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<TITLE>John P. Weston</TITLE>
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<CENTER><FONT FACE="Palatino"><FONT COLOR="#000000"><FONT SIZE="+3">Future
European Security Arrangements and</FONT></FONT></FONT></CENTER>
<CENTER><FONT FACE="Palatino"><FONT COLOR="#000000"><FONT SIZE="+3">Their
Economic Implications</FONT></FONT></FONT></CENTER>
<CENTER><FONT FACE="Palatino"><FONT COLOR="#000000"><FONT SIZE="+2">British
Aerospace Group Managing Director Mr. John P. Weston</FONT></FONT></FONT></CENTER>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">With the end of the Cold
War and the new era that followed, it would have been logical to expect
that NATO would no longer have a significant role in securing Western
Europe's peace and prosperity, and that the European Union would receive a
strong boost from potential new members, swelling its free market
population by 250 million new consumers.</FONT></FONT> </P>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">These expectations,
however, have not been fulfilled. The Partnership for Peace program and
the desire of Central European countries to use it as a path to membership
in NATO, together with the real threats to the security of the region that
have surfaced in Bosnia and Albania, have resulted in a world where few
responsible commentators would question the continuing need for NATO and
the relevance of the enlargement program. At the same time, the unity of
purpose that once drove the European Union appears to be increasingly
under threat. I for one am very confused as to whether EU's main vision is
a deepening of the economic and political ties among a core minority of
the member-countries, moving in the foreseeable future towards both
monetary and political union, or whether the vision is expansion of a
free, single market to encompass 24 European nations. When I ask senior
politicians which of these goals is the higher priority, I am told that
they are equally high. We must accomplish both simultaneously, which to me
seems very difficult, particularly since they have two very different
objectives.</FONT></FONT> </P>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">Despite these issues with
the European Union, both NATO and EU stand at an exciting point in their
development. NATO is likely to decide to admit Poland, Hungary, and the
Czech Republic, and all three of these countries wish to join the European
Union, probably by 2002. The addition of these countries, and others to
come, will make a significant difference to both institutions.</FONT></FONT>
</P>
<CENTER>
<H4><B><FONT FACE="Palatino"><FONT COLOR="#000000">ECONOMIC AND
POLITICAL CHANGES IN EUROPE</FONT></FONT></B></H4></CENTER>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">Within the European Union,
the dramatic development of the economies of Poland, Hungary, and the
Czech Republic, plus the embracing of Anglo-Saxon free-market principles,
will, I believe, result in new perspectives. The addition of these
countries will emphasize the difference between the disciples of
deregulation, free-market economies, and open trade and those European
nations that prefer a more protectionist approach. This new division
within the European Union will fall broadly on a North/South axis and
will, I believe, place new strain on the Franco-German axis as Germany
increasingly concentrates on the economic opportunities offered by the
high-growth, low-wage economies that already receive significant German
investment.</FONT></FONT> </P>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">In addition to new
economic divisions, we are also seeing significant political shifts within
Europe. We have seen right-wing governments in the UK and France fall to
substantial socialist majorities. And with the difficult unemployment
climate that now exists in Europe and the sacrifices that remain to be
made to meet the Maastricht criteria, there may be important messages for
the German government in their fall 1997 elections--particularly if
further significant belt-tightening measures are required to enable the
German economy to meet the Maastricht convergence criteria.</FONT></FONT>
</P>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">The more the criteria must
be flexed to allow French and German membership in EU, the more Southern
Mediterranean countries will be able to join. And the more Southern
European countries that are included, the less support there will be in
Germany for abandoning a strong Deutschmark, which underpins personal
savings and pensions, in favor of a weaker Euro, which may be better for
trade but seems remarkably unattractive to a German population with an
inbuilt fear of inflation and fierce pride in their strong currency. Such
an unenviable vicious circle must be giving Chancellor Kohl much food for
thought, though no one can doubt his determination to introduce the
European Monetary Union on time.</FONT></FONT> </P>
<CENTER>
<H4><B><FONT FACE="Palatino"><FONT COLOR="#000000">The New Labour
Administration</FONT></FONT></B></H4></CENTER>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">The UK's new Labour
administration will appear to many fellow European governments as a more
