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Adjusting to Tighter Times

French Firms Chart Way Forward

Mar. 4, 2013 - 05:15PM   |  
By PIERRE TRAN   |   Comments
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PARIS — The chief executives of two leading French defense companies, land weapons maker Nexter and electronics specialist Thales, last week sketched out their strategies as Western home markets slow down and oversupply forces high research and development spending to keep ahead of the competition.

At Nexter Systems, the high cost of R&D and oversupply are driving the firm to pursue industry consolidation as a medium-term objective, Chief Executive Philippe Burtin said.

Nexter, a state-owned company, invested 57 million euros ($75 million) of its own funds in R&D, of a total of 134 million euros, Burtin told a news conference. The rest came from the government. The R&D figure represented 18 percent of annual sales.

“We have to rally forces in Europe; we have to restructure the industrial landscape,” Burtin said, when asked if that funding was sustainable.

Numerous competitive offerings and a rapid cycle of equipment replacement are big market factors, he said.

Nexter is in talks with German industry and other “close neighbors” to create a third industry leader in European land systems, to rationalize products and enlarge financial resources, he said.

Burtin has long called for a third player to rival BAE Systems and General Dynamics in Europe. But Nexter has problems in finding a partner, and the French government has a role to play, a consultant said.

“Nexter is the perennial bride-in-waiting — the question is to what extent and for how long can the dowry remain attractive to potential buyers, particularly since nearly all of them sit outside France,” said Christina Balis, head of European operations at consulting firm Avascent.

“The key driver for any merger is still the French government, and I can’t see substantive progress in any talks without a serious initiative from Paris,” she said.

A partial privatization would help, but even a policy statement on support for greater European defense collaboration and promotion of European champions would go a long way, she said. President François Hollande and Defense Minister Jean-Yves Le Drian made comments on pro-European cooperation when they were on the campaign trail last year.

Nexter’s state-owned status “in no way” posed an obstacle, Burtin said. The French government has shown its willingness to develop the company, and that is what counts, he said.

Given the sovereignty issues, it is not possible to buy a company and the way ahead is to form alliances, Burtin said.

What would help industry rationalization is for the European armed forces to adopt common concepts of operations, specifications and requirements to allow a cooperative response from industry, Burtin said.

The only cooperative land program is the 40mm gun with Britain, under development through the CTA International joint venture between BAE and Nexter, he said.

Thales Targets Emerging Markets

The new Thales chief executive, Jean-Bernard Levy, gave his first news conference March 1, commenting on the electronics company’s 2012 results, which he said reflected a “mediocre performance.”

Levy hopes to give a “fresh impulse,” as annual sales have stagnated since 2007 and profitability is lower than for its European peers.

Thales booked only two contracts worth more than 200 million euros last year, Levy said.

The priority is to tap growth from emerging markets, he said. Markets in Asia, the Middle East, Latin America and Africa contribute only 20 percent, while mature markets deliver 80 percent of total sales.

Levy has put Pascale Sourisse in charge of international development to deliver that sales and order growth.

Demographic growth, rising living standards and urbanization bring infrastructure and security needs, Levy said.

Regional tensions mean there are “world zones where there are potential conflicts, which make it possible to sell our defense systems and equipment,” he said.

Levy has set a reorganization to harness the competencies of global business units, formerly divisions and country managers. Action plans will be drawn up to bid for contracts.

The strategy makes sense, but execution at the level of region, country and business line will decide the results, a market analyst said.

“The objective of going after emerging markets makes sense,” said Antoine Boivin-Champeaux, an analyst at brokerage Cheuvreux.

What need to be decided are the priorities and resources assigned at the level of region, country and product line.

For instance, the Middle East is wealthy, but decision times are slow, so Thales must determine the right level of staffing for the region, he said.

In business lines, satellites are strategically important but show a moderate return on sales, a financial area Thales seeks to improve. Bidding for a satellite contract needs to be weighed against more profitable activities, such as communications systems, for example.

In Latin America, Brazil’s defense budget is under pressure, so it may make sense to focus on Mexico in civil activities, where Thales is well-installed in the security sector, he said. Those types of decisions will determine whether the growth strategy actually delivers.

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