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<TITLE>2001Book - Final</TITLE>
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<P ALIGN="CENTER"><FONT COLOR="#1f1a17" SIZE="2" FACE="Palatino"> <I></I></FONT></P>
<HR SIZE="2"><P ALIGN="CENTER"><FONT COLOR="#1f1a17" SIZE="7" FACE="Palatino">
Chapter 22
</FONT></P><HR SIZE="2">
<P ALIGN="CENTER"><FONT COLOR="#1f1a17" SIZE="5" FACE="Palatino">
The Need for Euro-Atlantic Interoperability <BR>
And Investment
</FONT></P>
<P ALIGN="CENTER"><FONT COLOR="#1f1a17" SIZE="3" FACE="Palatino"> Mr. William
O. Schmieder<br>
Vice President, General Dynamics</FONT></P>
<P ALIGN="CENTER"><FONT COLOR="#1f1a17" SIZE="3" FACE="Palatino"><B>INTRODUCTORY
REMARKS</B> </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="#1f1a17" SIZE="2" FACE="Palatino">
<FONT COLOR="#000000" FACE="Palatino" SIZE="7">T</FONT>ransatlantic cooperation is, and will remain, an important focus for each
U.S. and European company represented here. The profound restructuring
underway on both sides of the Atlantic is creating within the defense industrial
base a new level of maturity. The model of a national industry that operates
within protected domestic markets and is sustained by government largesse
is defunct. We need a new model, based on a defense sector that is efficient,
commercially viable, and able to compete for funds in the capital market
if we are to achieve greater value for our customers and shareholders.
</FONT></P>
<P ALIGN="LEFT"><FONT COLOR="#1f1a17" SIZE="2" FACE="Palatino">
The Kosovo campaign was a reminder of the negative impact on coalition
operations that results from a lack of interoperability. Although the problem
was magnified by the decline in defense investment and by structural inefficiencies
in Europe’s defense sector, regulatory obstacles to the transfer of technology
from the U.S. to its Allies were also a factor. The Defense Trade Security
Initiative created in 2000 by the U.S. government seeks to create a de
facto transatlantic defense community in which technology can be transferred
with few impediments. Although implementation is just beginning, the policy
appears to be supported by the Bush administration. But two-way transatlantic
investment is crucial to complete this initiative.
</FONT></P>
<P ALIGN="CENTER"><FONT COLOR="#1f1a17" SIZE="3" FACE="Palatino">
<B></B><B>THE GENERAL DYNAMICS SANTA BARBARA TRANSACTION</B><FONT COLOR="#1f1a17" FACE="Times New Roman" SIZE="3"></FONT><FONT COLOR="#1f1a17" FACE="Times New Roman" SIZE="3"><B></B></FONT>
</FONT></P>
<P ALIGN="LEFT"><FONT COLOR="#1f1a17" SIZE="2" FACE="Palatino">
I would like to take this opportunity to share with you General Dynamics’
experience as a foreign investor in Europe’s defense sector. As is the
case with virtually every other industrial and service sector in the global
economy, the defense sector can no longer afford the luxury of serving
only national markets. The transatlantic alliance must ultimately be served
by a transatlantic industry. While leading European firms have recognized
this fact and successfully invested in the U.S. defense market, the U.S.
has not made significant investments in Europe’s defense sector.
</FONT></P>
<P ALIGN="LEFT"><FONT COLOR="#1f1a17" SIZE="2" FACE="Palatino">
General Dynamics held its first round of discussions with SEPI, the Spanish
privatization agency, in 1997. The timing for this initiative was critical.
While General Dynamics was seeking opportunities to access the armored-vehicle
markets in Latin America, Europe, and North America, the Spanish armored-vehicle
organization, Santa Barbara Industries (Empresa Nacional Santa Barbara
de Industrias Militares [ENSB]), was seeking privatization. What followed
was a three-year process to develop a business case that satisfied and
mutually supported Spanish government and General Dynamics’ interests.
</FONT></P>
<P>
</P>
<P ALIGN="LEFT"><FONT COLOR="#1f1a17" SIZE="2" FACE="Palatino">
In the background, German industry and the German government took sometimes
extraordinary measures to slow the process and ultimately stop the sale.
The factors that led to the Spanish government’s selection of General Dynamics
to privatize Santa Barbara serve as a metaphor for the environment surrounding
foreign direct investment in Europe’s defense sector. And the process by
which the issue was finally resolved is a useful case study in transatlantic
defense consolidation. The leading German armored-vehicle producer, Krauss-Maffei
Wegman (KWM)/Rheinmetall, shared General Dynamics’ interest in Santa Barbara.
As you may know, Santa Barbara produces the German Leopard 2E main battle
tank under license to Krauss-Maffei. Krauss-Maffei was understandably concerned
about a major competitor purchasing a plant that produces the Leopard 2E.