center or center-right administration than the average socialist
government, and I have been encouraged by the start of its new term in
office. All actions taken so far have been much in accordance with the
promises made during the election campaign. Particularly encouraging has
been the approach to economic policy and to business, including the
decision to allow the directors of the company running the National
Lottery to collect their bonuses! This decision was especially remarkable
as it involved reversing a position initially taken by the Minister
responsible for the lottery. The message that the Labour government wishes
to maintain its image as a party that recognizes the importance of a
thriving and motivated business community, and that this outlook took
priority over a more conventional socialist approach to the issue, is
important.</FONT></FONT> </P>
<CENTER>
<H4><B><FONT FACE="Palatino"><FONT COLOR="#000000">The New French
Government</FONT></FONT></B></H4></CENTER>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">Less clear is the impact
that the new French government will have, an impact that is particularly
important to the European defense and aerospace industry. Since 1993 we
have seen our American competitors grow through mergers to around three
times the size they were previously. By the end of 1997 we will see the
American defense and aerospace industry essentially dominated by three
companies.</FONT></FONT> </P>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">What lessons should
European industry draw from all of this? Clearly, European companies will
not remain competitive unless they rise to the challenge presented from
across the Atlantic. In 1994 or '95 there was little consensus in Europe
on what needed to be done, but since then I believe the need to create a
transnational European industry has been recognized by both industrialists
and governments. We must consolidate the aerospace and defense businesses
within Europe by forming an international business, with the industries of
France, Germany, and the UK at its core.</FONT></FONT> </P>
<CENTER><B><FONT FACE="Palatino"><FONT COLOR="#000000"> </FONT></FONT></B></CENTER>
<CENTER><B><FONT FACE="Palatino"><FONT COLOR="#000000">A EUROPEAN
DEFENSE COMPANY TO COMPETE</FONT></FONT></B></CENTER>
<CENTER><B><FONT FACE="Palatino"><FONT COLOR="#000000">IN THE GLOBAL
MARKETPLACE</FONT></FONT></B></CENTER>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">An essential element of
this international company would be a shareholder base spread over a range
of private investors in the countries within which it operates. The
businesses making up this company must be privatized before being put
together. The current French government's policy toward the privatization
of both Thomson and Aerospatiale is crucial to this process if France is
to play a significant role.</FONT></FONT> </P>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">The average U.S. company
in our sector has grown by 300% during the last few years. U.S. aerospace
companies will have sales volumes of between $30 and $40 billion per year,
compared to the largest European aerospace companies, such as British
Aerospace and DASA, with sales of between $12 and $15 billion per year.
The U.S. budget of around $270 billion now supports around one third the
number of defense contractors found in the United Kingdom, Germany,
France, Sweden, Italy, and Spain. These countries, which are home to the
bulk of European defense business, have a combined defense budget of $125
billion. In short, we are trying to support three times the number of
contractors on less than half the budget. In addition, in the U.S. there
is only one customer with one set of requirements; in Europe there are
many. Demand as well as supply is divided into too many parts.</FONT></FONT>
</P>
<CENTER>
<H4><B><FONT FACE="Palatino"><FONT COLOR="#000000">Elements of the
Proposed Company</FONT></FONT></B></H4></CENTER>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">A restructured European
aerospace industry should include the merged and privatized Aerospatiale
and Dassault Aviation, Daimler-Benz Aerospace, and British Aerospace. The
industries of Italy, Spain, and Sweden must also be viewed as essential
partners, although an entity that includes them can be constructed only on
a step-by-step basis, not in one "big bang." The resulting
European company should be owned directly by a distributed international
shareholder base. The existing companies would disappear. Simply put, the
private shareholders in each of the three initial merging companies would
exchange their shares for shares in the European company at agreed-upon
parities.</FONT></FONT> </P>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">I recognize, however, that
loss of national control in a restructured aerospace industry will be
universally acceptable only if there are barriers to the assumption of
control by other parties. To ensure this, I propose that the Articles of
the European company would forbid any one shareholder from holding more
than a certain percentage, say in the range of 8% to 15%. The shareholders
would also be forbidden by company statute from acting in concert.
