versailles 2011 05 euro defense 20110506 presentation v008
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2011 EURODEFENSE CONFERENCE
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ToC
Concepts and definitions (DIB, EDTIB, EDEM)
Trends about Defense budgets and the industry
EU27 vs USA gap & F+UK vs RoEU gap National budgets evolutions (incl. R&T)
Exports and the evolution of the world-wide market
Lessons learnt about Defense-related policies
LCC and international cooperation
Competitive vs cooperative learning
Focus on Offsets and contractual modes
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DIB Defense industrial base
Two reference concepts
The Demand side:EDEMEuropean Defense Equipment Market
The Supply side:EDTIBEuropean Defense andTechnological Industrial Base
The alternative:international cooperation vs. autarcy
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THE issue
A market is characterized by
Suppliers / Clients / Rules / Prices
Programs and technologies
An effective (critical) size Working about rules is important,
yet THE issue at stake dealswith the emergence of actual CLIENTS
committed to some European convergence(in the political, strategic, industrial domains, etc)and long lasting effective demand perspectives
Where are the clients? the budgets?
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Market heterogeneity
In the ASD domain,European countries separate between3 categories, depending on industrial bases and budgets:
Countries procuring ready-to-use materials withouteventually producing more than small contributions,and therefore focusing on transfers and offsets
Countries producing and procuring,and therefore interested in the preservation
of the local national industrial base (eg UK)
Countries producing without procuringbecause the local/internal market is mature/saturated,and therefore preserving the industry with exports (eg F)
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Economic investigationsabout Defense
Lessons learnt
In all countries, Defense industry-related reformshave addressed constraints introduced:
by decreasing national budgets, and by increasing costs for Defense systems
Introducing the EDEM requires NEW budgetsthat are not covered by national + European budgets
Introducing the EDEM requires NEW rules(addressing coordination + transaction costs)
Rules do not replace budgets.
Competition is not the only reference
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Part 1
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EDEMMajor transformation since the end of the 1990ies,with significant exports
2010 figures
Annual turnover: G US$ 97 Competences: 800,000 people
(supply chain)
Combined Defense spending of theEU27 countries: G US$ 280
Source:www.asdnews.com, cf ASD Report (APR 2011)
The EU Defense Market: Industry and National procurement
!
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Transatlantic gap
2009 data appraised PPP Unit USA UE27
Total population M 307 500
GDP G 13 068 13 607
Total Defense budget G 531 188
Defense CAPEX G 159 52
Defense R&D G 74 11
Military personal k 1368 1271
CAPEX per military capita k 116 30
OPEX per military capita k 272 79
29.9% 27.7%
13.9% 5.8%
Source: MinDEF/DAF/OED -- Ann Stat de la Dfense 2009-2010
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US DoD FY2011 requests
FY2011 budget request released FEB 2011 includes:
G$733.3 for national Defense G$548.9 for the regular (non-war) operations (base budget)
G$159.3 for ongoing military operations (Afghanistan + Irak +)
G$25.1 for defense-related activities other than DoD R&D: for the second year in a row, FY11 requests decline 5.2% to G$78.0 (-G$4.3),
with the notable exception of basic research (6.1) increasing by 6.7% to G$2.0
Supplemental acquisitions totaling G$33.6 G$33 for war costs
G$0.655 for the DoDs share of the humanitarian relief operations in Haiti
The House and Senate appropriations Committeesapproved draft FY2011 appropriations bills providingrespectively G$513.3 and G$512.2 for the base budget.
