ROME, LONDON, PARIS AND COLOGNE, Germany — As European shipbuilders prepare to transform their nations’ rising military budgets into naval power, local priorities are acting as formidable forces against the integration of a fragmented market.

Two years ago, Italian defense think tank CESI produced a document lamenting the fractured state of the European naval industry, warning that firms on the continent would be swept aside by foreign competition if they failed to team up and take on the world.

The paper provided the ideological underpinning for proposals by Italian shipyard Fincantieri to jointly build vessels with France’s Naval Group, a plan being considered by both governments.

But today, one of the authors of the report, Francesco Tosato, says that despite European Union moves to integrate the defense industry, little has changed in the naval sector.

“We still have six or eight types of frigates, each with manufacturing runs of no more than 10 vessels, which is unsustainable,” he said. Supporters of integration say shipyards will be able to cut costs through synergies and avoid competing against each other in export markets.

“The Germans are building U-212NG submarines with the Norwegians, but they are not integrating,” he added.

A second analyst agreed that integration is not happening, but offered a positive outlook.

“With European governments not wanting to spend on naval vessels, it is all about exports, and buyers in Asia and the Middle East want to deal with one government, not with Europe,” said Peter Roberts, director of military sciences at the Royal United Services Institute in London.

“They may want a German frigate with a French radar and MBDA missiles, but they still want one national point of contact,” he added.

Roberts also argued that European multinational shipbuilders risked stifling competition. “That could lead to poorer designs and higher prices,” he said.

In addition, one European industrial giant may be unable to offer different types of vessels to export customers with a variety of requirements.

“Customers have bespoke needs, which means systems integrators are crucial,” Roberts said. “Why not have systems intergrators working on a European basis? That could be the starting point for integrating Europe’s industry, rather than putting together shipyards.”

German angst

In Germany, meanwhile, industry officials and lawmakers are bickering over whether surface shipbuilding is, or should be, a national priority so critical that contracts must go to German yards. (The Ministry of Defence has only designated submarine construction as such a key capability.)

That debate permeates the competition for the MKS-180 program, a novel multi-use combat ship. The thought that Dutch contractor Damen, one of the bidders still in the race, could win the contract over the purely German team of German Naval Yards and ThyssenKrupp Marine Systems has some coastal politicians and trade unions up in arms.

There is a lot at stake for German shipbuilders. A recent MoD strategy document proclaimed a national objective of restoring the balance between out-of-area missions and homeland defense. The latter area has been chronically underfunded in the rush to provide troops at the tip of the spear with equipment that works, the argument goes.

That dynamic will “inevitably mean an increase in forces, including warships and modernization of the fleet,” a spokesman for the Germany Navy told Defense News.

For example, the service plans to buy at least one new warship annually over the next 10 years, plus 46 helicopters. Combined with a new deployment and manning scheme, officials hope to raise the entire fleet’s operational availability to 50 percent compared with today’s 30 percent, meaning more vessels theoretically will be ready to fight at any given time.

Those plans could directly translate into jobs in Germany, and domestic shipbuilders, including heavyweight TKMS, are doing their part to support the demand for government favoritism toward their own yards.

British exclusivity

The situation is similar in the United Kingdom, where shipbuilding for the Royal Navy is by definition a domestic affair.

It has been a little more than a year since the British government published a national shipbuilding strategy, which in part called for a greater surface warship building capability.

BAE Systems has had a stranglehold on the business since it first merged and then in 2009 acquired VT Shipbuilding.

BAE Systems’ two surface warship building yards in Glasgow, Scotland, meet the government requirement that complex warships must be locally built.

The Conservative government, however, made it clear in its shipbuilding strategy that while BAE would continue to build in Glasgow the planned eight Type 26 anti-submarine warfare frigates destined for the Royal Navy, it wanted another yard to build a fleet of five Type 31e general purpose frigates.

Peter Parker, the author of the strategy report, justified the creation of a second naval build center, saying it would be unprecedented for BAE to run two new programs side by side.

But it hasn’t been smooth sailing for British Ministry of Defence officials running the Type 31e program, as they seek sufficient bidders to hold a robust competition. Building frigates in a British yard with a price of no more than £250 million (U.S. $329 million) and an in-service date of 2023 has proved a challenge.

