Eager for access, arms companies reach across Atlantic

By Noah Barkin

PARIS (Reuters): Earlier this year, a senior European defense official took Norman Ray aside and explained to him the bitter truth of Europe's new approach to buying weapons ahead of a hotly contested purchase.

"I will certify that the system you Americans are offering will perform better, be delivered sooner and cost less at a lower risk than ours," Ray, the president of U.S. defense giant Raytheon's European operations, recalls the official telling him.

"But we Europeans are prepared to pay more to get less at higher risk and at a later date if it keeps our technology gap with the United States from widening."

In the wake of the Kosovo conflict, much attention has focused on Europe's plans for a rapid reaction force independent of NATO and the implications of this decision for trans-Atlantic ties.

But a parallel and equally significant outcome of the war has been a forceful pan-European drive, after years of heavy reliance on U.S. built military systems, to develop and build its own weapons -- whatever the cost.

In the same way as Europe's plans for its own fighting force have sparked concerns from the United States, this new drive has prompted warnings from the Pentagon about the emergence of a "Fortress Europe" mentality.

In some quarters, the will to "buy European" has been called counter-productive to the goal of deeper trans-Atlantic ties.

But officials and industry experts say Europe's newfound independence and assertiveness in the procurement arena may actually be creating the level playing field needed to foster closer cooperation between U.S. and European firms.

And while trans-Atlantic defense mega-mergers are still believed to be years away, the new balanced environment is supporting the closer, smaller-scale ties that will lay the groundwork for such mergers.

"For a long period the Americans were buying almost nothing from Europe and the Europeans were buying a lot from America," said Jean-Louis Gergorin, head of strategy for European aerospace giant EADS.

"Since the Europeans started buying less from America a more balanced situation has emerged where there is a mutual interest for trans-Atlantic partnerships."

Europe's collective effort to boost its home-grown industry, which has been given further impetus by the European defense industry's far-reaching consolidation over the past 18 months, was evident in several high profile arms purchase decisions over the summer.

In July, seven European nations pledged to purchase as yet undeveloped military transport planes from Toulouse-based planemaking consortium Airbus Industrie over existing aircraft built by U.S. industry leaders Lockheed Martin and Boeing Co.

Two months earlier, the British government elected to buy untested Meteor air-to-air missiles from Matra BAE Dynamics, a joint venture of EADS and Britain's BAE Systems, in preference to a derivative of Raytheon's proven AMRAAM missile.

While U.S. firms are encountering new resistance to their wares in Europe, European firms are trying to break down the borders which have prevented them from penetrating the U.S. market on their own.

This mutual interest in doing business on each other's turf is fueling everything from joint bids for key contracts to project- specific joint ventures.

In the British missile decision, Boeing teamed up with European bidders Matra BAE against Raytheon in a bid to gain a share of the contract.

More recently, on the other side of the Atlantic, EADS linked up with U.S.-based L3 Communications in bidding for Lockheed Martin's Aerospace Electronics Systems activities -- a business that ended up going to BAE Systems.

French defense electronics firm Thomson-CSF is working to expand its already strong relationship with Raytheon and EADS is talking to Northrop Grumman and Lockheed about partnerships in radar and space, respectively.

"I do expect a lot more teaming arrangements and that will be a two-way process," said Alexandra Ashbourne, a defense analyst at the Center for European Reform in London.

"In the case of Meteor it was very good for the Americans and for the Europeans these arrangements are a way of getting a better foothold in the United States."

With budgets at home under pressure, European firms are pushing harder to establish ties with the United States, which, at close to US$300 billion annually, spends far more on defense than any other country in the world.

Currently, the Pentagon procures only about 3 percent of its military equipment from foreign suppliers.

Strict U.S. limitations on the transfer of sensitive technologies have made it virtually impossible for European firms to do business there in the past.

Government and industry officials on both sides of the Atlantic say they are viewing BAE's acquisition of the Lockheed Martin electronics activities as a litmus test.

If the $1.67 billion acquisition gets the green light from the Department of Justice, it will represent the largest purchase of U.S. defense activities by a foreign company ever.

The acquisition would bring the UK company's U.S.-based revenues to $4 billion and its number of employees there to 25,000 -- more than its staff in all of Europe outside the UK.

Even if the BAE Systems purchase does get the go-ahead, some companies in Europe still fear access will only be granted to firms in countries that have long-standing, cosy political ties with the United States.

The U.S. government itself has said that Britain, Canada and Australia will enjoy privileged status in the defense arena.

The key question is whether this environment will evolve over time. If American companies want to do more business in Europe, experts say, then it will have to.

"I believe stronger bilateral relations between the United States and the UK will inevitably lead to better relations for the continental European companies," said Francois Heisbourg, head of the Geneva Center for Security Policy and a former top French defense industry executive.