The internationalisation of the European arms industry: Trends and implications
by Iraklis Oikonomou
published in (2008), Agora Without Frontiers: A Quarterly Journal of International Economy and Politics, Vol. 13, No. 4, April-May 2008, pp. 362-375.
The study of the prevailing tendencies in the production of arms in the European Union (EU) could be a useful tool for the understanding of major institutional developments at the EU level, including the formation of a common armaments policy. A major such tendency, evident especially during the period 1999-2006, is the internationalisation of military industrial capital at the European and global level. This article reviews the politico-economic processes that produced the European arms industry in its current, complex form. The discussion clarifies the concept of internationalisation and provides a critique of other competing concepts. The empirical patterns in Europe are dissected, with reference to concrete examples of arms-industrial transformation. The core argument of the article is that the main trend of the transformation is towards the formation of European internationalised military-industrial capital, rather than fully transnational capital. The analysis concludes that despite its magnitude, the phenomenon of European consolidation is characterised by certain limitations that do not justify the claim over the globalisation of the European arms industry.
What is internationalisation?
In the list of the world’s 100 largest arms-producing companies in 2005, only two, EADS and MBDA, were placed under a geographical unit larger than the nation-state, labelled ‘Europe’. All others had a clear national origin, a geographical area where usually the bulk of production takes place, the company’s headquarters are located and the majority of its controlling owners and managers originate from. Capital as a social relation knows no motherland but is not a nationally abstract force. It is characterised by territoriality, i.e. it exists within a given national context, formed by the social relations of production and the linkages of the capitalist class with the national state apparatus. Capital as a social relation is primarily constituted in the sphere of production, not of distribution. The location of production plants is secondary and may not always coincide with the territoriality of capital. Dassault will not cease to be French if its next fighter is produced abroad, as long as the firm is controlled by French stakeholders. That EADS holds a stake in Dassault is a sign of internationalisation, far more than export successes and subcontracting assignments for any of the firm’s products. Ownership, rather than the material process of production, is the definite criterion of the national character of capital.
The term ‘internationalisation’ denotes two interrelated processes: an increasing level of cross-border cooperation between firms with distinct corporate identities; and the merger between corporate actors of different national origins that leads to the creation of a new, internationalised form of capital. The difference between the two forms of internationalisation is in their impact upon the composition of capital. While in the first one capital retains its national basis, in the second one capital is transformed into a new entity through its unification with other, previously national industrial units. Companies with a distinct national affiliation seek to expand their operations to other national markets. The fact that arms firms may sell their products to distant lands does not automatically render them internationalised. As with the territoriality of capital, internationalisation originates from the sphere of production and is often realised through alterations in ownership structures.
Internationalisation is a deeper form of capitalist unification compared to international collaboration, the latter defined as ‘a form of international transaction whereby the member governments create a protected market for one or more items of defence equipment’. The three main forms of internationalisation are cross-border mergers and acquisitions (M&A), joint ventures and strategic alliances. A merger ‘occurs when two or more companies combine to form one new company’. An acquisition ‘occurs when one company buys another company or part thereof and it becomes part of the buying organization’. These schemes are not risk-free, given the challenges of corporate integration that they face. Vertical integration is more difficult than horizontal in most of the cases, since it requires the integration of parallel products and platforms and the interaction with new customers and suppliers in culturally diverse environments. A joint venture company ‘is a company jointly owned and operated by two or more parent companies’. In most cases, joint ventures aim for the development and production of a single item of equipment or family of weapon systems. Finally, a strategic alliance, of which the joint venture is its more integrated type, is an agreement between at least two firms to cooperate in specific activities, not necessarily involving equity participation. Apart from joint ventures, this category includes collaboration, consortia, licensing and offsets.
