Gert Runde is the Secretary General of the AeroSpace and Defence Industries Association of Europe (ASD). In this interview he shares his views on how Europe’s defence industry can retain capabilities and profitability during challenging economic times.
What do you believe should be done to strengthen and enhance the European defence industrial base? How can institutions such as the EDA contribute effectively to this process?
The core role of the EDA is to help governments attain their defence objectives by outlining the efficiency gains that could be a result of doing things together. But Member States all come from different horizons and do not in all cases have homogenous security and defence policy goals. So convergence has to be created in a pragmatic way. Mostly, and particularly in this field, Europe is forging common approaches through dealing with crisis situations. And the European Union does not see itself as a prime military power and understandably prefers to seek foreign and security policy benefits by using “soft-power” approaches. However we seem to be entering a period where we are witnessing a rising tension between not being a prime military power yet still being able to support doing the things we need and want to do to maintain a credible European foreign and security policy posture.
Surely the current one-by-one policy where we shop around between ourselves for assets during times of crisis – such as military transport aircraft – is not an optimised process. These crises can give us some guidelines to the future but we need to consider the equipment implications of these events becoming more prolonged and difficult, with increased demand for equipment. We need to consider what exactly we should be doing jointly and whether we have the technology investment in place for the longer term. Or whether we just go down commercial routes, that is, look for what is available, accepting the inevitable dependencies that this would create.
The degree to which Member States achieve demand consolidation though harmonization, coordination and synchronization of their individual procurement initiatives is key to the preservation of a healthy defence industrial base in Europe.
Member States have to define those defence areas which they need to retain under their direct influence to serve an immediate national interest and then agree collaborative approaches for the rest. There should be room within the EDA for this collaborative process to start and for governments, whether it is two or 27, to identify similar needs and discuss how to achieve the capabilities together. A key issue is agreeing a common timescale, to coordinate and synchronise national budgets. You can then develop an optimised investment plan from research and technology to actual procurement. Does this mean a single procurement agency for Europe? Maybe in the very long term but we can go a long way in the short term to synchronise approaches. We know this has provided benefits in the past. For example, with the Meteor air-to-air missile programme governments drew up common specifications, including those for the interfaces, and agreed to place orders in the same timeframe, but individually. This allowed the contractor the opportunity to benefit from a larger production run, with an appropriate reduced level of cost to the customer.
We see no reasonable prospect in the foreseeable future of the EU itself becoming a significant source of demand for defence goods and services - the fundamental challenges and responsibilities continue to reside in Member States. But we think the full potential of the EDA is not yet recognised by Member States and the Agency will have to market itself more proactively.
Industry was very much in support of the creation of the EDA and, although we do not in all questions share identical views, now more than ever we need to work more closely together. The EDA’s role for industry is essential but the Agency has to focus on speeding up the schedule under which cooperative initiatives are being delivered, to drill down into the wide process of pooling and sharing and identify more initiatives that are directly relevant to underpin defence industrial capabilities in Europe. Time is of the essence, now more than ever.
Surely we also need a well regulated European defence market but it cannot be created by regulation alone. Even if we have the same transparent rules for procurement and competition, without demand consolidation fragmentation endures. And who does that help?
Is Europe investing enough in research and technology (R&T) and if not, what can be done to reverse the decline?
Our mastery of technologies is an essential part of our industrial capability portfolio. Much of this capability has been generated by government investment from research to procurement, and governments should have an overwhelming interest in maintaining the competitiveness of “their” industries. But the paradigm is changing. We are –we hope – moving towards a European, rather than a national defence market, and additionally there is a real benefit for our Member States if companies can maintain or enhance their global competitive edge. If industry is competitive in Europe, it will be competitive globally and vice-versa.
In former times, governments had their national industries’ interests at heart, but if you widen the procurement circle to include other participating governments, those same companies need to be sure the new government customers will also respect their justifiable interests, in particular in the domain of Intellectual Property rights (IPR). Each company’s IPR portfolio after all is a key ingredient in its global competitiveness.
In 2006 EU defence ministers in the EDA Steering Board agreed they should increase the percentage of research and technology in defence budgets from 1.6% to 2.0%. But EDA's figures for 2010 showed it has fallen to 1.2%, and today the figure is certainly lower. This does indeed represent structural under-investment. There is no doubt that the accelerating and enduring erosion of defence industrial capabilities will have serious consequences for the security and defence policies that they help to sustain. What may be even worse is that there is no common view of which are the essential capabilities that will be needed over the next two decades; without this view it’s impossible to say whether, if you lose capabilities, this will result in a dangerous situation or not.
