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<TITLE>Celsius CEO Lars G. Josefsson's Speech to 1998 NATO Workshop, Vienna, Austria</TITLE>
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<BODY LINK="0000ff" BGPROPERTIES="FIXED" BGCOLOR="ffffff"><BASEFONT SIZE="3">
<P ALIGN="CENTER"><FONT COLOR="000000" SIZE="6" FACE="Palatino">Economic
Implications of European Security: The Future European Defence Industrial
Base </FONT></P>
<P ALIGN="CENTER"><FONT COLOR="000000" SIZE="4" FACE="Palatino">Celsius
Chief Executive Officer Mr. Lars G. Josefsson<A HREF="0_FN0.htm"><SUP></SUP></A></FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">Celsius
Corporation today is the 14th largest European defense company. Our
goal is to grow and to place ourselves among the top 10. This is a
challenging undertaking at a time when most countries are downsizing their
military forces. I am convinced, nevertheless, that we will achieve
our goal. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">To maintain
and improve our competitiveness we must not only accept the changes
occurring throughout the world but also try to influence those changes and
their different prerequisites. This calls for flexibility and
keeping the clock from being turned back. We should see changes not
as a threat but as a challenge full of possibilities. Industries
must prove their viability in times of turmoil, a fact that is the essence
of a free market. </FONT> </P>
<P ALIGN="CENTER"><FONT COLOR="000000" SIZE="3" FACE="Palatino"><B>EU
STRATEGY</B> </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">In the 1997
EU document “Realization of the Union’s Strategy for the Defense
Industry,” the European Commission states that it is urgent to push
for a European defense industry strategy so that we can keep and improve
the levels of competition and competence. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">But how?
That question is <I>not</I> answered. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">The
Commission report does say, though, that “ … about 70 percent of
the selling of defense material comes from space and electronic
industries.” However, much of the value added behind the
different weapon systems and other defense material comes from small- and
medium-sized companies. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">In the
European debate it has been emphasized that centers of excellence under
the umbrella of a European-wide corporation should be developed. I
do not believe, though, that creating giant corporations covering
everything from missiles and aircraft to electronics is the only way—or
the best way—to meet the challenges from and be on a par with the
United States. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">It should be
stressed that there are many governments that are reluctant to buy from
foreign companies or to harmonize their procurements. In addition,
where defense companies are in the public sector, it can be difficult to
create a cross-border merged company that will be financially attractive
to private shareholders. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">We also have
to recognize that there are European defense companies, of which Celsius
Corp. is one, that currently have substantial business interests in and
trade with the U.S. Some of these companies may not always share the
enthusiasm for future large-scale European rationalization, since this
could hamper future prospects for trade and collaboration with the United
States. It is also interesting to study what is happening in the
U.S. After a decade of mergers the government and the Congress have
started to question the industry consolidation that is creating private
monopolies. And yet despite consolidation, as was stated in the <I>Financial
Times</I>, the U.S. defense industry now employs 400,000 more people than
in 1987. </FONT> </P>
<P ALIGN="CENTER"><FONT COLOR="000000" SIZE="3" FACE="Palatino"><B>PROBLEMS
OF THE EUROPEAN DEFENSE INDUSTRY</B> </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">It is the
objective of the European defense industry to offer high-technology,
cost-effective equipment at competitive prices. However the industry
faces a number of problems in that regard: </FONT></P>
<UL>
<LI><FONT COLOR="000000" SIZE="3" FACE="Palatino">There is
over-capacity. </FONT></LI>
<LI><FONT COLOR="000000" SIZE="3" FACE="Palatino">The industry is
nationally protected. </FONT></LI>
<LI><FONT COLOR="000000" SIZE="3" FACE="Palatino">Cost effectiveness has
second priority. </FONT></LI>
<LI><FONT COLOR="000000" SIZE="3" FACE="Palatino">We are too occupied
with looking at the U.S. industry as a threat. </FONT></LI>
<LI><FONT COLOR="000000" SIZE="3" FACE="Palatino">R&D resources are
used inefficiently. </FONT></LI>
</UL>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">In order to
fix these problems, I believe that three key issues must be addressed.