The government stopped the competition earlier this year after it failed to attract a sufficient level of interest from qualified vendors. But officials got the show back on the road Aug. 20, restarting discussions with potential suppliers on a revised plan. Competition documents were issued to industry last month, with potential bidders mandated to reply by Oct. 19.

With German and the British shipyards hoping to secure their respective turfs at home, the Fincantieri-Naval Group deal could still become the poster child for European naval-industry consolidation.

At least, that’s the theory.

French maneuvers

French officials appeared to get cold feet earlier this month on a key aspect of the merger arrangement: a proposed cross-shareholding of 5 to 10 percent.

“Bercy is not keen,” said an industry executive, referring to the French Economy and Finance Ministry, located in a vast modern building resembling a bridge by the river Seine.

A source with the French Armed Forces Ministry would only say: “Negotiations take time. We need more time.”

Even before that wrinkle, the French and Italian governments requested “clarification” from Fincantieri and Naval Group after the two companies submitted dossiers in mid-July for a partnership.

The request for clarification referred to the key elements of cooperation in research and development, common purchase of parts and offers in export markets, an industry executive told Defense News.

Cross-border cooperation in foreign sales is seen as significant, as Naval Group has set a target of exports accounting for half of annual sales compared to the present estimated one-third of revenue.

Competition with Fincantieri raises the cost of sales and cuts profit margins, as each seeks to submit competitive offers.

If Naval Group and Fincantieri do manage to forge an industrial alliance, that will reverse a declining trend in cooperation. Previous French attempts to work with Italy in building a common MU90 light torpedo led to nothing, while the level of common parts on the FREMM multimission frigate fell compared to that realized on the Horizon air-defense frigate.

European industrial cooperation also stalled on the Scorpene attack submarine, with Spanish shipbuilder Navantia opting to pursue its own S-80 diesel-electric boat rather than work with Naval Group.

Tom Kington, Andrew Chuter, Pierre Tran and Sebastian Sprenger contributed to this report.

“Bercy is not keen,” said the executive, referring to the French Economy and Finance Ministry, located in a vast modern building resembling a bridge by the river Seine. The government’s reluctance to a proposed cross-shareholding of five to 10 percent is rooted in political concerns, according to the official, who asked not be named while discussing sensitive deliberations.

“Negotiations take time,” a source at the Armed Forces Ministry said. “We need more time.”

The French government’s position was first reported by business weekly Challenges on Wednesday. A lack of French political support for an exchange of equity stakes means the partnership project, dubbed Poseidon, is “taking water,” the magazine wrote.

The proposed cross-shareholding scheme stems from a business model forged by French car maker Renault, which swapped its shares for those of its Japanese partners Mitsubishi and Nissan.

There would not be a “golden share” veto in the proposed cross-shareholding between Naval Group and Fincantieri, the industry executive said. While there is no formal deadline for a deal, the upcoming Euronaval trade show here was seen as “an opportunity, an accelerator” for an announcement, the source added. Meanwhile, talks are continuing with the monthly meeting of a bilateral steering committee.

Euronaval runs Oct. 23 to 26.

Some 28 percent of Fincantieri is traded on the Milan stock exchange and the rest is held by the Italian Economy and Finance Ministry. Naval Group is held by the French government, with electronics company Thales owning 35 percent.

A Franco-Italian alliance in naval shipbuilding is seen as a major step toward European industrial consolidation.

Addressing annual news conference, Dhanoha said: “At the appropriate level, the Indian Air Force was consulted, but it is for the government to choose. It was decided to buy two squadrons through a government to-government deal, to meet up emergency requirements.”

India and France signed the €7.8 billion (U.S. $8.99 billion) inter-governmental agreement Sept. 23, under which 36 Rafale fighter aircraft will be procured from Dassault Aviation for Indian Air Force (IAF) in fly away condition. France will invest 30 percent of the total contract value in India’s military aeronautics-related research programs and 20 percent into local production of Rafale components to fulfil the mandatory offsets under the deal. The deliveries of Rafale fighters will start this month.

India’s main opposition party, Indian National Congress, has claimed on several occasions that the Rafale deal is grossly overvalued and tainted by crony capitalism. The Congress said the Modi government had failed to answer several questions on why public sector Hindustan Aeronautics Limited (HAL) had lost the manufacting deal to industrialist Anil Ambani’s Reliance Defence Ltd.

