Dr. Peter Lock
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letzte Änderung:03.01.2011
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Germany: the benefit of late-coming

A case study of the evolution of the defence industry, the role military technological innovation and changes in procurement
CREDIT / METDAC Discussion paper

This text was prepared under the European Commission's Targeted Socio-Economic Research Programme, TSER PC Project 1272, Contract SOE1-CT97-107

A web of ever increasing institutional networks supposedly designed to finally bring about a rationalisation of military procurement at different levels, national, bi-lateral, multilateral, at the WEU, EU and NATO levels, seems to constitute one of the most efficient barriers hindering any reasonable progress in the process of the urgent rationalisation of military production in Europe. The political rhetoric in favour of standardisation and co-operation starting with the two-way street across the Atlantic proposed in the mid-seventies had little, if any impact on military procurement among the NATO members. The paltry status of the interoperability and standardisation of military equipment among the armed forces in Europe or within NATO after decades of declared intentions testifies to the resilience of entrenched interests at national levels. Particularly when benchmarking the transnational rationalisation and integration of production in most sectors of civilian production with the status of the arms industry, it becomes immediately apparent that arms manufacturing continues to be shielded from international competition by national political interference which has long since been eliminated in most other sectors of the economy. Given the ever smaller numbers of players at the national level the procurement process often constitutes only spurious competition.

But also the on-going bi- or multilateral production of mostly expensive and sophisticated weapon systems is carried out in complex administrative structures which assure that all parties involved receive contracts in accordance with the respective national laws while the non-entrepreneurial principle of "juste retour" is being strictly observed (for details see: Petry 1999). Anecdotal evidence suggests that in these projects all players are keen to complement their technological competence at the cost of joint projects which tends to create duplication and overcapacities in Europe. Insiders of the workshare negotiations in projects like the Eurofighter are said to have coined the rule of the workshares being commissioned to the least competent as a result.

During the Cold War there were few effective market mechanisms at work in the reclusive world of military-industrial activities colluding with the secretive bureaucracies responsible for procurement. Additional vocal political protection of this industrial culture came from members of parliament whose constituency was profiting from procurement, but also from trade unions in the respective sectors. The fact that the EU affords itself with six distinct facilities for the final assembly of the current generation of fighter aircraft (4 x Eurofighter, Rafale, Gripen in Italy, Spain, France, Germany, United Kingdom, and Sweden) aptly exemplifies the entrenched diseconomy.

The post-Cold-War downsizing of procurement expenditures throughout Europe which was not compensated by increased export business did not immediately entice a substantial restructuring of the European defence industry as would have happened in other sectors in reaction to a comparatively substantial decline in demand. It is only in the late nineties that the consolidation process has gathered speed and direction; mostly at the initiative of the private sector involved. In the course of events governments rapidly lost control of the consolidation process, though they stick to their habit and lobby on behalf of their respective national champions in the international arena. This paper will focus on the German part in this European and transatlantic defence-industrial restructuring with particular reference to R & D and the increasing importance of civilian technology for competitive military production.

1. The policy actors and relationships

The demilitarisation of Germany following WW II brought arms production to a total halt until 1955. The leading brains of the military sector had been competitively soaked up by all parties of the emerging Cold War after 1945 into their respective military-industrial sectors. Other engineers experienced in the military trade succeeded in finding employment on their own in independently emerging nations like Argentina, Brazil, Egypt, India, Spain and continued to practice their trade there . Even in 1945 the arms manufacturing installations were not as completely destroyed as the volume of allied bombing might have suggested. Thus, after 1945 large numbers of machine tools belonging to the military-industrial infrastructure of the Nazi-regime were confiscated and dismantled to be eventually shipped mainly to the Soviet Union, but also to the United Kingdom. The Soviet Union even requisitioned an entire factory and forced the workforce to settle for several years in Russia.

