(2001) Consolidation Trends in the European Land Systems Sector

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Article considering shifts in ownership of Land Systems defence companies operating in Europe and scenarios for future evolution of the marketplace.
  WORLD DEFENCE SYSTEMS THE INTERNATIONAL REVIEW OF DEFENCE ACQl)ISITION ISSUES jULY 2001 RUSI VoL.3 No.2 A ROYAL UNITED SERVICES IN STI TUTEFOR DEFENCE STUDIES PUBLICATION The K y to G lob~ Communications AVA Y ~ n i cat i o n  Consolidation trends in the European land systems sector Dr JeffreyBradford,former ArthurD Uttle consultant and nowDirector world-wide consulting atThinkTools AG & Mike Price, former HeadofArthur D Uttle's UKStra tegy Practice and senior European de fenceindustryspecialist Post cok:l·war consalodallon l!ends ogruted amongst lhe hlgh·vaJue aerospace and etectronocs segments on the Unoted States are oncreasongly dnvong change amongstlandsystems players Thos anlcle 1s concerned wlll1 recent onduslnal developments amongst landsystems manutac~urers on Europe end represents the autho<s personal per~>PCCtãve onpronwyresearchconducted dunng repeaãed consultong engagements to the sector bet . _. 1998 and 2000' The key areas which tt.s anocte 'Mil exam one are the emergong structure ot theEuropean ondustry what players themselvesregard as the key success factors for themselves, and a look at the possoble routesalong whiCh the rndustry could develop Wholst the forst round ot NATO expansion ' the ITOd 1990s brought new playersIntothe European tand systems sector the pace of consOIKlatoon has contonued to acceler- ate amongst estab oshed player Successrve efforts by the UK company Alvos, secured Hagglunds of Sweden and GKN s land systems onterests The rVI!N dynamiC emerging for European playerS IS the oncrea&ng acQUISIIIVOOOSS ofNonh Amoncan ptaye<s. The staketaken on Sleyr ot Austna by General Dynamocs and their ~ enempt to acQuore SBB of Spaon ClWIItC have heightened <WlXIe\oes pettoC:Ib1y 11 GerrnMt General Molor.; Oleset OMslon Carod<l s acqursJtoon of MOWAG of SYMzer1and lOOk on-house ts desql capobili toes whiCh probably helped to bOlster 111ell sue cess on the lntenmBngade Combat VehiClecompetotoon woth the Porama Ill platform. Fogure 1 identofo<>S a selec ti on ot Europeanplayers. and thenatoonally of the owner Hostorocnlty, the naloonatorganozatoon ot the defence ondustry has led to a plethoraof 11001- de types AI present ruleast SIX manutacturers deSign and constn.d trad<ed IFV typo vehodes wt111st at leas< seven munufac.1ur1 cltStonct 616 W>eeled light armoured 119hictes Contras11ng ~Mih thos t ostorocal pocture IS the ohangong nature ot defence procurement by NAfO na11ons tn EuropeFootnote' Research conducted by the author betwoen 1998 and 2000. ã MRAV, 6x6 Variant, the new European armoured utility vehicle with rapidly-demount able mission modules , mado by the ARTEC consortium ( comprising KMW GmbH ,Rhelnmetall Landsysteme GmbH ,Alvts Vehicles Ltd andStork PWV). Photo. AMs Pte Programmes such a~ the Multo RoleArmoured Vehocle (MRAV), despote os chal lenges. demonstrate the overwhelmongdesore to acquore cheapeo defence eqwp ment of a standard who<:h w II ma> moze protechon of soldoers whilst conduct ng - - -- operatoons Opcratoons such os the GulfWar ot 1991, Balkanpeacekeep1ng and peace enforcement operatoons. down to low lntensãty operatãons such as S1erra Leone for the UK ndocate a desore to monl molefriend y casua toes ...... [LJIO Agure I: KeyEuropean Land Systems Players and Country Controlling  U.JI L.an systems ãMarl\ellng strength Ill koy export markets (l'ldudlng poiiQIIIJilPM) ãA suoog domesuc cuseomer c:oup1ec:1 Wllh a svong ãNeed