Patterns of consolidation and internationalisation
The unity of the process
In the late 1980s and throughout the 1990s a wave of arms-industrial consolidation swept through the EU, backed by the formation of joint ventures and other cooperative schemes, especially in military aerospace such as aircraft, missiles and helicopters.The magnitude of restructuring was unprecedented in the history of European arms production. Its main characteristics were the national and international concentration and centralisation of capital. A precondition for internationalisation was consolidation at the national level. Concentration is equated with accumulation. Nikolai Bukharin defined concentration as ‘the increase of capital that is due to the capitalisation of the surplus value produced by that capital’. Centralisation is defined as ‘the joining together of various individual capital units which thus form a new larger unit’. The main driving force of centralisation is competition between rival companies. Concentration and centralisation are conceptually unified but not identical processes. The former results from the reinvestment of profit, i.e. from the accumulation of surplus value. The latter represents the formation of a new capitalist unit from existing capitals, through the destruction of weak producers by more powerful ones. National concentration and centralisation of military-industrial capital led to the creation of ‘national champions’, i.e. of firms with a national capital base that dominated their national equipment market supported by their respective state.
Centralisation is a global process. Up until 1998, it occurred mainly in the USA, while between 1998 and 2000 it culminated in Europe. Developments between 1990 and 2000 characterised both the prime contractor and sub-contractor levels. In 1990, the 5 largest firms worldwide had a 22% share of all arms sales globally. Ten years later, this figure almost doubled to 42%, as viewed in Table 1.
Table 1: Centralisation ratio changes, 1990-2000 (% of combined total arms sales of SIPRI Top 100 Companies).
The process of centralisation in the military markets during the 1990s was faster than the centralisation in the total (civil and military) operations of the same firms. While in 1990 the centralisation ratios for arms manufacturing were much lower than the total operations of the firms, this gap was eliminated by 2000. Moreover, the largest arms firms in 2002 were much larger than their 1990s counterparts, a fact consistent with the concentration hypothesis.
Concentration resulted in fewer and larger firms, greatly dependent upon arms production. Their ranking in the European marketplace, their revenues and the relative significance of arms production for the largest ones can be seen in Table 2:
Table 2: European ranking of arms industries (2006)
BAE Systems, EADS, Thales and Finmeccanica dominate the EU market structure. There are great disparities between them. The arms-related activities of BAE Systems are more than double those of each of the other firms. These are followed by some middle-size corporations that, while operating mainly along national lines, maintain an internationalised dimension, such as Rolls Royce, Saab, Dassault and Safran.
All major arms firms embody the seeds of consolidation. In 1999, the merger of BAe and GEC-Marconi made BAE Systems. A year later, Aerospatiale-Matra, DASA and CASA formed EADS. DASA resulted from a takeover of MBB by Daimler-Benz in 1990 while Aerospatiale-Matra was created from a merging of Aerospatiale and Matra in 1998. Thales in France and Finmeccanica in Italy are the two other EU market leaders, also outcomes of national consolidation. The creation of national champions was a precondition for internationalisation. The bulk of large-scale consolidation occurred in the 1990s. However, change was visible in as early as the beginning of the 1980s. Then, a program of privatisations was initiated in the UK, involving firms such as British Aerospace (BAe) and Rolls Royce and triggering M&A activity. During the 1980s, national consolidation was also promoted in Germany with the acquisition of MBB, Dornier and Fokker by DASA.
In 1990, there were 16 prime aerospace contractors in France, the UK, Germany and Spain. In 2000 there were only 4.All of these corporate groups are involved to a varying degree in military projects. Military sales gained an increasing share of the total EU aerospace industrial turnover. A trend that lasted for over 20 years and witnessed the military share of this turnover fall from 67.5% in 1980 to 29.1% in 2000 was reversed. In 2003, this share was 35.7%. The merging of civil and military industrial activities, as in the case of civil and military aerospace industry, is a crucial effect of the dominant production patterns. In its quest for profit maximisation, military-industrial capital expanded into civil and quasi-civil activities, assisted by M&A that added to the complexity of each firm’s industrial activities.
