By Marina Malenic
LONDON–Anticipating a major drawdown in spending by European governments over the next several years, executives of the European Aeronautic Defense and Space Company (EADS) said last week that they are looking overseas to developing countries for both sales and cheaper labor.
“It is quite clear that European markets will decline, or be stable at best,” Stefan Zoller, CEO of EADS’ military division, told reporters here on Saturday ahead of the Farnborough International Air Show, which started yesterday.
“There is no question the cuts will have an impact,” he added. “How do we mitigate it? We have to go where the money is.” He was speaking at a July 17 daylong briefing organized by the European aerospace giant.
EADS’ main U.S. rival Boeing [BA] has also indicated plans to turn outward in pursuit of overseas opportunities as domestic defense spending is expect to slow. The company aims to increase its revenue from international sales from 16 percent in 2009 to 25 percent in future years in a “major repositioning,” its leadership has said (Defense Daily, July 8).
Pentagon officials last month unveiled their plan to find more than $100 billion in savings within the Pentagon’s arms-purchasing budget. Defense Secretary Robert Gates has previously warned that the “gusher” of wartime defense spending is being turned off and that the department is “reforming the way it does business” with an eye toward greater efficiency. Gates has said that the goal now is to sustain 2 percent real growth in the department’s spending from year to year.
Europe, by contrast, is expected to drastically reduce its military budgets–some by up to 15 percent through 2012–and continue to decline until at least 2014, Zoller explained.
In contrast to Europe and the United States, Zoller said Brazil, India, Qatar and Saudi Arabia are expected to increase their defense budgets dramatically in the coming years. For example, he said, India’s defense budget grew by about 4 percent this year over last to $32.7 billion, even in a harsh global economic environment. EADS is targeting such countries for sales of products such as its Eurofighter aircraft and Eurocopter rotorcraft, as well as various cyber security and surveillance services.
“These are developing markets, they are huge markets,” Zoller said.
EADS CEO Louis Gallois, speaking at the same event, said the global fiscal crisis is forcing Western aerospace companies to reshape their strategies in terms of labor markets as well. Developing countries are increasingly demanding reciprocity in terms of industrial development assistance–and the jobs that go along with that development–when Western countries seek market share.
“Export competition will become tougher,” Gallois said. “And everybody, including the U.S. companies, will go outside to foreign markets and they will be obliged, by and large, to invest and partner and share technology with the customer countries.”
Zoller also acknowledged that outsourcing labor has become inevitable.
“And once we have industrialization in other countries, it’s quite clear that a lot of labor will be going there,” he said.
“It’s clear that the old concept of exports won’t prevail,” he added. “These nations are asking for their own competence and for the ramp-up of their own industries.”
More and more export contracts include agreements on joint ventures and teaming arrangements with nascent indigenous companies. For example, in Brazil EADS has arranged a joint venture with the construction company Odebrecht, Zoller said.
“They want to participate in the value chain,” he said, “sometimes by as much as fifty percent.”
Gallois also reiterated EADS’ intention to make “reasonable” acquisitions in the U.S. defense sector in the coming years.
Despite the anticipated slowdown in U.S. defense spending, Washington still has by far the largest military budget in the world. The Obama administration has requested $548.9 billion for the Pentagon in fiscal 2011, a number that does not include costs for the wars in Iraq and Afghanistan. The FY ’11 base request is 1.8 percent more than FY ’11. Approximately $400 billion out of the appoximately $700 billion overall budget, which includes war costs, is spent on weapons and services from contractors.
EADS has long been angling for greater market share in the United States. Marwan Lahoud, chief strategy officer for the company, said he is looking “to obtain key technologies” but that he is against “the string of pearls approach” that would entail making many smaller acquisitions.
At the same time, the company is in a fierce contest with Boeing for a contract to build a replacement for the Air Force’s KC-135 aerial refueling tanker fleet.
Last week, the companies filed their latest proposal. EADS is bidding a design based its A330 tanker, and Boeing has put forth a 767-based offer.
Gallois expressed optimism about EADS’ chances.
“I think we have a fair chance to win…because we are fairly treated by the Pentagon,” he said.