By Pierre Tran
Paris – The arms industry and the armed forces ministry are holding talks on how to share the financial risk of building up stocks of weapons, as France moves toward what it calls a war economy after the Russian invasion of Ukraine.
“Who takes on the commercial risk in an industry where the goods cannot be freely sold?” Thales executive chairman Patrice Caine told Oct. 17 the two press clubs Defense Journalists Association and Association of Aerospace Journalists.
“What is the new balance?” he said.
The defense ministry and arms manufacturers are in talks on building up stocks and speeding up production following a June 13 speech by president Emmanuel Macron, with the head of state saying the war in Ukraine meant France and Europe were entering “a war economy” and needed to organize accordingly.
Weapons cannot be freely sold in an open market and are built to government order, Caine said, unlike the civil aviation sector, where Thales can take industrial risk and can pitch its aeronautics systems to aircraft builders such as Airbus, Boeing, Embraer, and Dassault.
The reliance on government orders applied across the rest of Europe and the U.S., he said, with the arms industry a highly specific business, an obvious fact but one which people tend to forget.
There is a long development cycle in building weapons, he said, which was not “compressible,’ although certain shortcuts could be made if there were anticipation with stocks and sub-assemblies held in hand.
European countries have announced plans to increase defense spending due to the war in Ukraine, he said, and that roughly doubled the “visibility” compared to the usual industrial outlook of four or five years.
In a war economy, there is what the client “sees” as a shorter production cycle, and the reality of the industrial process, he said. In that respect, there was a similarity between faster arms procurement and an impulse purchase of a smartphone, which took 12-18 months to develop and build from high technology components.
Who finances the stocks and where the cursor should be are part of the discussions with the armed forces ministry, he said.
The defense minister, Sébastien Lecornu, held Sept. 6 a round table meeting with the chiefs of staff, procurement chief, secretary general of defense and national security, and industry leaders, and set out the aims of adapting to a war economy.
Lecornu laid out four objectives, seeking capability to build more equipment, speed up delivery, and meet budget targets, the ministry said in a statement. The war in Ukraine showed the need to build up stocks of munitions in a “high intensity conflict.”
The top priority was to manage munitions, with the services building up their stock of munitions to allow them to respond to a “major engagement,” the ministry said.
As part of managing munitions, companies were called on to build up stocks of raw material to respond effectively to the ministry’s orders, and companies committed to speeding up production on high priority equipment, the ministry said. There was a study of companies in the defense industrial base to pool their stock.
That pooling of raw material was relatively easy for prime contractors, a defense analyst said, but there was a question for smaller contractors, which needed to find funding. Financing that building up of munitions needed to be addressed.
A speeding up of production could be seen with 155 mm shells being delivered in three months instead of nine, with the Caesar self-propelled artillery built in 24 months instead of 30, and soon to be speeded up to 12, the ministry statement said.
The other targets set by the minister were to simplify operational requirements, cut red tape for arms procurement, and ensure the supply chain was not dependent on foreign companies.
Caine referred to a meeting to be held Oct. 26, when asked about relations with the German industrial partner on the future combat air system (FCAS).
France and Germany are holding a bilateral ministerial summit meeting Oct. 26, seen as a key date in resolving a long standing dispute between Airbus Defence and Space, based in Germany, and Dassault Aviation, headquartered in the suburbs of the French capital.
“Political pressure has moved things along,” the defense analyst said, and there seems to have been movement in that industrial row.
Airbus DS has held off signing a contract, seeking to share a joint prime contractorship with Dassault. The French company has insisted on playing the lead role on the phase 1B to develop and build a technology demonstrator for a next generation fighter at the heart of the FCAS.
France, Germany and Spain back the FCAS project, estimated to be worth some €80 billion ($79 billion). The planned fighter would replace the Rafale and Eurofighter.
A second defense analyst said perhaps there might be an announcement on work on the demonstrator, but that might be a diplomatic gesture, with perhaps the project to be curtailed after the prototype is built.
“Let’s see after phase 1B,” the analyst said. Work on a demonstrator would help Airbus to “master the technology.”
There is much at stake as the concept of European sovereignty underpins the FCAS project, the analyst said, and diplomacy calls for some form of a positive announcement to be made at the summit.
Meanwhile, on the prospect of the U.K. cutting the defense budget, Caine said Thales had to wait and see, and then adapt to spending decisions.
“Let’s wait and see what the British government tells us it wants to do,” he said.
Both the candidates who campaigned for leadership of the political party spoke of spending up to three percent, he said, and in view of the state of the British economy, it was hard to say what would happen next.
The company would adapt to what the government decided, while explaining the consequences, he said.
Defense minister Ben Wallace and one of his deputies, armed forces minister James Heappey, are reported Oct. 18 to have indicated to be ready to resign if prime minister Liz Truss failed to observe a pledge to boost annual defense spending to three percent from two percent of gross domestic product by 2030, worth an estimated £100 billion ($113 billion) a year.
Truss last month won the votes of members of the Conservative party and gained her appointment as prime minister, beating her competitor, Rishi Sunak, who was previously chancellor of the exchequer, or finance minister.
Truss is under severe political pressure following her appointment of Jeremy Hunt as chancellor. Hunt has said he would ask all government ministries to cut spending, after his cancelling deeply unpopular tax cuts announced by his predecessor, Kwasi Kwarteng, who lost public and political favor due to his mini-budget.
Truss summarily fired Kwarteng last week because of financial crises sparked by his mini-budget, which proposed those tax cuts for the wealthy.
The Thales U.K. unit builds weapons including the Starstreak short range missile and Lightweight Multirole Missile, dubbed the Martlet, reported to have been shipped to Ukrainian forces. The British market is a major contributor to the company’s balance sheet, with total sales of €17 billion ($17 billion) expected for this year.
Featured Photo: 24th March 2022. Emmanuel Macron, President of France during press conference, after NATO Extraordinary Summit. Brussels, Belgium