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F+UK vs. Rest of EU27
2009 data appraised PPP Unit F+UK
Rest ofEU27= 25countries
Total population M 126 374
GDP G 3886 9721
Total Defense budget G 80 108
Defense CAPEX G 25 27
Defense R&D G 6.9 4.1
Military personal k 437 1284
CAPEX per military capita k 56 21
OPEX per military capita k 126 63
Source: MinDEF/DAF/OED -- Ann Stat de la Dfense 2009-2010
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CAPEX in EU27
Total Defense CAPEX in Europe
Acquisition: FR+UK = G 25 ; Rest of EU = G 27
R&D: FR+UK = G 6.9 ; Rest of EU = G 4.1
CAPEX relevant as per reference to the Europeandirectives about programs in cooperation do notrepresent important yearly amounts: EDA budget (2009): M 8.4
EDA programs (2009) (A+B+C): M 170
OCCAR programs (2011): G 3.06
[in M]: A400M (699.262), BOXER (406.524),COBRA (24.018), ESSOR (30.348), FREMM (827.972), FSAF/PAAMS(270.163), TIGER (802.177)
Our guess: this is not superior than a yearly G 4.0
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NL Defense budget 2011
Cutbacks in the Defense CAPEX amount M 810 (>70%of the 2011 CAPEX), & another M150 in the longer term
Staffs will be reduced by 30%; the number of top-levelpositions will be reduced from 119 to 80
Large OPEX reduction, e.g. in the RNL Air Force (KLu): Number of F-16s reduced from 87 to 68
The Cougar transport helicopter will be phased out
3rd DC-10 will not be taken into service
2 Ground installation defense platoons and1 Patriot battery will be taken out of service
HOWEVER the Dutch Parliament has approved thepurchase of 2 JSF test planes (costing together M270)
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The budget
gap betweenF + UK vs.Rest of EU
DefenseCAPEX
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World military expenditures
According to SIPRI, world military expenditure in 2010is estimated to have reached G US$ 1,620 (current)
This represents a 1.3% increase since 2009,and a 50% increase since 2001
This corresponds to 2.6% of World GDP
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National or regional shares of armssales for the SIPRI top 100 for 2008
Region / country # of companies Arms sales ($b)
USA 44 229.9
Western Europe 34 122.1
Russia 7 10.8
Israel 4 7.0
Japan 4 6.9
India 3 4.2
South Korea 2 1.8
Singapore 1 1.3
Canada 1 0.7
TOTAL 100 384.7Source: SIPRI
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Confrontation betweeninfluence zones where
the industry gains anaccess to reserved markets
Emerging actors do not
expect any autonomyfrom existing integrationnetworks, and relate onlyto a precise zone of
influence
Rationales for Defense exports
During the Cold war Today
Globalization of thesupply chain
International competitionoccurs now without anyreference to reserved influence zones
Emerging actorsintroduce their ownstrategy (teaming,influence zones, etc)
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Situation in civilian aeronautics
In 2007, the USA vs Europe confrontation polarizesaround champions : Boeing vs. Airbus
USA: Sikorski, GEAE, Goodrich, Honeywell, PW, Bell
Europe: Eurocopter, RR, BAE, MTU, SAAB, Mess-D, Liebherr,
THALES, SNECMA, DASS, CASA, Mess-B, Alenia, Agusta, etc
others:Elbit (Isreal), Embraer (Brazil) and Bombardier (Canada)
In 2011, emerging actors in BRIC countries havebecome effective (and aggressive) competitors
eg with single aisle aircraft: Russia: Sukhoi Super Jet-100 + Irkut MS21, UAC
India: RTA70
China: AVIC (ARJ21) + COMAC (C919)
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The industryworld-wide
competes for thesame export
markets
Military exports:Export have becomemore complex and morechallenging for theEuropean industry
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Part 2
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Towards an actual EDEM...
Competitive efficiency of the industrydepends on the access to market
Production has to generate actual profits,not only cover R&T + development costs.R&D has to be procured with specific procurementmodalities in order to securebasic research (exploration) activities
Creating the conditions of an actual EDEM requires:
the cancellation of the notion of national return
the installation of (mutual) dependencies
further restructuration in the industry
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Licensing
Co-production
Co-development
Teaming
Strategic alliances
Joint ventures
Acquisition Supply chain
International cooperation
Modalities Instances of programs (2001)
Patriot PAC-3 for German Army (LM+EADS)
Rolling airframe missile (Raytheon + BGT)
JSF
Meteor
Alliance for medium caliber ammunition
LM Alenia Tactical transport systems
LM aerospace electronics business (BAe) SAAB JAS-39 Grippen (GE-Volvo Aero) with
Honeywell, LM, Sundstrand
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These cooperation modalities open the path towards
various levels of economical and organizational efficiency
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Lessons learnt:
International cooperation incurs usually: Increased life cycle costs [LCC] (+25% to +50%)
Longer time schedules; and delays
Increased difficulties for export negotiations
Improved life cycle costs (from R&T todecommission) ONLY occur when:
Diverging specifications for the program
Duplication of adm interfaces and production lines
Demultiplication of disclosure specifications andinformation sharing rules within the consortium
ARE AVOIDED.
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Strategic management ofknowledge (learning processes),Management of technologies
Characterizing the nature ofeconomic efficiency requiresfurther investigation associatedwith
Learning and innovatingWITH the partners
(cooperative learning)vs.
Learning and innovatingAT THE EXPENSES
of the partners(competitive learning)
Source:Versailles & Merindol,DPE, 2005"Transatlantic cooperationand R&D management:an inquiry into the problemof complementarities"
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Licensing
Co-production
Co-development
Teaming
Strategic alliances
Joint ventures
Acquisition Supply chain
Cooperation efficiency?
