By Georg Mascolo and Dietmar Hawranek
European defense contractors are hoping that they will be able to sell their AirTanker A330-200 to the US military.
EADS really didn't have much of a chance at first. When the US military put a contract out to tender that promised to be one of its biggest and most prestigious so far, a contract that would be worth $23 billion in the first stage alone, it was almost a foregone conclusion that the deal would go to an American company. Anyone with the notion that a European company, whose main shareholders are the French and the Germans, had a good chance of landing this mega-deal with the Pentagon would probably have been viewed as incredibly naïve.
But things seem to be looking up for the Europeans. As of last Wednesday, the European Aeronautic Defence and Space Company, or EADS, can actually hold realistic hopes that it just might be the recipient of an initial order from the US military for 100 tanker aircraft. In the long term, the contract for replacement of the entire fleet of around 500 tanker aircraft is up for grabs -- a contract potentially worth up to $100 billion.
Ralph Crosby, EADS' North American Chairman and CEO, announced in Washington that his company would be willing to build a factory in Mobile, Alabama, creating up to 1,000 new jobs, if the Pentagon awards him the contract.
How to Win Contracts and Influence People
The pledge to create jobs in the United States is the first key condition for securing the deal. The second is to come up with a US company as a partner, and that's where things are looking good for EADS. The Europeans are currently involved in promising negotiations with Northrop Grumman, where Crosby was president. And the third condition -- one with which Crosby is all too familiar -- is to gain political support.
Crosby was joined on the podium by Republican Party leaders from Alabama and by Roger Staubach, whose agency was commissioned by EADS to start looking for a production site. The fact that Staubach is an American football legend already makes him the perfect standard-bearer. But even more important is the fact that he is a friend and supporter of the family of US President George W. Bush.
EADS' man in Washington, Crosby, says what you would expect him to say at this kind of event: "We'll win."
Of course, that's easier said than done. Competitor Boeing is fighting tooth and nail for a contract that once seemed a sure thing. That is, before a corruption scandal prompted the Pentagon to reopen the bidding process. Ronald Marcotte of Airbus rival Boeing promises that "It's going to be a very aggressive competition. We're ready to rock and roll."
Even securing a portion of the contract would be a coup for EADS. Until now, the Europeans have managed to gain only one percent of US defense contracts. By contrast, US companies claim about 20 percent of the European defense market.
The fact that it's almost three times as big as the European market isn't the only reason the US market is attractive to European defense contractors. In the United States, companies are paid based on what is known as the cost-plus method, which translates into higher profits. In addition to being reimbursed for their costs, companies receive a markup on their profits, resulting in average returns in excess of ten percent. In Europe, on the other hand, companies are required to deliver their products for a fixed price. However, because the costs of new weapons systems are difficult to estimate, manufacturers can count themselves lucky if they end up with profits in the five-percent range.
The Costs of War
The high costs of the Iraq war have forced the Pentagon to pay closer attention to money and pricing when buying weapons, making the US market more open to foreign companies. US soldiers haven't been carrying Colts for a long time. Instead, the US military's handgun of choice is a Beretta developed in Italy. Gulfstream has been replaced by Brazilian manufacturer Embraer as the military's supplier of reconnaissance planes. And in an especially symbolic move, the Pentagon also decided not to order President Bush's new helicopter fleet from US manufacturer Sikorsky, but from AgustaWestland, an Italian-British joint venture.
The Who's Who of the arms trade.
Many European manufacturers hope to follow the example of Britain's BAE Group, which upped its US sales from $2 billion to $5 billion within five years and now does more business with the Pentagon than with the British Ministry of Defense.
BAE doesn't see itself as a British company, but as the "first trans-Atlantic defense company," and it already employs almost as many people in the United States as it does at home in Britain.
Since 1999 the British have been strengthening their position by buying about a dozen US companies involved in the defense industry. Most of these companies were so small that the Pentagon, which has the power to block these types of deals, didn't perceive the British entry into the market as a threat. But the companies were large enough to enable BAE to begin building its own business. Of course, BAE's mission was certainly facilitated by the close alliance between British Prime Minister Tony Blair and US President George W. Bush in the Iraq war.