With the accession of the Federal Republic of Germany to NATO in 1955 the German industry started to enter the field of arms production as a late-comer. A large number of restrictions still applied. The WEU served as the supervisory body. Over the years most of the restrictions were allayed, while some were eventually replaced by declared voluntary restraint, particularly in the field of weapons of mass destruction. At the time the civilian industries witnessed a dynamic reconstruction and the political opposition to German rearmament was by no means negligible. But the conservative government under Adenauer was committed to integrate the country into the western alliance on equal terms. It attempted to lure the existing industry into the manufacture of arms and to restore military research.

The first generation of equipment of the hastily created armed forces (Bundeswehr) was procured in the United Kingdom, France and the United States. But every effort was made to have domestic suppliers in place for the second generation of equipment and to set up a military R & D infrastructure as military innovation was considered at the time to be the essential driving force of national industrial competitiveness. Particularly in the aerospace industries the ten year break meant that German industries were late-comers and had to accept the "humiliating" role of license producers before catching up with current standards of aerospace technology. In other areas, naval construction, particularly conventional submarines, tanks, armoured vehicles, artillery, small arms etc. the pre-1945 knowledge base was merely mothballed and successfully reactivated.

The attempt of the Adenauer government to push ahead and match the military-industrial status of France and the United Kingdom was impeded by the deliberate institutional arrangements to make a German army acceptable again. Institutional safeguards were put in place to avoid a recreation of the sinister alliances which had fuelled the preparation of WW II. But the Adenauer-Strau§ drive was also met with resistance by the scientific community. In the declaration of Gotinga in 1958 eighteen of the best known natural scientists publicly declared their opposition to getting involved in research that might support the development of WMD. As a result the creation of a military research and development infrastructure did not lead to a centralised institution. Two distinct forms evolved instead during the sixties: a number of specialised small or medium sized Fraunhofer-Institutes were created which were basically depending on contracts and basic finance from the Ministry of Defence and secondly the mainly private arms industry was eligible to receive often lavish funds to work on the design of specific weapon systems. Sometimes such contracts were not even related to agreed procurement projects as was the case with a vertical take-off and landing aircraft, designed during the sixties. It was also agreed that in principle arms production was to be organised by the private sector.

One can describe the evolution during the sixties as a bifurcated development. On the one hand there were the manufacturers of conventional arms other than aerospace who were able to draw on their experience before 1945. In addition they successfully exploited the synergies offered by the thriving civilian manufacturing sector in Germany. On this basis they managed to penetrate the markets in smaller NATO countries and beyond. In contrast the restarting of the aerospace sector in Germany was faced with a record of dynamic technological advances after 1945. Lavish subsidies, aggressive and expensive import substitution, license production and finally co-production, always aiming at the acquisition of technologies which the industry had not yet mastered, marked the pace of this sector both in its civilian and military branches. In the logic of the German procurement system subsidies took the form of project contracts, mostly including the manufacture of the respective item. A huge civilian procurement bureaucracy emerged. Contractual relationships with second and even third tier suppliers were the rule which developed into an obstacle to the consolidation of the arms industry. As a result a large number of small and medium sized companies became part of the supply network, often charged with license production. Particularly American manufacturers of electronic devices opted to form their own subsidiaries in Germany, in order to avoid the sharing of knowledge under license agreements. This supply network was amenable to intensive political lobbying, involving such arguments like national sovereignty, regional employment and potential spin-off. Rivalries among the federal "Länder" helped to strengthen the position of the suppliers belonging to the extended network. Initiatives to introduce at least some real market mechanisms into the procurement process by assigning to one company the role of a general manager were immediately neutralised by the obligation to share a large proportion of the contract with small and medium enterprises. Only at the end of the eighties the government finally imposed a consolidation of the aerospace sector and forced the "Länder" to relinquish their partial control. DASA under the helm of Daimler Benz came into existence. But this consolidation was driven by the civilian and not the military market.

At the end of the Cold War the "incumbent" military suppliers were knit into an elaborate policy network in which local parliamentarians, the "Länder" on behalf of their producers, and the often long serving members of parliament who control the defence committee were involved. Given the modest share of military production in German manufacturing, industrial associations were politically only visible in demanding the liberalisation of the export legislation.