The conclusion that national consolidation was a pre-condition for European consolidation should be qualified. National consolidation paradoxically served as a hindrance to further European consolidation, as in the case of the merger between GEC-Marconi and British Aerospace – BAe. This merger blocked the inclusion of BAE Systems in EADS, which was originally planned by national governments. At the time, the preferred option was the formation of a European Aerospace and Defence Company (EADC), through the merger of Aérospatiale, DASA and BAe. This political plan was undermined by market considerations. When the military arm of GEC-Marconi became available for acquisition, BAe decided that such an important supplier with increased access to the US market could not be left to another competitor and acquired it in January 1999. The radical shift in the size of BAe and the strategic reorientation of the company meant that a partnership among equals envisioned in the EADC plan could not materialise.
The main comparative indicators of internationalisation are the number and type of cross-border collaborative projects. While the 1960s and 1970s witnessed a relatively stable number of consortia-based collaborative programmes, the second half of the 1980s saw a sharp increase in deeper forms of collaboration including joint ventures, M&A and strategic alliances. This process continued throughout the 1990s. Over 90 collaborative programmes, joint ventures and international acquisitions involving a European manufacturer took place between 1988 and 1992. Pierre de Vestel demonstrated that the macro-trend between 1961 and 1994 was towards the establishment of deeper forms of internationalisation though permanent industrial arrangements, parallel to inter-governmental or inter-firm, product-related alliances and agreements, such as traditional consortia. This tendency culminated in the late 1990s with the establishment of EADS.
Principal examples of joint ventures in the EU include MBDA, Astrium and Alenia Marconi Systems (AMS). MBDA, the number two missile manufacturer in the world, is controlled by BAE Systems (37.5%), EADS (37.5%) and Finmeccanica (25%). Astrium, now part of EADS, was a joint venture 50% owned by Aerospatiale Matra and BAE Systems, and 50% by DASA. AMS, a 50%-50% venture between Finmeccanica and BAE Systems, was dismantled in 2005 as a result of BAE Systems’ re-orientation of activities towards the US. Cross-border M&A is also an integral part of internationalisation, culminating in 2000 when Thales bought UK-based Racal Defence Electronics for £1.3 billion. The following section reviews the particular corporate and sectoral outcomes linked to internationalisation and consolidation.
The corporate impact of internationalisation
The case of EADS
The business deal that made EADS resulted from the merger of Aerospatiale-Matra and DASA. Spanish CASA became their partner soon after the firm’s launching on 10 July 2000. EADS can be regarded as a largely Franco-German entity, given that the share of CASA is much lower than the others. EADS focuses its operations on the European market, while also targeting the US market. In 2004, the bulk of EADS revenues came from Europe (45%) with North America in second place (27%). In particular, EADS maintains close links with UK military-industrial capital. BAE Systems was a 20% shareholder in Airbus up until 2005, when it decided to sell its entire stake to EADS. In addition, EADS and BAE Systems formed MBDA together with Finmeccanica. EADS has also been active in acquisitions involving UK firms. Its latest addition in 2004 was Racal Instruments Group for US$105 million, which included the acquisition of Racal’s US-based operations. Accessibility to the US market is a key privilege of UK capital and forms part of the rationale behind acquisitions involving UK-based firms. Apart from MBDA, EADS’ web of internationalised ownership includes a 45.5% stake in Dassault and 43% in the Eurofighter project. The acquisition of a 5-7% stake in EADS by Russia’s state-owned Vneshtorgbank in October 2006 demonstrated the two-way street of internationalisation. While capital seeks to expand aggressively, it must defend itself from other rival capitals at the same time.
It is true that the bulk of EADS economic activity is absorbed by Airbus and consequently by mostly civil applications of technology. In 2004, approximately 25% of all revenue came from military business, the second biggest in Europe after BAE Systems. However, numerous indicators show that the military sector plays an increasingly important role in the company’s operations and that there is a corporate intention to develop it further. In the period 2000-2004, revenues from military businesses rose by more than 50%, from €5 billion to €7.7 billion. Noel Forgeard, former CEO of EADS, revealed that ‘it is simply not satisfactory that all these other [arms-related] activities should contribute so little to EADS’ overall results’. Airbus activities are directly related to existing military programmes, giving ‘Airbus a strong buffer against fluctuations in the civil market’. By 2006, Airbus was linked to major military programmes, such as the A400M strategic transport aircraft, the Multi-Role Tanker Transport Aircraft and the UK Future Strategic Tanker Aircraft.