Modalities
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All these cooperationmodalities may rely oncooperative learning,
or on competitive learning
International cooperationcannot be appraised
without investigating theunderlying managementof strategic knowledgeassets (incl. R&T)
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Strategic managementof knowledge
The industrial strategy dilemma,as appraised from the industry
Technology transfers relate to thedynamics of elaboration for strategic knowledge assets,and for new technologies (innovation)
If one transfers its distinctive knowledge assets,it loses sooner or later its relevance in any partnership
If one ONLY transfers the products of its distinctiveknowledge assets
(and commits to on-going R&D),then it preserves its position in the value chain,and its contribution to the partnership
There is a need for strategic knowledge mapping(cf the methodology introduced by the I-Space Institute)
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Offsets
Offsets may be understood as a way to sponsor a program, or as the initiation of win-win competencetransfers and long-lasting interactions
Sponsorshipa package added to have the bride look nicer
Lockheed F-16 deal in Poland
Transfer of competencesa long-lasting cooperation suited to tight couplingbetween complementary players
Dassault and Embraer on basis of the Mirage III export to Brazil
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Transaction costs
When the consortium has to manage
Asymmetric knowledge bases,
Multi-lateral roles, and
Multi-lateral responsibilities,
the governance model becomes more complex.
Such a complexity introduces delays and costs.
TRANSACTION COSTS rise exponentiallywith this complexity, and explain delays and costs.
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Transaction costs minimization
Sound programs managementrequires transaction costs minimization.
In complex programs with international cooperation,this requires a TOP-DOWN organizationteaming a governmental office with a system integrator,and their bilateral negotiations with the rest of the industry.
The governmental office is also THE client.Its authority depends on its market power
and on its (technological + managerial) competence.
The JSF program introduces a sound reference modelfor optimized governance in international cooperation(as seen from the US perspective).
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The devilis
in the detail
S&T efforts requireconsistent attentionaboutlearning processes,and contractual modes
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Conclusion
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Points to be addressed
Institutional issues
Coping with gaps (F+UK vs UE; UE vs USA)
Coping with the new aspects of EU burden sharing
Preservation of competences in the industry Architectural [ie. Integration] knowledge
Component knowledge (supply chain / subcontractors)
Introduction of an actual industrial policy
Coping with international programs (R&D / production)
Attributing precise responsibilities (State/industry)
Fostering stable anticipations on transaction costs
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Towards a cultural revolution?
A concrete COMPULSORY European preference has to be introduced (346?)
The notion of European preference does not mean
much without R&T and production budgets
Any fair return rule inside Europe has to be stopped,and replaced by a logic of complementarities that doesNOT care about mutual dependencies inside the EDEM
Governance rules and contractual modes have to be
introduced consistently with the purchasing power(R&T and production) of the States
If this revolution does not occur,the industry will seek for survival with local strategies
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MAJOR ISSUE
Preserve
individual andcollective
competences
S&Tpolicies
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Aviation Week and Space Technology,Special double issueAPR-25/MAY-02 2011
Further reading
Shi Lang [Varyag]
J-20
DF-21D
J-15
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www.opensolutions.be
www.ispaceinstitute.com
How to contact us
Dr Valrie MERINDOL
valerie@merindol.net
http://www.merindol.net
+33-0-617 09 06 43
Dr (HDR) David W. VERSAILLES
david@dwv.fr
http://www.versailles.net +33-0-609 52 54 56
Blog: http://dwv.tumblr.com
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The European complexity
NATO
UEEDA
LoI + OCCAR
countriesrepresenttogethermore than 90%of EuropeanDefense
investments
CroatiaAlbania
NorwayTurkey
CanadaUSA
LoI
Sweden
OCCAR
Belgium
France
GermanyItalySpainUK
Iceland
GreeceLuxemburgNetherlandsPortugalPolandCzech Rep.Hungary
EstoniaLatvia
LithuaniaSlovakiaSloveniaBulgaria
Romania
Denmark
AustriaIrelandFinland
MaltaCyprus
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Air forces: Fighters
NATO
UEEDA
CroatiaIceland
NorwayTurkey
CanadaUSA
LoI
Sweden
OCCAR
Belgium
France
GermanyItalySpainUK
Albania
GreeceLuxemburgNetherlandsPortugalPolandCzech Rep.Hungary
EstoniaLatviaLithuaniaSlovakiaSloveniaBulgaria
Romania
Denmark
AustriaIrelandFinland
MaltaCyprus
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Legend:
Air Defenseprovided byNATO
Fightersprocured inUSSR
or in China
Aircraft
Eurofigther
JAS39Gripen
Mirage 2000
F-16
F-18
JSF
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Retour sur les dfinitions
6.1 Basic research
6.2 Applied research
6.3 Advanced Tech Dev
6.4 Advanced Component Dev
6.5 System Dev & Demonstration
6.6 Management support
6.7 Operational system Dev
R&D
(RDTE)
R&Tou
S&T
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EU27 R&T contributors
6.1 Basicresearch
6.2 Appliedresearch
6.3 AdvancedTech Dev
6.4 AdvancedComponent Dev
6.5 System Dev& Demonstration
6.6 Managementsupport
6.7 Operationalsystem Dev
R&D
(RDTE)
R&T
Source: MinDEF/DAF/OED -- Ann Stat de la Dfense 2009-2010
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DWV&VM, 2011
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