Defence research and technology investment is undertaken by Member States in view of a capability need and is usually full-funded because they have an upcoming capability need and there’s nothing in the portfolio to meet that need. So they work with industry to create that capability. This process will continue but we now face important questions of affordability. Member States will increasingly have to coordinate this with other Member States – though there will still be instances of some governments undertaking work on an exclusively national basis – and coordination will typically be done through the EDA. This is an EDA capability, which is currently under-exploited in our view, especially for Category B programmes. This is a valuable resource and Member States should have more recognition of them and be more open to coordinate their approaches.
It is clear that not all Member States have gone down the process of understanding what they want to share and what they don’t want to share –from both research and procurement points of view.
Across the institutional divide the EDA and the European Commission now have a tool to coordinate their investments in research and technology to prevent waste and duplication. But the Commission undertakes R&T work at a lower- tier technical readiness levels from that of the EDA – the higher you go towards technical readiness the closer you move towards putting that new technology into the defence market and that’s not an area in which the Commission operates. The Commission can help through its framework research agenda with the first steps of technology research that is relevant to future defence capabilities, but not exclusively so, and then it’s up to Member States and the EDA to develop the more defence specific technology. This is a process which needs to be better coordinated; the Commission also funds this work differently and makes the results freely available within the EU and sometimes beyond, which is mostly not appropriate for the defence sector. The related IPR issues are another factor – rules for intellectual property use are different for work which is funded through the grant mechanism (on the Commission’s side) as opposed to defence research investments by the Member States.
So how does Europe remain competitive in a market that is increasingly global and in which buyers are becoming far more intelligent in terms of procurement practices?
The fall in product demand and increasing under-investment in R&T among European Member States are causing companies to seek market opportunities in more dynamic economies in an effort both to sustain profitable activities and maintain their defence industrial capabilities. But the European defence industrial community can only be sustainably successful in foreign markets if it can demonstrate that there is a national and/or EU home market for their products. Home customer demand has always been a pre-requisite for successful defence exporting.
There are constraints to marketing globally – we cannot do it everywhere and we do not want to do it everywhere. In addition, many potential foreign customers expect genuine cooperation and industrial investment. So, by seeking to exploit foreign markets, we contribute to creating our competitors of the future.
Then there is the problem of technology drain. These new competitors will not want an investment in yesterday’s technologies; they want to create their own capabilities. So suddenly you can create a “reverse dependency” situation where politically acceptable countries acquire technological capabilities on which Europe may soon start to depend. These implications have to be properly thought through.
What effect do you forecast from the activities of Commissioner Barnier and the Task Force on defence? How much input has ASD had in these activities?
The task force, as we interpret it, is there to help. It wants to help governments achieve the objectives they have set for themselves. While we welcome the Commission’s interest in supporting the defence sector, the actions available to or suggested by the Commission are not central to the underlying problems faced by the industry in the short and medium term, and need to be seen and understood in this context.
What do you see as the priorities for European defence in light of the EU Council’s workings? How important will the EU ministerial meeting on defence be at the end of this year?
In terms of raising to the level of heads of government the issue that there is more to European security and defence policy than the external aspect, the council meeting is extremely important. We have started our dialogue with the EDA and the Commission to ensure all arguments can be brought forward. We have tried the “bottom-up” approach but to achieve real progress, what Europe really needs now is the “top-down” focus and support by Heads of State and Governments.
Consolidation in the European defence industry is a hot topic, with the failed merger of EADS and BAE Systems and rumours regarding mergers within French industry bringing a fresh focus to it. What is your view on the imperative for consolidation and the barriers that stand in the way of making it effective?
Our association is not working on consolidation scenarios. These are issues where each company has its own strategy and its own portfolio of interests and those are extremely competition-sensitive. I can only offer you a few general considerations. “Consolidation” has become a buzz-word for journalists and analysts – it covers many underlying issues, which many people who use the word do not probably fully understand. It is important to understand that consolidation, in particular in our industry sector, is a result of market conditions and political concerns that are fully under control of the EU Member States.
- This interview was first published in the third issue of the European Defence Agency's magazine "European Defence Matters". You can download the magazine here.