Moving to other corporate actors, BAE Systems is the largest European military company and the fourth largest in the world. As is the case with EADS, domestic consolidation was a prerequisite for the making and international expansion of BAE. The company has placed a clear emphasis on the military equipment sector and especially on the fighter market, participating in the Eurofighter and JAS-39 Gripen programmes. In the former, it owns a 33% stake of the consortium, while in the latter it set up a joint venture with Saab. In addition, BAE Systems owned a 34% stake in Saab, reduced to 20.5% in March 2005. This is indicative of a broader trend of disinvestments of BAE Systems’ capital base in Europe, in order to concentrate on the US market. Apart from the reduction of its share in Saab, BAE Systems sold Atlas Elektronik to ThyssenKrupp and EADS and terminated two joint ventures with EADS (Astrium) and Finmeccanica (AMS).
Thales, the leading French arms manufacturer, went partly private in June 1998 when Thomson-CSF merged with the defence electronics arms of Alcatel and Dassault Électronique. This move reduced the shareholding stake of the French state from 58% to 40%. The new company shifted its orientation from national market leadership to a ‘multi-domestic’ strategy. This strategy involved European expansion through the acquisition of small and medium-sized producers, such as the Dutch firm Signaal. The acquisition of Racal Defence Electronics in 2000 established Thales as the second biggest military contractor in the UK market and increased its dependence on foreign markets.. In 1998, Thales owned 55 foreign subsidiaries while in 2000 their number had rocketed to 213, whose respective sales and exports accounted for over 75% of the firm’s total sales. In 2006, Thales and Alcatel-Lucent agreed on the transfer of the latter’s space and security assets to Thales, linking the latter to the Italian industry through the joint venture that Alcatel had formed with Alenia Spazio, a subsidiary of Finmeccanica. This move increased the stake of Alcatel-Lucent in Thales to 21% and decreased the French state’s stake to 27%.
The Italian firm Finmeccanica, partly privatised in 2000, maintains a strong internationalised set of activities. The acquisition of the remaining 50% of Agusta Westland in 2004 made Finmeccanica the world leader in the helicopter market. Finmeccanica is also a 25% stakeholder in the MBDA joint venture. In 2005, the firm concluded two major international agreements with BAE Systems in defence electronics and Alcatel in space applications, with the formation of Eurosystems and Alcatel Alenia Space respectively. Indicative of the firm’s scope are its links with the Russian arms industry. In 2006, Finmeccanica allied with the Russian Sukhoi on the development and production of the Superjet 100 civil aviation aircraft.
For Saab, the bulk of its revenues come from its national market: in 2003 over 54% came from Sweden. Still, the company has been subjected to internationalising pressures, mainly through the significant participation of BAE Systems to its shareholding status. Interaction with EADS is also extensive. Saab Aerospace is a sub-contractor to Airbus, responsible for the development and production of parts of the wings of the A380, a programme which will generate revenues of an estimated US$1 billion in a 20-year period. The company also participates in the A400M, while Saab and EADS jointly participate in the development of the Taurus cruise missile programme. In 2004 military-related activities accounted for 78 percent of the Saab Group’s orders.
The land and naval sectors
The internationalising trend characterised primarily the aerospace sector, while land and naval systems sectors were less subjected to it. The land sector showed some initial moves towards national consolidation and internationalisation after the late 1990s. The reasons for this comparatively slow process were economic, exemplified in the relatively lower increases in research and development (R&D) costs, longer production runs, longer tradition as a state-owned sector, less collaborative programmes and more limited civilian activities compared to aerospace. Diminishing demand for new battle-tanks after the end of the Cold War and the abandonment of heavy land forces pushed land armament companies to restructure, albeit on a smaller scale compared to aerospace. For example, in 2004, BAE Systems acquired Alvis, a UK armoured vehicle manufacturer, outbidding a previous offer by General Dynamics. BAE Systems also owns the Swedish firms Bofors and Hagglunds and successfully moved into the US land systems market by acquiring United Defense in 2005. Rheinmetall and KMV became the principal land sector firms in Germany, following a process of national consolidation during the 1990s, and state-owned GIAT is the principal manufacturer in France. The lack of increased European collaborative links permitted the intrusion of US capital into the European land systems sector through General Dynamics. In 2003, its European acquisitions – Santa Barbara, Steyr and MOWAG – were integrated into the European Land Combat Systems company. In short, the land arms industry in Europe is a sector largely under the control of the aerospace sector, when not wholly owned by it.
