client, the consultant said.
On industry consolidation, the report argued against a vertical integration, calling it a “lose-lose” approach, as prime contractors taking over subsystem suppliers would cut down on competition. The report recommended a horizontal consolidation among small and medium-sized companies as this would strengthen the supply chain.
A horizontal consolidation by level one and two suppliers is an important subject, the consultant said. “There is need for consolidation at the equipment maker level” along the lines of the auto industry, the consultant said.
To boost industry competitive-ness, the report called for critical mass by domain and a gradual move toward specialization in platforms and systems, leading to European centers of excellence.
At the Franco-German seminar in Berlin, two former senior German government officials said European pooling and sharing, NATO smart defense and the letter of intention in defense cooperation can only work under a clear program.
Other German participants said existing equipment can be shared, but it lacks a new program.
Obstacles to the European pooling and sharing include a lack of a common defense policy, which is needed if equipment is to be put into a common pool; an inability of chiefs of staff to agree on specifications; and protection of national industrial capacity.
The seminar concluded that greater transparency and openness on French intentions are needed, and both sides should drop their arrogant attitudes.