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Emerging Markets Boosted Last Year's Orders for Thales

Company Reported €1B Profit for 2013

Feb. 24, 2014 - 11:59AM   |  
By PIERRE TRAN   |   Comments
Thales Chief Executive Jean-Bernard Levy.
Thales Chief Executive Jean-Bernard Levy. (Agence France-Press)
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PARIS — Thales saw a sharp lift in 2013 orders from emerging markets, and the defense electronics company is looking to further extend its international footprint as European budgets face pressure.

“It’s particularly spectacular,” Chief Executive Jean-Bernard Levy told a Feb. 20 news conference after the release of 2013 results.

Last year saw 10 large contracts from clients in Africa, Asia, Latin America and the Middle East, compared with two in the previous year, representing a 30 percent rise in value.

Those deals were each worth more than €100 million (US $137.6 million). With pressure on defense at home, growth must be found abroad.

The sales drive outside France and Britain reflects a “redeployment,” Levy said. Those home markets accounted for 40 percent of total sales, while emerging markets made up 24 percent.

“We know we will be under pressure. We have defense activities in Western countries,” Levy said. On the 2013 domestic sales, “we can talk of a good resilience ... as the difficulties were not too sharp,” he said.

The target is for double-digit growth in orders from emerging markets, while the 2014 forecast for total orders is stable, Levy said.

Total orders for 2013 rose 7 percent to €14.17 billion from €13.29 billion.

Thales will find stiff competition in a foreign sales drive, an analyst said.

“The problem is every other Western defense company is also looking to emerging markets,” said Sash Tusa, a director at Edison investment research agency, London.

“There seems to be an implicit assumption that the emerging economies are all growing rapidly, but the recent currency weakness in Turkey, India and Indonesia has shown some real problems with their economies,” Tusa said.

For Thales, the policy is a long-term strategy.

Even if the growth in those markets is weaker than the previous year, it is “extremely high compared to Western Europe,” Senior Vice President Pascale Sourisse said. China’s economic expansion may have slipped from 10 percent a year to 7.5 percent, but there were still big sales prospects in infrastructure for trains and air systems, she said.

The 10 big deals from emerging markets were among a total of 19 orders, with Britain and France making up the most from “mature countries,” Levy said.

The executive committee received presentations on “incredibly large” opportunities in the emerging markets, Levy said. That pursuit of foreign markets is an extension of the “multidomestic” policy, Tusa said.

“Denis Ranque started Thales doing this nearly 15 years ago,” Tusa said. Ranque set up local partnerships in South Korea, Singapore, Australia and Brazil, through joint ownership, acquisitions and technology transfer, he said.

The drive to boost export revenue as much as possible underscores a lack of European cooperation and carries a burden of political responsibility, an analyst said.

“Every defense company follows the money,” said Nick Witney, senior policy fellow at the European Council on Foreign Relations.

Recent research shows Asian defense spending has outstripped that of the West, so companies are looking in that direction. That creates competition among Britain, France and Germany, and reflects a lack of European cooperation in defense.

Such a race for arms sales should bring a sense of strategic responsibility, Witney said, but it seems governments are leaving the companies to simply sell.

“Sooner rather than later European governments will need to start thinking about Asia as just more than a market,” he said.

Orders from emerging markets rose 30 percent in 2013 to €4.57 billion from €3.51 billion a year ago.

In recent weeks, India, Indonesia, Brazil, Turkey and South Africa, dubbed the “Fragile Five,” have sparked fears in the financial markets amid reports of large fiscal deficits, falling growth rates and inflation.

Argentina, Venezuela, Ukraine, Hungary and Thailand are also seen with macro economic concerns.

Warship builder DCNS has been told to better manage its civil nuclear work, following a report of losses in that area of diversification, Levy said. Thales holds 35 percent in the naval company. The government would decide on any further sale of DCNS stock, Levy said.

Levy said he expects sales and orders to be steady in 2014. Operating profit would rise between 5 and 7 percent from the €1 billion reported for 2013, he said. That gain would have been 1.5 percentage points higher, but currency declines for Australia, Britain and Canada shaved off the profit figure.

That €1 billion profit figure marked an historic high for Thales, Levy said.

While still hoping for a possible mega contract to sell missiles to Saudi Arabia, Levy said, Thales had to wait many years before its 2013 signing of a relatively simple contract, dubbed life-extension Sawari 1, for frigates.

Email: ptran@defensenews.com.

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