lor realism abOut COSt sttvctures in the ommed.ate future ã Eoonomoes of scale to aJd export success ãFocus on eos1 redo octoon to become a low cost manufadtnr ãInvestment ., new technologtesFinancialCompetenceMarkelAccess ã WhMied capabthty (18-26 ton range) ãInvestmentin hrghor skrlls andtechnologies (e.g.dlgrtlzaliOn) ãElecltonics and fire control ã Development of systems ontegration capaWy Key Technologies ã Need lor ocus (lor Wllomal and -pen:epiiOns) I · R&O(b-~ I FQI :nimbly (b Value Charn _ ~~ P~ffioo ----' CompositiOn of Portfotlo ãOlher buSiness rnus1 calalyse R&D knowledge lor alto be VIable Figure 2: Land Systemt player Key Suceeu Factors Funhe<. the more diverse nature ol opera· toons reqoãe equrpman1 W>lh g.ea~er HexO;..->y lor transport world-wide Yot>lst awa.l<'lg tile Aottus A400M transport ElJ'opean govern ments commãt!lngto mãlãtary operatiOnsaround the globe w111 need accessto lãght. ellect1ve veh icles wh1ch can posãlion their forces ãn limeto act. wholst 11 necauary. awa1 t· 1119 S<Oa ~H ol more trad toonal heavy equ.p ment such as M8Jil Battle lanka iMBTs) and lnloYJtry F;g>ã.ng Vetlocles (!FVs) The US 1 ntenm Br.gade Corr-bat Team expenments dfld European expenoneethere lorecreate a des~re for cheap. etfacuve, ftexr ble combatvehicles- a dãHãcultrecope tor the ãndustry where nat1onal organizationhasresuted rn higher pL<ehase costs per vehocle Whallheretore IS changing lo enable the n. lrl!lt.,... or emetgr19 operaiJonal needs? n oUd be suogesled lhal the Jlii'I'IIWY a- IS lhe reia·tNety low value of combat vehicles ~to arrcraft and navalvessels PolãllClansare keen to deland hrghvalue employment rn oreassuch as aer0$pilce and electronics w1th hogh R &D components and perceiVed mu~opher' effecls I!Yough the economyThe l<wld sys:ems sector IS perceived traclt· llonal1y as a heavy engllleOlMQ arena whereR&D rs a secondary concem Electrorocs are rncreasãngly bacomng a higher value com~ nent ol the land system 111 the same way that tile autOI!lOINe lfldvslry IS 4M>' ''' The<etore, the llbiLty to create hullS lor lhe hogh ã<We COI'I1POI*'ts COUld be seen as becorno1g stead ty more of a eonvnodã'Y The pace of consolidation has continued to accelerate amongst established players As part of OU' ~ e!lor1s we have~ ken to a runber of JeadonQ land syslems com ~ tn Europe and Nonn Amenca 10 ideno ly wh~t playe<s saw as the~r key success fac· tors. The resea r ch led toa reassuflngly som1larJ)Oint ol vãew wãth live maãn laetors ãdenltfiedsurroundãng marketaccess. koy teehnologoes, portloio composo:.on, ~ ChOO posroon and financial ~ence DetaAs o1 these factors 1n proolded In !Qxe 2 Marl<et access IS crrt.cal tor tn06I ' not aJI European players due lo the dãlhcu t>es on acl_.tng nallonal economteS ol scale Some COlJ 'troes benefit fromlong hostorcal ttes that ma1<0 the e.poo ol equopment 88Sle< and polot.cal support enhanCeS thS SllllllJ'ther The dãscussoon regarClãng koy technologães whãch compames should onvest ' centeredaround the h1gh value electronãcs component ol the platform. Electronãcs andlirecontrol systems were seen as an ãnvewnent pnorl\y of several p&aye<s. However. this I)OOntiZatoon<eQUifed tor many rtl\-estmenl n buildong and 8CQ '' the retevant capablrtoes The ãssue ol portlolio composrtoo reRected lhe d1verse nature of compen1us supplyong lend systems. In many ãndustfleS thetrendisto dlV&St busãnesses whichate not compii·mentary wãth the company's core m ssãon. Inthe land systems arena there are compatli8S w th QUote Olverse rnteresiS A rGCI8tll example pr101 to IS acqooillOn by Rolls Royce was Vockers 'htl!Ch had a \Ubslantl81 marone engãnes bul.o<lo.lss along. ãdã rts manufacture ot the Challenger2 MBT The value chaãn posãtãon was raised as a key ãssue l or success amongstland systems manufacturers Those eompani8S we spoketo saw R&D as very ornponant due to the rus tomer contact (amongst riiQUifements staff) t tuk Ill the ea<1y stageS ol a protect. F.