Government influence might be focused on golden shares but with limited
rights, perhaps exercisable only in situations where a national emergency
has been declared or where specific national security interests are
involved.</FONT></FONT> </P>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">The European company I
speak of will own all the assets, intellectual property, and other
resources necessary for business. It must also be under a single and
unified management. Like any good business, it will have to be responsive
to its customers, and will remain highly dependent on governments for
investment and contracts; the democratic process will therefore continue
to play a determining role in the way the business is run. Governments
will rightly expect a return on their investments in terms of employment,
their national technology base, and returns from export sales. In bidding
for contracts it will be the job of the company's unified management to
respond to these requirements and to distribute work in a way that is both
equitable and industrially rational. We must get away from the kind of
intergovernmental <I>juste retour </I>arrangements that have hampered
collaborative programs in the past.</FONT></FONT> </P>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">Satisfaction of these
requirements will require that the company preserve national identities:
it will need to be perceived to a large extent as German in Germany,
French in France, British in the UK, and so on, much as Airbus is today.
Headquarters in each participating country's capital and directors drawn
from the three nations would symbolize this identification, but would also
ensure that each government had a national focal point for dialogue with
the company. The various national authorities would also assume
responsibility for ensuring compliance with security and export control
regulations.</FONT></FONT> </P>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">The company will also have
to retain major national production facilities in each country to preserve
and, where possible, generate employment. In addition it will need to have
centers of excellence in each country, such as research offices and test
centers, to preserve each national industrial and technological fabric and
to secure genuine interdependency among the nations to meet their military
requirements.</FONT></FONT> </P>
<CENTER>
<H4><B><FONT FACE="Palatino"><FONT COLOR="#000000">Partnership
Possibilities</FONT></FONT></B></H4></CENTER>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">A European defense company
could play a significant role in integrating into the European network of
collaborative programs the defense and aerospace industries of the Central
European countries that enter NATO and the European Union. This assistance
would help these countries develop and maintain the key systems design and
engineering skills necessary for real capability in our industry, and help
with some of the major equipment decisions that these governments will be
making over the next few years. The initial partnerships and the economic
offset activities that such purchases generate will be very important in
setting future partnership patterns for their industries. As we know,
there is a big difference between a partnership whose members are given
full access to the technology involved in a certain system as well as the
ability to modify and further develop the system as requirements change,
and an off-the-shelf purchase of an offset program that delivers
build-to-print work to the factory floor but does nothing for the
engineering skills and resources necessary to sustain the business.</FONT></FONT>
</P>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">Finally, I wish to make
the point that European consolidation and restructuring are not directed
against the U.S. We are not creating a "fortress Europe" to
compete with "fortress America." We Europeans must maintain and
develop our transatlantic links. But to be a satisfactory partner for
American companies we need to achieve something on their scale. We also
must remember that the process of globalization is beginning to draw in
Asian partners, and to contribute to global partnerships we must first
reorganize and restructure.</FONT></FONT> </P>
<CENTER>
<H4><B><FONT FACE="Palatino"><FONT COLOR="#000000">THE FUTURE OF THE
EUROPEAN AEROSPACE INDUSTRY</FONT></FONT></B></H4></CENTER>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">The future of the
aerospace and defense business is a global one. By the end of 1997, the
U.S. aerospace industry will be dominated by three companies, and in 10 to
15 years' time the global aerospace industry will also be dominated by
just two or three big players. We at British Aerospace see the first step
along this path as the formation of the European entity that I just
described. This step would be followed by a transatlantic link, when the
U.S. industry and government are ready to see such a relationship put in
place. The time it will take to reach this point will be longer than it
would be for a consumer business, but it will still be short compared with
the development time and product life cycles of our major defense systems.
We need to start planning for the structural changes now.</FONT></FONT>
</P>
<P><FONT FACE="Palatino"><FONT COLOR="#000000">The successful
introduction of the more streamlined supply industry we envision should
have important economic consequences for all of our customers. We will be
able to supply them more efficiently, spread the development load for the
crucial technology base over a wider range of government contributors, and
counter the effects of further budget squeezes. While the work will be a
challenge that will require the support of the government community, the
benefits will certainly be worth the effort.</FONT></FONT> </P>
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