Discussion Paper 1: European Defence RTD in Context

Authors: Andrew D. James and Philip Gummett

The aim of Discussion Paper 1 is to provide an overview of the major actors in defence RTD affairs at the European level; and to indicate some of the key political, industrial, technological and military issues which are shaping events. Thus, the emphasis in Discussion Paper 1 is on the European level of analysis and it does not discuss national systems, since these are referred to in Discussion Paper 2 and are to be developed in detail in later phases of the project.

Discussion Paper 1 is set against the context of the profound structural, commercial and technological changes that have affected the defence industry in Europe and the US during the 1990s. In particular, it notes that consolidation, rationalisation and capacity reductions amongst large defence contractors have had a profound impact on direct employment and severe knock-on effects for defence-related suppliers. As a consequence, between 1989 and 1996, defence industry employment in those countries that today constitute the European Union fell by more than 450,000 (a decline of more than one-third). However, as James et al (1998) argue in a recent study for the European Commission, major changes are still to come and the European defence-related industries are currently in the calm before the storm.

A great deal is resting on the effectiveness of the European response to these changes. Thus, Discussion Paper 1 emphasises that the scientific, technological and industrial base of western Europe, like that of the United States, has depended significantly upon substantial investments in the defence sector. Thus, various sources have estimated that more than half of European RTD expenditure is accounted for by defence-related activities. Clearly, changes in the scale and nature of defence RTD has implications for scientific and technological activity in Europe. The Discussion Paper also notes the considerable differences between the defence RTD expenditures of individual European Member States and the United States of America. Emphasising the disparity, it notes that the scale of the western European arms market as a whole is only about half that of the United States, while the turnover of the US defence contractor Lockheed Martin company is roughly equal to the combined annual military equipment expenditure of the UK and France. Indeed, it is the size of the leading US defence contractors that has finally forced European governments into serious consideration of trans-European defence industry restructuring.

Discussion Paper 1 also notes the changing technological environment in which military RTD is now conducted. The end of the Cold War altered many of the long-established relationships in the military-industrial networks. In particular, in most countries budgets for military R&D; have fallen along with total military spending, affecting both government and industrial laboratories. Nevertheless, the paper notes that it is important to stress that in many countries high technology weapons remain central to military doctrine, and military R&D; is still a large and important component of government spending for R&D;, one that would command our attention on size alone. Recent changes in long-term prospects for military R&D; and in R&D-performing; institutions raise other important issues for government policy. Indeed, it is not clear whether traditional means of governance for R&D; are adequate to the new challenges.

At the same time, the importance of the changing relations between technologies of defence and civil origin is emphasised and in particular the emergence of dual-use as a new paradigm for thinking about defence-related technology. For most of this century, it has been accepted that in all important defence-related areas, technology of defence-origin has led, indeed has driven, that of the civil sector. Increasingly, however, dual-use technologies are recognised as having important implications for policies on defence technology and procurement, the technology strategies of large defence companies and the view taken of the implications of national economic competitiveness for national security (Alic et al, 1992; Andrews, 1995; Cowan and Foray, 1995).

With regard to the defence industry, Discussion Paper 1 compares the pattern of restructuring in the United States and Europe. The United States has seen a rapid consolidation of its defence industry in recent years associated at the prime contractor level with a series of so-called "mega-mergers". The Paper notes that, although Europe's defence companies have already engaged in significant restructuring both within and across borders, the restructuring process in Europe has been slower than in the US, both as regards rationalisation of production capacity and consolidation of the defence industry, although there are important national variations (Gummett and Stein, 1997; Skons and Cooper, 1997; Wulf, 1993; Sandström and Wilén, 1993; Brzoska and Lock, 1992; Hébert, 1991). European firms have encountered important barriers to trans-European mergers, acquisitions and joint ventures. These barriers have included state ownership of some of Europe's largest companies, varying corporate la ws and significant differences in production costs between national defence industries and defence contractors. At the same time, despite growing political efforts in the direction of integration through the establishment of the four-country Joint Organisation for Armaments Co-operation (OCCAR), defence continues to be viewed as a sector of strategic significance by national governments who therefore actively scrutinise foreign interventions (Commission of the European Communities, 1997; Gummett and Stein, 1997; Lewis and Starr, 1997).

What has emerged from this restructuring process is a defence industry where a fragmented European industry faces a number of very large US companies which can achieve competitive advantage from economies of scale and scope with regards to production and the development of technology. Notwithstanding the barriers to integration at the European level, the threat posed by the US defence industry is increasingly driving European companies to seek to consolidate. Discussion Paper 1 considers the December 1997 joint statement by the governments of the UK, France and Germany, asking their countries' aerospace and defence industries to draw up plans for restructuring and the prospects for the European defence industry.

The remainder of Discussion Paper 1 discusses the political context in which European RTD activities take place and describes the policy measures and actors at the European level which are relevant to the subject of the report. Discussion Paper 1 notes that measures have been implemented under the auspices of the European Community, European Parliament, the EUREKA programme and the Western European Union as well as through business-led initiatives.