In March 2005, one of the world’s largest defense conglomerates, UK-based
BAE Systems, paid roughly $4 billion for United Defense Industries, a U.S.
company that manufactures a host of weapons, including the Bradley Fighting
Vehicle. Although alliances among defense manufacturers and subcontractors are
nothing new, this merger was unique: The strategic union of these two companies
created the first truly transatlantic defense firm. As the forces of
globalization bear down on an industry that has historically been constrained by
domestic political considerations, this merger will surely not be the last of
its kind.
 | THE BRADLEY Fighting Vehicle is one of the weapons systems made by United
Defense Industries, acquired by UK-based BAE Systems in 2005. |
In fact, with the trend toward consolidation of large, established
defense firms inside Europe and the United States nearing an end, aerospace and
arms anufacturers in both markets are looking to forge alliances, or even to
merge with firms across the Atlantic, in order to grow. The potential to each
side is clear: A burgeoning U.S. defense budget provides unrivaled opportunity
for European firms to expand beyond their traditional customer bases and tap
opportunities stemming from the needs of coalition warfare. Similarly, U.S.
firms seek customers and partners abroad to limit their exposure to future
fluctuations in the federal defense budget.
While politics in both the
United States and Europe will continue to be an obstacle to global
consolidation, the defense industry has already begun to forge successful
multinational alliances that will serve as a new model for success. For
example, U.S. aerospace giant Lockheed Martin and Anglo-Italian helicopter
manufacturer AgustaWestland currently partner in specific markets.
Massachusetts-based Raytheon has a similar agreement with the French defense
conglomerate Thales Group. Such alliances will only grow—in fact they must.
Companies that alienate themselves from transatlantic partnerships run the risk
of losing international market access. Worse, they will be forced to compete
against the combined resources of U.S.-European partnerships. From the Halls
of Montezuma
To understand the forces relentlessly driving defense firms to
seek even the slightest global competitive advantage, one must look no further
than the financial stakes at hand. Each year, the nations of the world
collectively spend an estimated $1.1 trillion on defense; the U.S. government
accounts for almost half that amount. According to government statistics, U.S.
firms sold $11.6 billion worth of arms to other countries in 2005. The United
Kingdom ranked second, delivering $3.1 billion, and Russia third, with $2.8
billion.
Traditionally, defense firms in Europe and the United States
penetrated new markets and captured market share primarily through direct sales,
which were often limited to opportunities where domestic industrial base
concerns were minimal. If, for example, a U.S. firm manufactured a type of
armament that a foreign country could not produce itself, decision makers in
that country could purchase the armament without a domestic political backlash.
When possible, defense companies also penetrated new markets through tactical
acquisitions and limited global alliances. European defense firms achieved early
success in accessing U.S. markets through joint ventures, alliances and
partnerships with U.S. businesses, particularly on a subcontractor level. To no one’s surprise,
the business of defense often centers more on
politics than on free-market principles. |
U.S. companies have recently shown interest in awarding even more
subcontracting work to European firms in exchange for international market
access. Driven by the demands of coalition warfare and growing interest in the
international marketplace, Washington has shown a certain willingness to grant
foreign companies a more active, yet still limited, role in military programs,
especially when teamed with U.S. industry.
|