Although the naval sector is characterised by fragmentation, especially in the shipbuilding area, some elements of national consolidation are evident, more so compared to the land industry. In Germany, ThyssenKrupp acquired HDW in 2004 creating TKMS. In France, Thales transferred its naval business to the state-owned DCN in 2007, getting in return a 25% share of the company. Factors fuelling internationalisation, similar to those affecting aerospace, exist in the naval sector to a lesser degree; for example, competition from the US is limited. Internationalisation is also obstructed by differences in ownership status. An earlier plan to merge HDW and DCN was opposed by Germany, on the grounds that DCN was subjected to French governmental control. However, seeds of internationalisation are visible in two collaborative naval programmes, the French-Italian European Multi-Mission Frigate Programme and the UK-French Future Aircraft Carrier. The economic pressures on the naval industry are greater than the land sector – greater R&D intensity, civilian applications and existing collaborative programmes – and talks for the creation of a naval EADS have been ongoing.
Internationalisation, transnationalisation or globalisation?
Some theorists opted for the term ‘transnationalisation of production’ to describe the expansion of the production process beyond the nation-state. Robert Cox referred to ‘transnational production organisations whose component elements are located in different territorial jurisdictions’. For William Robinson, ‘the arms industry has itself been in the process of transnationalisation’. This terminology conflates the production as a material process with capital as a social relation. The fact that different components of a product are produced in different countries does not signify the transnationalisation of capital. The composition of capital ultimately determines whether transnationalisation occurs. This composition may involve more than one national affiliation, but is never purely transnational. Nicos Poulantzas’ observation remains today as valid as it was in 1978: ‘internationalization is brought about under the decisive domination of capital originating from one single country’. Even the most highly internationalised industrial units, such as EADS, maintain a clearly delineated, multinational – but not transnational – composition of capital. Excluding EADS, three out of the four biggest arms companies in Europe still retain a clear national capital ownership; ‘BAE is primarily British, Thales primarily French, and Finmeccanica primarily Italian’.
The same is true for the term ‘globalisation’; capital ownership has become internationalised but not global. Several authors use the term to denote the increasing significance of global arms-industrial competition and/or the expansion of cross-border collaboration. This is misleading, given that competition occurs between companies that are not global in their capital ownership and are not distributed evenly around the world. In addition, hierarchical relations of power between and within regional economic blocs retain their significance and are not eliminated. What Robinson understands as globalisation is for most of its part regionalisation. These blocs are characterised by hierarchically differentiated power structures and uneven development, as exemplified by the case of the EU among others.
This brief overview of industrial developments in the arms-manufacturing sector in the EU highlighted the far-reaching transformation that the sector has undergone as a result of economic internationalisation. A complex web of corporate alliances, mergers, acquisitions, joint ventures, and other collaborative schemes has unfolded next to the intensification of inter-capitalist competition. The centralisation and concentration of military-industrial capital has led to the formation of fewer and larger, i.e. more powerful corporate actors, whose interests are no more restricted to their respective national markets. Considering the unity of political and economic power, a major claim of radical political economy, one may assume that this profound transformation will involve changes in the institutional setting of the segment of the EU that deals with armaments issues. However, this possibility exceeds the limited scope of this research note. Instead, turning back to the debate over economic internationalisation and alternative conceptualisations, one can conclude together with Kees van der Pijl that “the notion of a universal homogenization suggested by the term ‘globalization’ is wildly premature”, at least as far as arms production in the EU is concerned.
Tables and references available in print version only.