The financial burden of the unification imposed a continuous overproportional reduction of procurement, but the government proved largely incapable of setting political priorities. Only DASA as a powerful player managed to have its major projects approved (Eurofighter and two helicopters). The necessary exit and consolidation in other segments of military production was kept back by the indecision of the government and the hope of single players to belong to the survivors through intensified lobbying. It is therefore not inconsistent with this process that two secretaries of state in the MoD who were responsible for procurement during the nineties are presently charged with bribery, one even went missing.

A new white book on defence supposedly outlining a new military doctrine was announced several times, but the project did not materialise under the Kohl governments. The strategy to accommodate entrenched interests and repeated public declarations by Kohl that there would be no losers in the restructuring of the armed forces ("Bestandsgarantie") left the minister of defence with little room of manoeuvre. There is no tradition of other ministries to interfere in the process of procurement. Though export licences are granted by an inter-ministerial council where among others the foreign office and the ministry for economics have a vote.

Traditionally the parliamentary committee on defence was dominated by declared and undeclared lobbyists from CDU and SPD alike. As a result surprisingly few critical questions are being asked in this committee. Considerably more substantive scrutiny is regularly exercised by the budget committee, but the deliberations are usually focusing on the consistency of spending plans rather than conceptual issues. Although ideologically until recently NATO was regularly dealt with as an external arbiter unfailingly legitimising higher military expenditures, the thick web of national interests dominated the concrete procurement decisions as well as the level expenditures. Hence the gap between the political rhetoric and actual implementation continued to widen.

The paralysis of the consecutive conservative governments left exhausted armed forces for the new government (1998) to deal with. However, the incoming "red-green" government was not prepared for the task, a fact reflecting the relative absence of a substantive discourse over defence matters in the German parliament throughout most of the time during the Cold War. Later the unification dominated the political scene. The incoming social-democratic defence minister (Scharping) publicly demanded a substantially increased budget even before accepting the post. Following in the footsteps of his conservative predecessor he abstained from initiating long overdue structural reforms. He even gave a guarantee of continued existence to many unsustainable organisational units like the totally oversized civilian procurement bureaucracy (BWB). He argued that the Bundeswehr was largely neglected by the previous government and is therefore operating with antiquated equipment.

But he did not get additional funds and was asked to lower expenditures in support of the debt reduction strategy the new government was pursuing. Belatedly he instituted an independent commission whose task is to elaborate options for the future design of the armed forces. The report, due to be published on May 23, 2000. has already begun to leak into the media. It suggests a substantial reduction of force levels, a drastic reduction of military service and reorientation towards foreign missions under a mandate of the United Nations. The Bundeswehr (Generalinspekteur) came also forward with a proposal suggesting a rather limited reduction and conservative reform of the armed forces. At the same time the defence minister has already signed a pilot contract with leading suppliers of hardware and services regulating a radical outsourcing of infrastructure, repair and maintenance and other services as well as leasing arrangements. This contract is meant to set an example for a radical procurement reform which, without explicitly saying so, will not only make the existing procurement bureaucracy largely obsolete. It will eventually set free as many as 100 000 civilian employees, more than half the present level.

While it is too early to predict the pace and depth of the forthcoming transformation of the armed forces and the procurement process, it is safe to predict that years of stalemate have provided for an ample space for action. The active role of the Bundeswehr in Kosovo stimulated a substantive public debate on the future role of armed forces making it more likely than ever before that the political rhetoric will be followed by decisions. Thus, for the first time in decades the conditions are set to substantially change the structure of the armed forces.