“The earlier deal for 126 medium multirole combat aircraft reached an impasse during negotiations,” Dhanoa said,, referring to a $12 billion medium, multi-role combat aircraft program that was launchced in 2007 but scrapped 10 years later. “We had three options: wait for something good to happen, withdraw the global tender and start over again, or do an emergency purchase. We did an emergency purchase.”

Dhanoa called the cost of 36 Rafale was “reasonable and adequate.”

The latest comments from Dhanoa come after Indian defence minister Nirmala Sitharaman called baseless congressional allegations of a reduction in the number of Rafale jets being purchased from France. Congress has demanded the government explain why instead of 126 Rafale fighter jets, only 36 are being purchased if they were cheaper under the NDA deal than the prior deal.

Sitharaman is expected to hold the first annual defence ministers dialogue with her counterpart Florence Parly in Paris Oct. 12-13, as the two countries seek to expand bilateral defense and strategic ties.

In France, Dassault said the company had picked Reliance as its Indian partner to meet requirements for local offset established by the Indian Defense Procurement Procedure and Make in India policy. The statement followed controversy sparked by remarks by former French president François Hollande, who said the Indian government selected Reliance as the local partner and that the company “had nothing to say on the subject, we had no choice, we took the partner which was presented.”

Dassault put out its statement on the deal for 36 Rafale to India Sept, 21 statement, stating that, in accordance with the policy of Make in India, Dassault Aviation decided to make a partnership with India’s Reliance Group.

Asked by a French journalist about Washington blocking the sale of the Scalp long-range weapon to Egypt and Qatar, Mattis said American and French staff were meeting on that very issue even as a press conference was being held.

“We discussed this,” he said. “We also have our staffs meeting. We have an invitation out to France to answer two final questions. The meetings are going on as we speak.”

Mattis, on his first visit to Paris as defense secretary, was speaking at a joint press conference with his French counterpart, Armed Forces Minister Florence Parly, held at Brienne House.

The two issues to be resolved target “certain technologies” that the United States only shares with its closest allies, including France, and whether that technology can be further transferred, and how France can protect that technology, he said.

“Right now we don’t have a final answer but it is all going in the right direction,” he said. “And it was a very fruitful discussion today. Our staffs are working this forward right now.”

The conundrum stems from the French sale to Egypt and Qatar of Scalp cruise missiles to arm Dassault Rafale fighter jets. The weapons include U.S. parts, leading Washington to evoke the International Traffic in Arms Regulations regime.

Parly, meanwhile, thanked Mattis, for help in gaining U.S. authorization for arming French Reaper drones, cleared for fitting by the end of the year.

U.S. President Donald Trump plans to come to Paris to mark the Nov. 11 Armistice Day, she said.

That date is highly significant for France, marking the end of World War I, in which millions of troops died in the trenches.

Mattis said he was not concerned about a drive by France and Germany to build a stronger European defense, as there were some issues which were “of interest only to Europeans.” As long as the European drive would not duplicate NATO or compete for alliance forces, “we see this in a positive direction,” he said.

Mattis earlier met French President Emmanuel Macron and would go on to Brussels for a NATO ministerial meeting.

“We are in the process of pursuing the strategic partnering agreement,” a Naval Group spokesman told Defense News. That agreement covers some 30 years and is an extremely close commitment, he added.

“It is plain logic that that takes time,” he said. “We are not particularly worried. We remain confident.”

Naval Group is working under a 2016 design and mobilization contract on the Australian future submarine program, while negotiating the strategic partnering agreement. The latter is a critical contract which moves the French company closer to building the diesel-electric boats in Adelaide under an Australian $50 billion (U.S. $36 billion) deal.

There is concern that failure to reach consensus on intellectual property and warranty conditions have held up a signing of the strategic partnering agreement, with time running out, Australian Broadcasting Corporation reported.

“Negotiations on that document have stalled and it is feared they may not be resolved before next year’s federal election,” ABC reported. Signing the strategic partnering agreement by the end of this year is needed to allow detailed design contracts to be finalized and building of the boats, the broadcaster reported.

In Australia, Defense Minister Christopher Pyne sought to calm the waters with an Oct. 1 reply on social media.

“There is no delay to the delivery of 12 Future Submarines. Negotiation of strategic partnering agreement is continuing & we will ensure we end up with an equitable & enduring agreement to deliver the capability our servicemen & women need, and get the best deal for Australian taxpayer.”

