With the recent Franco-German merger of Nexter and Krauss-Maffei Wegmann (KMW), it seems Europe’s fundamentally national-based defence sector has finally embarked on the long awaited restructuring it has been flirting with since the turn of the century.
The new company, known as KANT (KMW and Nexter Together), unites the French state-owned manufacturer of the Leclerc battle tank with the German family-owned maker of its Leopard counterpart in a 50:50 partnership with annual sales of almost €2 billion and a €9 billion order book.
This new armoured systems giant marks a major turning point in the consolidation of the fragmented European land weapons market, and will ultimately be able to do for European land-based defence systems what Airbus has done for Europe's aerospace industry. As a joint statement from the companies claims: "the alliance of KMW and Nexter creates a group with the momentum and innovative force required to succeed and prosper in international competition."
It certainly looks a timely move. The annexation of Crimea coupled with the ongoing volatility of parts of the Middle East has driven renewed European interest in armoured vehicles, and there are further opportunities in the growing markets of South America, Africa and the Asia Pacific region.
According to the Strategic Defence Intelligence's recent 'Global Armored Vehicles and MRO Market 2015-2025 report' the worldwide sector is expected to be worth $22.1 billion in 2015, rising at a CAGR of 3.97% over the period to reach $32.6 billion. Infantry fighting vehicles (IFV) and main battle tanks (MBT) are tipped to be the biggest contributors, respectively forecast to account for 37% and 22% of the market.
It is an already crowded market place, and even with the merger, the company is still significantly dwarfed by the likes of BAE Systems and General Dynamics. Add the rest of the world's manufacturers into the mix, including fellow European firms, such as Germany'sother land-system supplier, Rheinmetall and the Italian OTO-Melara, and the competition is likely to be strong.
Individually, the two elements of KANT currently field strong product portfolios. In addition to the Leclerc MBT, Nexter offers the Véhicule Blindé de Combat d'Infanterie (VBCI) wheeled armoured IFV, the Véhicule de l'Avant Blindé (VAB) APC and the Aravis mine resistant ambush protected (MRAP) vehicle. KMW has a range of infantry mobility, fighting and reconnaissance vehicles, including the Dingo, GTK Boxer, Puma, Fennek, Grizzly and Mungo ESK, along with self-propelled tracked howitzers, rocket launchers and anti-aircraft artillery, in addition to the successful Leopard 1 and 2 MBTs.
It has led some commentators to suggest that there is too much of an overlap to be able to live up to what the French MoD described in the build-up to the merger as a 'competitive industrial group offering a wide product range, and complementary know-how and competencies'.
Although there is clearly a high degree of product duplication, and the individual manufacture of the existing models is intended to continue, such criticism may be a little harsh; there is still some room for synergy in the current line up. Adding KMW's PzH 2000 self-propelled tracked howitzer to Nexter's Caesar truck-mounted system and Trajan towed artillery creates a complete product range - and there is obvious scope in future for self-competition to be eliminated during the development of new lines.
The idea of industrial cooperation in the European defence sector has been raised for years. Europe's big six defence manufacturing nations signed a letter of intent that set out to find a framework to achieve it back in 2000, but in practice, little progress was made in the years that followed. With the Nexter-KMW merger, the first steps towards the sort of consolidation that the US sector underwent in the 1990s now seem to have been taken, with the partnership seeking to use its now greater critical mass to improve its competitive edge.
Each partner is expected to realise benefits of around €35 million once the merger has been fully completed in five years time, through its enhanced purchasing power for raw materials and manufacturing tools and by adopting a unified approach to export sales.
Enhancing competitiveness on the global market may be one of the big drivers on the deal, but achieving it may not be an entirely easy ride.
Even between the two prime movers of the European dream of an 'ever-closer union', national interests still complicate the transfer of sensitive defence technologies, and looking at the world arena, Paris and Berlin have a fundamental difference of ethos when it comes to exports.
For France, defence products are to be exploited as fully as possible on the global market, with French companies accounting for five in the Stockholm International Peace Research Institute's top 50 arms sellers in the world, and one of those making the top ten. Germany, on the other hand, with just one, ranking 39thon the SIPRI list, takes a far more circumspect approach, leaving German defence firms subject to significantly greater restrictions on foreign sales.
With reports coming out of Bundestag suggesting that little shift is currently planned in the export regime, it remains to be seen if adequate work-around can be devised to allow KANT to achieve its full world market potential.
Unrest in Ukraine and elsewhere has reawakened European defence thinking on armoured vehicles, and France and Germany have both begun initial investigations for next-generation replacements for their Leclerc and Leopard MBTs, which could prove an important first test for the new company.
KMW's Leopard 2 has been a notable commercial success, having been sold to 15 countries worldwide, while the Leclerc, by contrast, has had a much more modest reception from the global market. KANT is widely tipped to work on a MBT successor, unofficially dubbed the Leopard 3, in time to meet the 2030 start-date reported for the progressive retirement of the Leopard 2 from German service. However, Nexter was recently given the contract to extend the life of France's Leclerc fleet to 2040 and beyond, leaving the ageing tank to be retired long after the KANT influenced 'Leopard 3' had been introduced.
There are always going to be timing issues when rival companies, which are existing direct competitors, come together. There is in effect no right moment, but even though it is an inevitable artefact of the merger's five-year preparation period, for something as high-profile as the next-generation MBT, the fit is clearly less than ideal. Looking to the future, however, although developing and marketing any new armoured vehicle brings its own challenges, especially in the APC and IFVs sectors, such issues are unlikely to recur.
Airbus for Tanks?
The French media has been quick to describe the merger as an 'Airbus for tanks', picking up on the parallels that many of the country's politicians have been keen to draw between the two.
There are, similarities, but there is one very important distinction; although there is a defence element to Airbus, its global rise was firmly rooted in the civilian market. Like all defence sector companies, however, KMW, Nexter and 'newco' KANT essentially work for governments, and for them there are no guarantees that the Airbus model will hold true.
Only time will tell how effectively the new armoured vehicle giant can replicate that kind of commercial success, and as the French MoD hopes 'ensure the long-term development and competitiveness of the defence industry'.