By contrast, at first hardly anyone believed that EADS had much of a chance of clinching the big tanker aircraft deal. After all, German Chancellor Gerhard Schröder and French President Jacques Chirac had more than angered the US president and the Pentagon with their staunch opposition to the war.
In tests, Airbus' tanker aircraft proved to be superior to Boeing's competing model, the KC-767. Because the aircraft is capable of storing fuel in its wings, the fuselage can be used to transport passengers or military equipment. This isn't an option in the Boeing model, because more fuel tanks are located in its fuselage. This was the main reason the British and the Australians, Bush's closest allies, opted for the Airbus tanker.
Dodgy Deals
Could American military vehicles be made by Europeans?
In return for the promise of high-paying jobs at Boeing upon returning to the private sector, the US government's procurement officials agreed not to scrutinize Boeing's costs too closely, resulting in a deal that was overpriced by up to $6 billion.
This was followed by lawsuits and dismissals. The CEO of Boeing and Secretary of the US Air Force James Roche both had to go. Darlene Druyun, the Air Force procurement official who was initially in charge of the tanker aircraft deal, and who subsequently landed a lucrative job at Boeing, is currently serving a nine-month prison sentence. The US Senate is still investigating the scandal. And with every new detail that comes to light, EADS chances improve.
The contract is incredibly important for the American aircraft manufacturer. It could provide Boeing with key competitive advantages over its European competitor, not just in the defense industry, but also in civil aviation, where Boeing could invest profits from the defense deal in the development of new passenger aircraft.
"Security from Foreigners is no Security at all"
To increase its chances of regaining the tanker contract in the wake of the scandal, Boeing is increasingly betting on the support of the "buy American" contingent, which sees awarding defense contracts to foreigners as almost a threat to national security.
Influential Republican congressman Duncan Hunter is viewed as the leader of the pro-Boeing camp. To this day, he likes to recount the story of a Swiss company that deliberately cut back its production of components for laser-guided missiles during the Iraq war, citing it as an example of foreign unreliability. The company says that it was held up by special export permit requirements in times of war. In Congress, Hunter is co-sponsoring legislation whose only purpose seems to be to prevent a contract from being awarded to EADS. Under the proposed law, the Pentagon would be prohibited from signing contracts with foreign companies being prosecuted for subsidy cases before the World Trade Organization (WTO) -- as is currently the case with EADS.
The European challenger can only hope that this Airbus law will fail to make it through the Senate. EADS is less concerned about a second effort underway in the US Congress, which approved legislation that would require the government to impose an embargo on companies from countries that sell weapons to China. Although Chirac and Schroeder have called upon the European Union to lift its weapons embargo on China, the sanctions are likely to remain.
European arms - as American as apple pie.
Part of the Pentagon contract would require Crosby to shift large segments of EADS' American helicopter production from Texas to Mississippi. American company Bell also assembles helicopters in Texas -- one reason why EADS is unlikely to gain much support from Texas politicians. But EADS is the only helicopter manufacturer in Mississippi, the home of influential Senator Trent Lott, who could be a powerful ally for the European company.
Choosing the production site for the tanker aircraft was also based on political considerations. Competitor Boeing counts Washington state's Democrats, who are concerned about jobs at Boeing's Seattle headquarters, among its most loyal political allies. This has prompted EADS to focus on Alabama, a state with a Republican administration. Alabama Senators Jeff Sessions and Richard Shelby are members of two important bodies in the Senate, the Armed Forces and Appropriations Committees.
Despite its concerted lobbying efforts, EADS cannot hope to land the entire tanker deal, which would open up the US defense market to European companies more than the US military considers desirable.
Arms experts argue that the Pentagon should buy its aircraft from two different manufacturers. That way, the military would not be forced to ground its entire fleet if it encountered technical problems with the highly complex tanker aircraft. This argument prompted EADS' Crosby to propose that Boeing and EADS each be awarded 30 percent of the contract, and that the remainder be subjected to a public bidding process. Even that would be an enormous success for the Europeans.
It's an outcome Crosby already seems to have anticipated, albeit on a small scale. At his presentation in Washington, he handed out plastic models of the Airbus plane -- complete with the insignia of the U.S. Air Force.
Translated from the German by Christopher Sultan
© DER SPIEGEL 26/2005
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