Nigel Pittaway in Melbourne, Australia contributed to this report.

“OCCAR (Organisation for Joint Armament Cooperation) has commissioned Airbus Helicopters, on behalf of the French, German and Spanish armament agencies DGA, BAAINBw and DGAM, to perform de-risking studies aimed at providing the Tiger with next-generation battlefield capabilities,” the company said Sept. 27.

The studies will help in development and retrofit preparation of avionics and mission and weapon systems for the Tiger, the company said. Electronics specialist Thales and missile-builder MBDA will take part in the studies.

“We are proud to be preparing the future of the Tiger as it represents a major program for the European defense cooperation initiative,” said Bruno Even, CEO of Airbus Helicopters.

French Armed Forces Minister Florence Parly said she is trying to persuade her German counterpart to opt for the same missile as France for the Tiger, rather than make its own order for the the Rafael Spike missile.

The de-risking studies may consider various options, such as Spike, Brimstone and MMP missiles, and will note the changes that might be required, such as fitting an antenna for radio data link to deliver pictures to the cockpit right up to impact, an industry executive said.

The French Army is drawing up requirements for a future tactical air-to-surface missile, dubbed MAST-F, which would arm the upgraded Tigers.

Rafael has pitched its extended-range Spike ER2 missile to Germany for the Tiger, hoping Berlin will follow the flight path of Spain, which arms its Tiger helicopters with the Israeli weapon.

The DGA and the Navy have been working on a “reflection for definition studies,” with those studies required to launch the carrier project, Laurent Sellier told Defense News on Sept. 24. Industry has served as observer, while the procurement office and service lead the discussions.

The studies will consider the future carrier’s capability to carry the Rafale fighter jet and its successor, as well as drones, he said. It will be up to the ministry to “greenlight” the contracts for the carrier.

Sellier was speaking on the sidelines of a news conference held by Gican, the industry association backing the Euronaval trade show, which opens Oct. 23.

Dassault Aviation, shipbuilder Naval Group and electronics specialist Thales have been sitting in on the discussions led by DGA and the Navy, an industry executive told Defense News. “There is close teamwork on tackling the overall problem,” the executive said.

The DGA and the Navy launched the first study at the end of August, examining lessons learned on aircraft carriers in operation and reviewing operational requirements of the future carrier, the executive said.

Thales could contribute its experience from working on the British carrier Queen Elizabeth. Other companies, such as MBDA, could be invited to take part in the studies.

A second study, largely steered by the DGA, will focus on technology and overall architecture, including onboard combat systems, system of systems and naval architecture, the executive said. That study is expected to be launched toward the end of October or early November.

The overall dossier comprising the two studies is expected to be completed at the end of 2019 or early 2020, and will allow the authorities to decide the capabilities of the ship. The studies will consider key factors such as size of the vessel, propulsion — both conventional and nuclear — and aircraft-launching capabilities.

The aircraft will not be included in the carrier budget but will be a major element in design and construction of the ship, which will be a system of systems. The studies will help determine the budget for the carrier.

There have been three large carriers built in the West — the U.S. Navy’s Gerald R. Ford and America, and the British Royal Navy’s Queen Elizabeth — since France launched the Charles de Gaulle, said Robbin Laird, an analyst with consultancy ICSA, based in Washington and Paris.

Any French study should look at those ships and see the technology available for a new carrier, such as an electromagnetic aircraft-launch system, he said. The French should consider the impact from an “evolving force system,” such as the use of direct-energy weapons for close-in defense and the integration of air and sea systems, he added.

Another major factor in designing a new carrier could involve France’s adaptation of the planned Franco-German jet fighter to a carrier-based version, he said. That future fighter will replace the Rafale and Eurofighter Typhoon.

Britain and Italy will fly the F-35 Joint Strike Fighter from their carriers, he said. That deployment of the F-35 calls for interoperability of the future French carrier and its aircraft with operators of the jet.

French Navy pilots have flown the Rafale from U.S. carriers as part of training, French Navy Rear Adm. Gilles Boidevezi told news conference attendees.

The French Navy sent pilots, support staff, 12 Rafale jets and a Hawkeye spy plane to the U.S. earlier this year to qualify and train with the U.S. Navy. The French pilots flew from the George H.W. Bush carrier, sailing out of Newport naval base.