1.2 The military doctrine

The specific historical heritage, the German armed forces are burdened with, prepared the ground for a unique externalisation of the military doctrine. The FRG limited the scope of its military doctrine to a strict submission to the command of NATO. With the exception of a Gaullist temptation during the early sixties and the debate about stationing additional nuclear missiles in reaction to the Soviet SS 20 no national discourse related to the military doctrine ever took place after the SPD in 1959 had finally embraced the western orientation and the integration into NATO. Between 1968 and 1982 the SPD controlled the MoD and was eager to be seen as a truly patriotic and reliable political force. It attempted in vain to placate the armed forces by providing lavish budgets which in the early seventies the Bundeswehr was hardly capable of properly absorbing. Until the very end of the Cold War Article 26 of the Basic Law (constitution) was interpreted as an absolute barrier to any type of out-of-area operation. According to this view the only legitimate action the Bundeswehr was entitled to was territorial defence in the context of NATO. Therefore the Bundeswehr had not developed adequate logistics and training for missions mandated by the United Nations. On the first occasion of soldiers participating in an UN-mandated mission the SPD challenged this decision at the constitutional court. However, it ruled UN-mandated missions as legal.

The virtual absence of a permanent national strategic debate explains in part the extremely slow political reaction to the radically changed political environment circumstances after the end of the Cold War. The budget was reduced in real terms and in addition the territorial reorganisation of the Bundeswehr after unification increased the share of operating costs. Most procurement programs designed during the eighties in the context of the East-West confrontation were not abandoned, but simply stretched over a longer period. Only smaller programs like the caseless ammunition and the corresponding gun designed by Heckler & Koch were definitively shelved which put H & K into the red and eventually into the portfolio of BAe. The only structural change was the slow preparation of a 60 000 men strong so-called crisis reaction force (Krisenreaktionskräfte) mandated to be operational in 2003. There was also resistance from within the Bundeswehr which argued that it would be dangerous to neglect the territorial defence, since the political climate and the balance of power might change again.

Without a new military doctrine no decisive procurement priorities emerged and the roughly five billion DM left for procurement were hardly sufficient to maintain the German participation in the major collaborative projects in the aerospace sector. The MoD prepared annual reports on the situation of the different military-industrial branches focusing on the maintenance of a minimum capacity required to preserve the capacity and the know-how. But it became obvious that the private sector did not share the "national" interest of the MoD. Instead the leading companies engaged in across-the-border restructuring. They began to withdraw from certain fields or entered minority partnerships with French companies (i.e. helicopters, missiles) in particular. In other field they clearly pursue leading positions within the EU (i.e. Rheinmetall, Blohm & Voss). The eventual formulation of a new military doctrine as a result of the on-going debate is not likely to change the present course of the industry-driven consolidation beyond the national market.

1.3 The Boundary of the Policy Network

The old policy network which preserved stable supplier relationships including second and even third tier suppliers for more than 30 years has been losing its currency, mainly due to the substantial reduction of procurement. An increasing number of suppliers can not any longer rely on defence business and is open to consolidation or exit from the sector. In the course of events the BDI (Association of German Industries) pressed the MoD for a radical outsourcing of activities as a compensation for reduced procurement levels and a liberalisation of the export regulations implied in a common European standard of export control. Only in the aerospace sector transnational relationships are important because it is basically civilian-led and focusing on the competition with the United States which requires close co-ordination among the European players. In the past the policy boundary was rhetorically transatlantic, though in reality national with a European orientation in all fields where Germany was not self-reliant. With end of the Cold War the rhetoric shifted towards the EU and the need to develop a common foreign and defence policy.

But the process became more and more industry-led forcing politicians to sanction the consolidation. A major reason for Germany to support increased independence from the United States is the perceived need to develop stable relations with Russia which is only feasibly as a European project if a repetition of the fatal role of Germany as "Mittelmacht" is to be avoided. Force projection is a recent element in the German debate and their is a broad consensus that if at all taken into consideration force projection must be embedded in a legitimate international coalition. For the time being Germany wants to increase the European component in international operations, but continues to accept the supreme role of the United States. However, there is a strong intent to build up preventive, non-military intervention instruments as part of a common European foreign policy.

An independent European defence capability entering a subtle rivalry with the United States has little support in Germany. Not least because some of the major military-industrial companies are global players in the civilian sector with substantial stakes in the United States (i.e. Daimler-Chrysler), but also because "atlanticism" is widely seen as in the continued interest of Germany. Though there is little emphasis on interoperability between NATO forces which will improve only as a result of further consolidation of the military-industrial sector and full privatisation in Europe and the increasing importance of civilian standards for military equipment.