First, Europe has to decide whether to follow the road of <I>central
planning</I> <I>or</I> <I>market economics</I>. Second, a method
for effective multilateral <I>R&D/Product Development</I> must be
established. Third, the process of creating true <I>cross-border
companies</I> must be accelerated. </FONT> </P>
<P ALIGN="CENTER"><FONT COLOR="000000" SIZE="3" FACE="Palatino"><B>CENTRAL
PLANNING VERSUS MARKET ECONOMICS</B> </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">I do not
think that a centrally planned defense industry is the way to maintain and
develop a modern, efficient, and competitive industry in Europe. I
am afraid such a solution would be counterproductive and widen the gap
between the American and the European defense industries. Centrally
planned industries have never been able to compete. They have never
proved to be efficient and I do not believe that the formation of a
European Armaments Agency would be an effective way to manage common
activities. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">I am
concerned that various representatives in Europe believe that the solution
is a centrally planned defense policy, with only one supplier and one
acquisition agency. I do not believe in such a solution. Historically,
centrally planned economics have proven inefficient, often resulting in
the need for heavy governmental subsidies. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">Furthermore,
the independence of small nations can be at risk if they can choose only
between one U.S. and one European solution. In the U.S., questions
already have been raised regarding the value of large mergers as the
number of competitors decreases and monopolies occur. Europe should
learn from this situation and avoid encouraging European monopolies within
the defense sector. From a small nation’s perspective, this
kind of solution could also reduce the options for cross-border
cooperation, be it in Europe or in the U.S., simply because you must
contribute to be an interesting partner and thereby receive something in
return. Market economics presume that having many customers and many
suppliers is the key element for creating competition and ensuring the
effectiveness of the system. Europe has to find ways of developing
along this route. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">The cost of
defense systems is largely determined when the requirements of the system
and the system design have been set. By determining costs in this
way, Sweden has had striking financial efficiencies (approximately a
factor of 10) in international comparisons in such areas as intelligent
artillery ammunition BONUS and the new heavyweight torpedo Tp 2000.
</FONT> </P>
<P ALIGN="CENTER"><FONT COLOR="000000" SIZE="3" FACE="Palatino"><B>R&D/PRODUCT
DEVELOPMENT</B> </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">This area is
the key to developing the competence needed for the future. As
warfare heads quickly in the direction of the intelligent battlefield,
future security clearly requires more investment in such development.
I believe the U.S. currently outspends Europe three to four times
over when it comes to R&D/Product Development. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">Sweden
believes that to engage in technological cooperation a country must have a
high level of national competence and technological know-how. Only
countries and companies with such competence and know-how will find
qualified partners. In other words, it is an absolute prerequisite
to be strong at home if you want to collaborate in the field of
technology. In this regard, Sweden has been not only a recipient of
technology in the defense sector but also a contributor to it. A
conscious national investment in technological competence can lay the
foundation for future strategic alliances. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">To me, R&D/Product
Development has great potential to increase European efficiency. European
investment in this area should preferably be made multilaterally, avoiding
duplication where possible, and should be based on the principle of
national sovereignty. I also think that national investment in this
area should be made in—or flow back to—the particular country.
This is important not only from the point of national security, but
also for the development of the national high-tech industry base. To
encourage initiatives and create a spirit of competition on the customer
side, I think it is also important that countries that undertake a
specific initiative be given the lead role in the execution of joint
projects. This will minimize the need for large central agencies in
Europe. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino"> </FONT></P>
<P ALIGN="CENTER"><FONT COLOR="000000" SIZE="3" FACE="Palatino"><B>CROSS-BORDER
COMPANIES</B> </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">A
market-driven focus on multilateral R&D/Product Development will
inevitably lead to a more integrated European defense industry structure.
Such a structure is the basis for cross-border companies, as
complementary skills surface and in-depth knowledge between cooperating
industries increases. Cross-border companies are needed in order to
eliminate the present overcapacity and to maintain competitiveness. But
the process of cross-border consolidation is very slow. In my view
this is a result of the game of dominance played by both governments and
companies. To me the question of central planning versus market
economics has to be clearly answered before the process can be speeded up.
</FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">However,
there have been some recent successes, one of which is the announcement of
an agreement among Celsius, Raufoss of Norway, and Patria of Finland to
create a joint ammunitions company. This company will be one of the
largest European companies in the field of small- and medium-caliber
ammunition. </FONT> </P>
<P ALIGN="CENTER"><FONT COLOR="000000" SIZE="3" FACE="Palatino"><B>CONCLUDING
REMARKS</B> </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">Speaking
from Celsius’s point of view, I believe that in order to have a
viable defense industry capability in Europe you have to have at least a
few competent industries within each sector, perhaps with the exception of
advanced aircraft. Competition is a prerequisite for maintaining a
technological edge. We should therefore welcome competition from the
U.S. that focuses on future developments in and production of defense
equipment. I have proposed that the Nordic countries reserve 1% of
their defense budgets for multilateral Nordic R&D/Product Development
projects in order to stimulate defense industry cooperation as well as
increase the efficient use of respective budgets. Such action will
be possible if governments are prepared to invest jointly, give initiating
nations the lead role as well as a commitment that a fair return will be
given on the R&D money they invest, and support the national defense
and industrial capability. I am happy to say that the Swedish
Defense Commission this spring emphasized that a viable European defense
industry is essential for cooperation with the U.S. and to assure European
freedom of action. </FONT></P>
<P ALIGN="LEFT"><FONT COLOR="000000" SIZE="3" FACE="Palatino">To conclude
I want to state that Celsius intends to stay in business as one of Europe’s
leading defense industries. We look forward not only to competition
but also to cooperation with governments and defense industries in Europe
and in other parts of the world. </FONT></P>
<P ALIGN="LEFT"><A HREF="josefsson98.htm">Go to Top of Page</A></P>
<P ALIGN="LEFT"><A HREF="workshop98.htm">Return to Vienna '98</A></P>
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<P ALIGN="LEFT">Copyright © 1998 Center for Strategic Decision
Research</P>
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