ROME and PARIS ― As French and Italian officials begin a series of meetings to decide how to integrate the two nations’ naval industries, experts in Italy are busy scratching their heads over how to make space for the country’s biggest supplier of naval systems — Leonardo.

Officials from the two countries held hurried get-togethers last month to thrash out rules for a long-planned “Naval Airbus“ — the answer to Europe’s fractured and overlapping naval industry.

When the tie-up proved less simple than predicted, planners took a step back and agreed to give themselves until next June to figure it out.

A naval alliance is key to reaching “critical mass,” Naval Group Chairman Hervé Guillou said Sept. 28, a day after a Franco-Italian summit agreed to work toward a bilateral consolidation.

But whichever way they cut it, officials in Italy need to figure out what to do with Leonardo.

In the first instance, the integration would involve Italian shipyards by Fincantieri and French shipbuilder and systems supplier Naval Group.

But French systems firm Thales holds a 35 percent stake in Naval Group, meaning it would have a seat — directly or indirectly — at the table when it came to decide what radar, combat systems, cannons, torpedoes and electronics went on board any ships built by the new Franco-Italian entity.

Across the Alps, Leonardo — which competes with Thales in the naval systems market and traditionally kits out Fincantieri vessels — would risk being shut out.

The answer, according to Pier Francesco Guarguaglini, who formerly ran both Leonardo and Fincantieri, is to spin off Leonardo’s naval business into a new firm. “Leonardo could have 65 percent and Fincantieri 35 percent in the firm, which would participate in the naval integration and balance out the presence of Thales,” he told Defense News.

“If the Italian government has decided that only Fincantieri should participate in the integration, then it would be necessary for Leonardo’s naval activity to be partly possessed by Fincantieri, and this solution would achieve that,” he added.

An Italian analyst argued that the principle of balancing out Thales was sound, but needed to be done differently.

“Given that Fincantieri has a large amount of civil work, it needs to split off its naval activity and put that into a new company with Leonardo’s naval activity. Fincantieri would take 45 percent, Leonardo 35 percent and Italy’s state investment fund 20 percent, “ said the analyst, who spoke on condition of anonymity.

“The firm would then neatly mirror the structure of Naval Group, and the two companies would function like the national companies in MBDA — free to talk to their own clients, but working under a holding structure that manages strategy,” he added. “Neither Fincantieri or Leonardo will like this solution, but it may be the only way forward.”

An initial move to restructure shipbuilders also calls for decisions in the high-value electronic systems sector.

French obstacles

On the French side, there are issues to be tackled as Naval Group and Thales compete with each other in offering their respective combat management system to clients, according to an industry executive, who spoke on condition of anonymity. A combat system is a key part of a warship and a big source of income.

An alliance that brings Leonardo into closer cooperation on future naval programs raises the stakes for Thales, the executive said.

One option would be a “Soviet-style solution of sharing out the tasks,” said Jean-Pierre Maulny, deputy director of think tank Institut des Relations Internationales et Stratégique. Procurement offices would award program contracts in that approach.

Another option would be to hold competitions for the deals, he said.

If Thales saw the market was being reduced, then its stake in Naval Group could be of less interest and it would be up to the Dassault family to decide whether Thales would hold on to those shares, he said.

The Dassault family holds some 26 percent of Thales.

Thales declined comment.

A steering committee of Naval Group and Fincantieri executives as well as French and Italian government officials is drafting a road map to be presented in June next year for a naval alliance.

Tom Kington is the Italy correspondent for Defense News.

More In Industry
Biden drops out of 2024 race
Defense Secretary Lloyd Austin praised Biden for his "profound and personal commitment to the Department of Defense and the American military" on Sunday.