-.at as.<embly wasseen astlllportant. espeoally  li Requirements 2025 I Key: [I = Scenar io Ukely Prolee!lon WO!Qht D riv er oper81ing (compared 10 (compared to OII'IVVonment 2000) 2000) 0 El ements = Comp r is mg European style Same ( armour Same( armour S cen ari os theatre offsets weight offsets weog ht El eme nts loss)loss) ã ; of a pa rt1 cu1ar scenar io Europe+ 1.5 times - 5 ~ comparedMiddle Eastbener than to average G nvironment today 2000AFV Europe, M1 dd le Twice of today's ·1 0% East plus As iat evel of compared to enwonment protecbon ..I. average 2000 Gl obal 2.5hmes ·15 % env~ronment eJ bener than compared totoday average 2000 Figure 3: Simplified scenarioforoperating requirements to 2025 amongstcoontneswhose 1ndustry is foreign owned. Lastly, 1n-seMCe support was seen asimponant as 11 offers steady revenue streamsforthe hfe of theproduct The more diversenature of operations requireequipment with greater flexibility The final cnt1cal success factO< 1denlified was that offinanoalcompetence. Many landsystems compan1es 1n Ewope have been, to an extent, sheltered from lull commerc1al pes- suresdue to sens1tivily surrounding lhetr own ership. NorthAmerican players havebeen forcedto be more open abOut howcost structures comply WTth commercial requlfements. Nowthat Amencan players are making acqu1- S111ons 1n Europe. 1t will probablyupt he stakesfor Europeanplayers, and make costreduc-tions 1n t he manufactunng pocessa key goal. systemS/ordnance spectalists. multisectordefencecompanies, eng,neermg and auto- motive parent compames Armoured vehicle specialists Typtcally this cluster cons1sts of companiesfor whom over 50% of their bus1ness 1S denved from armoured vehicles The rahonalefor remaãn1ng 1n the 1ndustryoften seems to be driven by a strong brand an dthe pnde of the management tealfn. Land Systems I Ordnance specialists Th1S clustercons1sts of players whom have expertise 1n landsystemsbutattheir core are ordnance manufacturers Typãcally compan1es whichhave acqwed veh1cle compan1esto prov1de mobility for the weapon systemsThiscluster tends to sell complimentaryproducts to thesame cuslome r. The land systems sector is perceived traditionally as a heavy engineering arena where R&Dis a secondary concern Multi sector defence company Th1s clusterconsists of a few lar ge playe<s who prontete the<r capablht 1es as system lnte- graiO<s tobring together lhe necessalfY com-ponentstodeliver a land systems platform tot he end user. The systemsrntegration capa- bthty acts as an Integral part of the bus onesstocapture de f ence spend1ng. Engineering parent company The engineenngparentcluster 1S com-pnsed of trad,hona l heavyeng,neenng com- panres which added defence capabilities to thetr spectrum of capab1lit1es tosupport a nat10na lneed R&D cost sharing andtechno!· Of!f transfercan makeplayers in th1s clusterf inanCJatly a11ractive .especially if the preced-Ing synergies can beobtained.Given the natureofthe industry. customer 1equtremen t s. and the emergent ktey success factO<S, how are compan,es reac11ng at pes- antto the bustness enwonment? Our resealfch suggests fl\/9 mainclustersof com- panieS ex1st W1th1n theLand Systems domainat pesant. armoured veh,cle speoahsts,land I :... I L...::~:: m ; , ;~ .: ; :. = · .. .J Figure 4: Simplifiedstrategicoptionsfora generic land systems manufacturer 164 World Defence Systems Volume 3 Issue 2
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