European Naval Consolidation Still Remote
(Source: defense-aerospace.com; issued Oct. 28, 2004)
by Giovanni de Briganti
EURONAVAL SHOW, Paris --- Despite the encouraging noises made at the Euronaval show here this week about the consolidation of Europe’s naval shipbuilding industry, the fact remains that the prospect of a pan-European naval group is still a long way off, and may in fact never materialize.
At issue is that while national consolidation is widely seen as a pre-condition to transnational restructuring, it is not clear that it would benefit all of the existing shipyards, many of which face excess capacity and low orders which suggest several may go out of business. Also at issue is the fact that France’s DCN group is currently state-owned, and that until it is at least partly privatized the German government refuses to allow it to merge with German shipyards, which are themselves being restructured.
France and Germany are open in principle to an alliance between shipbuilders in both countries but a deal needs time, a German Economy Ministry spokeswoman said on Tuesday after talks between the two countries’ finance ministers. "We are basically open to a Franco-German shipyard alliance. But for that time is needed," she said.
French Defense Minister Michele Alliot-Marie announced here Oct. 25 that France would by year-end enact a bill allowing defense electronics group Thales (which is 31% owned by the French state) and others to buy a stake of up to 49% in DCN. However, she said, the French government’s stake will not drop below 51%.
The preferred option seems the merger of DCN’s naval construction unit and Thales’ French naval business into a new company, employing fewer than 6,000 people, or less than half of DCN’s current workforce. The net effect would be to dilute DCN’s state ownership and make it an acceptable partner for Germany, while improving the joint company’s effectiveness and profitability. However, working out the details of the merger will require quite some time, Jean-Marie Poimboeuf, CEO of DCN, said Oct. 26.
But some doubt that a healthy French naval industry would want to share work with less favored European competitors, and go as far as to suggest that French ambitions end with the partial privatization of DCN. “The real goal is to merge DCN with Thales’ naval business,” says one European industry executive. “The prospect of pan-European restructuring is simply being bandied to placate DCN’s trade unions.”
Nonsense, says a senior Thales official. “We can help DCN improve substantially its profit margins, and by teaming even more closely for export we can also generate additional business,” he said.
Thales CEO Denis Ranque said in an Oct. 25 television interview that it is “too soon” talk of Franco-German naval defence conglomerate along the lines of the European EADS group, adding that some housework needs to be done on both sides before going European.
DCN, which was incorporated under company law in early 2003, foresees sales of about 2 billion euros in 2004 and a profit greater than the 107 million euros it earned in 2003. More significantly, says Poimboeuf, its current order book is worth nearly five years of sales, and it is negotiating additional orders worth an additional 15 billion euros with the French government for a new aircraft carrier, a new class of six attack submarines and a new class of multipurpose frigates to be developed jointly with Italy.
This program, designated FREMM (Frégates Multi-Missions) calls for construction of an initial batch of 12 ships, eight for France and four for Italy, for which a contract is to be let in early 2005. However, the two navies see a combined requirement for 27 of these 5,500-tonne, gas-turbine-powered ships, for delivery by 2017. The MoU launching the program was signed at the Euronaval show here on Oct. 25 by French Defence Minister Michele Alliot-Marie and her Italian counterpart, Antonio Martino. With such a backlog and future prospects, it is not clear that DCN would gain by merging with less financially secure European shipyards.
But whereas French and German shipbuilders do not have any common program around which to structure a possible merger, France now has two major frigate and one missile program in common with Italy. “We’ve been working together for a long time, and it would make more sense to link up with Italy’s Fincantieri rather than with German yards with which we compete across our entire product line,” one French official told defense-aerospace.com.
Another stumbling block is that French officials are leery of combining their shipyards with Germany’s as long as an American firm, One Equity Partners (OEP), retains its 25% percent stake, but German industry officials say OEP would be willing to sell its share to a European buyer if the price is right.
Under an agreement announced Oct. 7, Germany’s ThyssenKrupp Werften and Howaldtswerke-Deutsche Werft (HDW) agreed to merge and form a new company, ThyssenKrupp Marine Systems AG, which will have 9,300 employees and an annual turnover of 2.2 billion euros. The new company will be controlled and managed by the Thyssen Krupp group, with a 75% stake. The balance will be owned by OEP, which will also receive a cash payment of 220 million euros from Thyssen Krupp.
In addition to the new Thyssen Krupp Marine Systems, other European yards looking to consolidate include part of Spain’s Izar group, France’s Chantiers de l’Atlantique, a unit of the troubled Altom group. Another European player is Italy’s Fincantieri, currently controlled by a state-owned holding company and a consortium of Italian banks, but which has a large business building cruise ships.
Finally, the future of British naval shipbuilding remains unclear. BAE Systems tried, without success, to sell off its naval business earlier this year, but in now considering developments. “We are currently reviewing all options, and have made no decision on the naval business,” a company official said Oct. 27. Also unclear is whether VT Group, the other British shipbuilder, will be able to retain its independence in the long run.