Germany’s status as a heavyweight weapons producer may be under threat as its share of the world’s market falls to 5 percent, down by a half.
A new report from Stockholm International Peace Research Institute (SIPRI) showed that China has pushed Germany into fourth place, becoming the world's third-largest exporter of arms after the United States and Russia.
Germany is still a leading manufacturer of submarines and tanks. However, the industry is being hit by tough export rules imposed by Sigmar Gabriel, vice chancellor and economics minister.
It means that exports to countries with poor human rights records, such as Saudi Arabia, are almost impossible for Germany’s weapons makers.
The hard line taken by Mr. Gabriel, who is leader of the Social Democrats, reflects the views of the majority of the German population.
This policy means financial difficulties for the arms industry. For example, Rheinmetall, Germany’s biggest defense company, is to announce a loss on Thursday at its shareholder meeting.
“For our defense business, 2014 was a very tough year,” Armin Papperger, the company’s chief executive told Handelsblatt. “We have to talk about the role of the industry and about Germany’s security.”
I don’t want any secrecy. I’m open about the fact that we want to export to Saudi Arabia. Armin papperger, chief executive, rheinmetall
Mr. Papperger is calling on the German government to clarify where companies can sell defense technology in the future, and which systems are considered to be vital for the country's security.
Defense Minister Ursula von der Leyen had been criticized by the industry for arguing that only sensor and cryptotechnology should be considered vital to national interests and therefore be procured from German companies.
If the German government no longer views submarines and tanks as key to the national interest, the Rheinmetall boss is threatening to move his business abroad.
Mr. Papperger wants Rheinmetall to be among the biggest makers of weapons worldwide, on a par with companies from the United States or the United Kingdom.
Rheinmetall is currently the world’s 32nd biggest producer of weapons so Mr. Papperger has a long way to go. There is a €7 billion difference in revenue between the tenth largest weapons maker in the world and Rheinmetall; a sum that is double the company’s revenues for military technology last year.
To achieve his ambitions, Mr. Papperger will have to buy companies and he is currently working on an acquisition strategy. There are plenty of attractive options, from ThyssenKrupp’s marine technology business to Airbus’ land defense systems.
ThyssenKrupp’s submarine business would cost €2 billion, according to sources close to the company, twice what Mr. Papperger is willing to pay.
A deal with Airbus would not be so easy either. The company wanted to sell a package of its electronic equipment, mobile hospitals and radar systems for €2 billion but not all the components fit in Rheinmetall’s portfolio.
Mr. Papperger has also long been keen to buy Krauss-Maffei Wegmann but so far the family-owned company which makes tanks has sought an alliance with Nexter of France.
This Franco-German combination would not be good news as Rheinmetall would not be involved in making the Leopard combat tank, a popular weapon for export. KMW and Nexter have not yet been able to agree how much power the German company would have in such an alliance. Negotiations are not set to be concluded before the third quarter, which would prolong talks by up to a year.
Saudi Arabia had originally tried to order 270 Leopard combat tanks from KMW but the deal was blocked by Germany’s policies against exporting weapons to countries with poor human rights records.
KMW faces economic difficulties if the deal does not go ahead and the fusion with Nexter seemed like the answer – and a way to circumvent Germany’s export controls. “France wouldn’t have a problem with exporting the tanks to the Saudis,” one manager from the defense industry said.
Export controls are not the only problem facing the industry. Governments in the West are spending less and less on defense; this is only gradually changing with the crisis in Ukraine. The German government recently pledged to start spending more on defense again, given the heightened security concerns about Russia.
As a result, the situation of defense firms is likely to improve gradually. “Thanks to the number of contracts we have, revenues will increase bit by bit,” Rheinmetall’s Mr. Papperger said, adding that the situation in 2015 might be brighter.
Mr. Papperger is upbeat, an optimist who speaks openly about his work and said most people respond positively when they hear about what he does.
He is aware, though, that German firms are unlikely to experience the kind of optimism that is widespread in the industry in the United States. “We opened a factory there and it was on national television. I was impressed,” he said.
The contrast with Germany is striking. At Rheinmetall’s shareholder meetings, there are regularly protestors. A large proportion of the population supports the country’s policy of restricting exports, but Mr. Papperger wants to be more open about the business and doesn’t shy away from taboos.
“I don’t want any secrecy. I’m open about the fact that we want to export to Saudi Arabia,” he said. He believes Saudi Arabia is a stabilizing force in the region, and he would also export defense systems to Libya and Iraq if this were permitted by regulations.
While the rules are still restrictive, Mr. Papperger managed to win political support for creating a national defense champion, a project that is important to him. Mr. Gabriel has publicly called for consolidation within Germany’s defense sector and said that German companies should form partnerships with other domestic companies before seeking alliances abroad.
German politicians have mixed opinions about Mr. Papperger and have criticized his ambitious plans which have not yet been realized; some prefer his predecessor, Klaus Eberhardt, according to one politician who specializes in defense issues.
Competitors in the industry agree. Mr. Papperger is too aggressive and puts his company’s interests ahead of those of the sector, one competitor complained.
Mr. Papperger is president of Federation of German Security and Defense Industries, or BDSV, and in this role, is the sector’s senior representative. He achieved this after initial difficulties due to the strained relations between him and Frank Haun, KMW’s chief executive. Neither of the two main figures in the sector was to get the post but Mr. Papperger’s chance came when ThyssenKrupp’s compromise candidate, Hans Christoph Atzpodien, stepped down. The association did not publicize the change at the top and keeps a low profile in general, preferring to carry out discreet talks with politicians than splash headlines.
Nonetheless many managers in the defense industry complain at trade fairs how unfair and one-sided the German view of the defense industry is compared to other countries. Few have dared to try and readdress this balance in public. “Politicians should be doing that,” one industry insider said, who preferred to remain unnamed.
Rheinmetall’s Mr. Papperger is keen to break through this barrier of silence. He will have to if Rheinmetall is to become an international heavyweight. If one of the top makers of weapons in the world was German, this might push forward the debate about how much military equipment Germany is willing to export. For now, though, the answer seems to be less is more.