</FONT></P>
<P ALIGN="LEFT"><FONT COLOR="#1f1a17" SIZE="2" FACE="Palatino">
The Spanish government evaluated Krauss-Maffei’s and General Dynamics’
offers based on the two companies’ respective proposed investment, retention
of the work force, complementary products, market access, and work infusion.
In January 2000, SEPI informed General Dynamics that its offer had been
selected. Negotiations for the sale were concluded the next month and the
contract was signed following the March 2000 Spanish general election.
The signing of the sales contract produced the first of four “transition”
meetings between Santa Barbara and General Dynamics. It also produced the
first clear indications that the transaction had become enmeshed in the
politics surrounding the European consolidation process.
</FONT></P>
<P ALIGN="LEFT"><FONT COLOR="#1f1a17" SIZE="2" FACE="Palatino">
The German government, with encouragement from Krauss-Maffei, applied diplomatic
and industrial pressures in an attempt to overturn the Spanish government’s
decision. Increasing German pressure resulted in a “summit” meeting between
the German Chancellor and his Spanish counterpart in October 2000. While
the German government’s activism did not reverse the Spanish decision,
it did succeed in delaying further action until after the Nice Summit thru
December. Pressure on Spanish authorities to abandon privatization of Santa
Barbara reached a peak following the summit. A subsequent meeting between
Spain’s President Aznar and Chancellor Schroeder in Berlin finally produced
a German government agreement to stop resisting the Santa Barbara transaction.
Two developments important to the final resolution took place in March
2001. The Spanish government awarded the contract to produce a high-speed
train to a German firm, and a Special Technology Protection Agreement was
reached between Santa Barbara and Krauss-Maffei. This agreement established
procedures for protecting Krauss-Maffei’s intellectual property rights
in the Leopard 2E when ownership of Santa Barbara passed to General Dynamics.
All parties are expected to sign the agreements in June 2001, and General
Dynamics’ ownership will be official in July 2001.
</FONT></P>
<P ALIGN="LEFT"><FONT COLOR="#1f1a17" SIZE="2" FACE="Palatino">
However, General Dynamics has not waited for the official transfer of ownership,
but has begun placing work in Santa Barbara’s factories. Today, Santa Barbara
is under contract to produce parts for the M-1 Abrams main battle tank—not
for Spain, but for the U.S. market and other global opportunities. General
Dynamics is also committed to placing additional work in Santa Barbara
facilities to address worldwide requirements for a variety of new programs.
We believe this is a clear sign to Spain and other European governments
that U.S. investment in your industry can lead to greater efficiencies
and broader market access.
</FONT></P>
<P ALIGN="LEFT"><FONT COLOR="#1f1a17" SIZE="2" FACE="Palatino">
If I may, let me offer several observations that we have drawn from our
Santa Barbara experience:
</FONT></P>
<LI><FONT COLOR="#1f1a17" SIZE="2" FACE="Palatino">
Few agree that direct investment in the European defense sector by parties
outside Europe should be evaluated on traditional economic and industrial
criteria.
</FONT></LI>
<LI><FONT COLOR="#1f1a17" SIZE="2" FACE="Palatino">
Not all European governments accept consolidation along transatlantic lines;
some remain convinced that a Euro-centric approach to consolidation is
the only acceptable answer.
</FONT></LI>
<LI><FONT COLOR="#1f1a17" SIZE="2" FACE="Palatino"> Many European decision makers
are conflicted about transatlantic industrial consolidation. Most of Europe’s
leading defense firms seek to achieve global access to critical enabling technologies
by investing in the U.S. market. However, they are reluctant to accept U.S.
investors in the European defense sector. </FONT></LI>
<LI>
<div align="left"><FONT COLOR="#1f1a17" SIZE="2" FACE="Palatino"> The politicizing
of decision making regarding foreign direct investment has been raised to
the head-of-government level. This further complicates a process that should
be driven by commercial, industrial, and technical considerations. </FONT></div>
</LI>
<P ALIGN="CENTER"><FONT COLOR="#1f1a17" SIZE="3" FACE="Palatino">
<B>CONCLUDING REMARKS</B>
</FONT></P>
<P ALIGN="LEFT"><FONT COLOR="#1f1a17" SIZE="2" FACE="Palatino">
In closing, let me say that we expect that our purchase of Santa Barbara
and our investment in European industry will prove successful for both
sides and result in access to markets, capital efficiencies, shared technologies,
and better returns to our customers and shareholders. To expect anything
less suggests returning to a model that no longer reflects the realities
of 21<FONT COLOR="#1f1a17" FACE="Palatino" SIZE="1"><SUP>st</SUP></FONT><FONT COLOR="#1f1a17" FACE="Palatino" SIZE="2">-century market conditions.</FONT>
</FONT></P>
<P ALIGN="LEFT"><FONT COLOR="#1f1a17" SIZE="2" FACE="Palatino"> <BR>
</FONT><FONT COLOR="#1f1a17" SIZE="2" FACE="Palatino"> </FONT></P>
<p> </p>
<p align="CENTER"><a href="workshop2001.htm">Back to 2001 Workshop Index</a></p>
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