The Charles de Gaulle recently began sea trials from Toulon naval base after some 18 months of a major overhaul in dry dock. The upgrade included replacing onboard nuclear fuel and modernization of the combat and telecommunications systems. The carrier will now solely fly the Rafale, having withdrawn from service the Super Etendard fighter.

That spending increase excluded pensions and will represent 1.82 percent of gross domestic product, part of a French bid to hit a target of 2 percent of GDP by 2025, the ministry said Sept. 25. Next year will be the first year of the 2019-2025 military budget law.

“This is a major financial effort desired by the president, being adopted in the first year of the military budget law,” the ministry said.

The increased spending was expected, as the government has formally adopted the multiyear budget law, which seeks to meet the NATO target for military spending.

Of that total budget, €850 million has been earmarked for overseas deployment, up €200 million from 2018. The budget is expected to rise to €1.1 billion in 2020. Previously, the Armed Forces Ministry shared some of that cost with other ministries, but it must now fund its foreign operations on its own.

Among the weapons to be ordered next year are a Barracuda nuclear-powered attack submarine, three fleet auxiliary tankers and two aircraft fitted for gathering electronic intelligence. The tanker ships will be bought in cooperation with Italy.

Other orders include upgrades for 10 Mirage 2000D fighters; 125 firing posts for the MMP anti-tank missile; 60 Meteor long-range air-to-air missiles; and six patrol boats for overseas deployment.

Some €758 million will be set aside on research and development studies, a step toward a pledge to spend €1 billion on R&D annually. Some €4.2 billion will be spent on service support, mostly dedicated to aircraft maintenance.

A six-strong batch of Reaper drones is due to be delivered next year.

“At the ministerial investment committee, the Direction Générale de l’Armement received the mission to accelerate the delivery of the A330 MRTT Phénix,” the armed forces ministry said in a Sept. 20 statement.

A 12-strong fleet of the A330 MRTT by 2023 brings forward delivery of the air tankers by two years, the ministry said. A further three units will be ordered to bring the total fleet to 15 in the following years, the ministry added.

No dates were given for a contract for the A330 MRTT or the value of the planned order. No date was set for a further batch of three more units.

That boost for inflight refuelling was among the equipment modernization measures included in the 2019-2025 military budget law, formally signed by French president Emmanuel Macron just before an official garden party on July 13.

The French Air Force has long lobbied for renewing the aerial capability, as the present aging tanker fleet is a key element in the airborne nuclear deterrent. French air operations in allied operations in the sub-Saharan Sahel region and the Middle East rely heavily on U.S. air tankers.

The A330 MRTT will replace a mixed fleet of C-135FR and KC-135R tankers — some of which are close to 60 years old — and A310 and A340 strategic troop and transport aircraft. The A330 MRTT is a military conversion of the Airbus A330 airliner.

That is the second batch of VT4 four-wheel drive cars ordered by the DGA, which placed an initial order for 1,000 Mk1 units in December 2016.

The planned total fleet of VT4 vehicles is 4,380 units, based on a modified version of the Ford Explorer car, for the Air Force, Army, Navy and support services, a DGA spokesman said Sept. 17. The first of a batch of 500 units are due for delivery this year, with a second 500-strong batch to be shipped in 2019, he added.

A first shipment of the VT4 will go to the Army, the DGA said in a Sept. 6 statement.

“To effect this, the DGA put in a place a procedure to execute the program in the most timely manner,” the procurement office said. This swift delivery is part of the government’s drive to transform the DGA in acquiring equipment, the office added.

Arquus said last year that an initial delivery had been expected in 2017.

Arquus adapted the unarmored vehicle “to militarize it and make it meet all demands in terms of payload, weapon integration, notably the Famas and HK416” assault rifles, the company said in a statement. Communications equipment, security systems, air conditioning and comfortable seats were also part of the adaptation.

The Mk1 version will be used for training and street patrols in the domestic anti-terrorist Sentinel operation, while the Mk2 will be equipped for overseas deployments, the company said. Assembly of the latter will start next year. Service is included in the order, with a pledge of 90 percent availability of the total fleet.

Both versions of the VT4 were on display at the Sept. 10-11 Summer defense university event at the military staff college. The VT4 replaces the P4 patrol car, which has been in use since the 1980s.