Defenses Down Arms Industry Opens Up

The merger of German and French tank makers KMW and Nexter heralds the end of a purely German arms industry, with fewer export restrictions.
The French-German merger could mean foreign sales for other German arms manufacturers.

 

Frank Haun has a special wish for France's national holiday, Bastille Day, on July 14.

"My dream would be to drive down the Champs-Élysées in a Leopard tank during the parade," said Mr. Haun, the CEO of Munich-based defense contractor Krauss-Maffei Wegmann (KMW), at a conference in Paris recently. 

The idea of seeing the "Leo," perhaps the most German of all weapons, at a celebration of French national pride could soon be a reality. If everything goes as planned, Mr. Haun and Philippe Burtin, head of French tank maker Nexter, will sign a merger agreement by July 14.

The Bode family, which owns KMW, and the French government will each own half of the merged company. With €1.7 billion ($1.88 billion) in sales, the KMW Nexter group will be Europe's largest tank manufacturer.

The only outstanding hurdle is that France's parliament must first formally approve Nexter's privatization, something which is expected to happen by July 13.

The joint KMW Nexter holding company, with the working title KANT (a typically military acronym for KMW And Nexter Together), is more than just another German-French joint venture. "The merger marks the beginning of a new phase of consolidation in the German defense industry," said Heinz Schulte, head of Hamburg-based Griephan Global Security, an information service specializing in the arms industry.

They certainly won't start off by shipping tanks to Saudi Arabia, because Germany would have to object to that. Jean-Pierre Maulny, Deputy director, International and Strategic Relations

It will be at least three years before the holding company, to be headquartered in Amsterdam, will have jointly developed tanks, howitzers and transporters. But KANT will make its mark on the German defense industry before then: this merger is sure to open the gates to more joint ventures with foreign companies and more exports.

"If KMW, whose tank exports are often the subject of political controversy, is open to foreign shareholders, then all German defense contractors could bring in investors from abroad in the future, even to the point where they acquire a majority stake," said a senior executive in the German defense sector. "When that happens, the new groups will be less and less subject to unpredictable German export guidelines and increasingly to the rules of partner countries. Almost all of them are not as strict."

In other words, KANT will face fewer export hurdles than the purely German company KMW faces today, contrary to statements that have been made by Economics Minister Sigmar Gabriel, a member of the center-left Social Democratic Party (SPD). This also applies to all other international mergers that involve German investors.

That number could increase, because large segments of the German weapons industry are up for sale. ThyssenKrupp CEO Heinrich Hiesinger wants to offload his submarine and frigate business to pay for transforming the company from a steel giant into a technology corporation.

Airbus Chief Executive Tom Enders wants to sell all parts of his military business that are unrelated to the company's core aerospace business – including a sale of the radar division.

Many smaller defense companies are also seeking investors, now that they lack the necessary funds for expansion after their main customer, the German military, embarked on a prolonged austerity program.

Before KANT, only domestic companies were permitted to buy sensitive German defense technology. As a result, Airbus was unable to find a buyer for its defense division.

Düsseldorf-based Rheinmetall was betting that Thyssen, for lack of other bidders, would eventually sell it its shipyards for substantially less than the reported asking price of €2 billion ($2.22 billion).

This is likely to change with KANT. Airbus, for example, could sell its radar business to partially government-held Thales Group from France. Thyssen would even have several potential buyers for its Marine Systems business: French state-owned shipyard DCNS, the British company BAE Systems and U.S. giant Lockheed Martin.

Officially, the German government wants nothing to do with this transformation brought on by corporate rapprochement. "I assume that KANT will not undermine German export principles," said Matthias Machnig, state secretary in the economics ministry, which is responsible for arms exports.However, he just announced that the value of German arms exports in 2014 was a third below that of the previous year, thanks to his ministry's restrictive rules.

The reality is that the German government has already come to terms with KANT and its consequences. "If we had wanted to oppose the deal, it would have happened long ago," said German government officials.

Laurent Collet-Billon, the head of the French agency DGA, in charge of purchasing for the French military, said: "We at Nexter managed to achieve a compromise over the export rules." The compromise is based on a 1972 German-French agreement reached by then Defense Ministers Helmut Schmidt and Michel Debré.

"Neither of the two governments will prevent the other one from exporting jointly developed or produced armaments," say insiders, quoting the text of the agreement, which was never published, for political reasons. "This is crucial for France," said the chairwoman of the French defense committee, Patricia Adam.

To avoid embarrassing Germany, insiders expect compromises from Paris, such as an exemption for overly controversial orders. "They certainly won't start off by shipping tanks to Saudi Arabia, because Germany would have to object to that," said Jean-Pierre Maulny, deputy director of the Paris-based Institute for International and Strategic Relations. France could also accept a requirement that only German managers have access to certain technologies, he added.

But these rules are likely to wear off over time. "Once the public has become accustomed to KANT and, perhaps, the Bode family ends up pulling out of the company, the differences to other French defense contractors will disappear," said an industry insider from France.

 

This article first appeared in WirtschaftsWoche business weekly. To contact the author: [email protected]