2. Procurement

Relative to total military expenditure (45,3 billion DM in 2001) the volume of annual procurement continuously shrunk over the last ten years and is likely to have bottomed out with approaching five billion DM in 1999. Over many years the defence debate targeted a 30 % share for procurement and other investments, but in reality the share fell well below the 20 %. Military expenditures had peaked in 1990 with 53 billion DM, the MoD has calculated the present expenditure well below 40 billion DM in prices of 1991(Bundesministerium der Verteidigung 1999, p.130). In addition since 1994 the MoD does not any longer receive a reimbursement for the additional costs for international missions from other budget titles. The present government obviously uses the drive towards consolidation of the state finances to enforce the overdue structural reform of the Bundeswehr. But at the same time the chancellor has agreed that potential savings from outsourcing to the private sector will become available for the purchase of new equipment required for the envisioned international operations. Also, in case a substantial reform becomes effective, considerable resources could be mobilised by selling the real estate which can be marketed because it will not any longer be needed.

Military science and technology expenditures in Germany are comparatively modest. The expenditures vacillated during the nineties between 2.5 and 3 billion DM annually with a tendency of reduction in nominal terms. The MoD counts development of weapons systems including all testing as science and technology expenditures. The bulk, roughly 75% is expended for the development of specific major weapon systems most of which are being developed jointly with other nations. Therefore 45 % of development support flows into multi-lateral projects (Petry 1999, p.32). The biggest share is absorbed by the Eurofighter. Roughly 600 mio. DM are dedicated to general "research and technology". "Research and development in defence technology are embedded in the national research and development policy. As other departments of research they rely on the broad scientific knowledge of the civilian research supported by the government in form of "add-on" programs ..." (Faktenbericht 1998 p.166). And indeed this contention of the Ministry responsible for research is fully corroborated by two recent studies on the relationship between civilian and military technology. (Brzoska 1999 and Altmann 2000). Altmann describes the systematic co-ordination between civilian and military aerospace research, aiming to avoid any duplication and to achieve synergies. The annual volume of civilian support for research and technology in the aerospace sector hovers around 350 million DM, while the military aerospace research receives approximately 150 million DM.While the civilian support is matched by at least the same sum by the industry, the industry contributes only marginally to military research. From the perspective of managing research resources the military segment is surprisingly well integrated into the co-ordination of the policy at the national level, which makes it easier to mobilise civil-military synergies than in a more closed military planning system.

The long gestation periods of military platforms tends to appropriate a substantial part of future procurement resources. The MoD highlights this dilemma in its recent account of the situation. Only four systems absorb 11 billion DM until 2003 which would amount to half of the available resources calculated on the basis of the current budget. Since all of them are produced jointly with other European partners, it is safe to assume that they have passed the point of no return. As a result the Bundeswehr presently does not have the resources required to adequately equip for the new doctrine which is likely to emerge shortly, as long as significant parts of the present organisation are not closed down. In one way or another international joint projects account for 80 % of the procurement (Petry 1999 p.32).

At the political stage national production is still an icon appealing to politicians, but the reality in terms of value nationally added is often quite different, because major components are regularly oligopolistically controlled at international markets. In Germany procurement is still fully controlled by the BWB (the civilian procurement bureaucracy), offers of compensation in cases of export orders have contributed to the lasting grip of the BWB. Thus, international procurement often reflects a "quid pro quo" and does not reflect a market-driven internationalisation of procurement. Reflecting the relative levels of competence the army and the navy are less likely to procure their weapon platforms abroad while the airforce is more likely to seek foreign products because of their superior quality or affordable price. But the indications of a more market driven procurement strategy in the case of major systems are not yet visible, possibly because all the resources are presently absorbed by older "inherited" procurement programs. The real test for a change will be the forthcoming purchases of equipment for out-of-area operations.

3. The structure and functioning of a domestic defence production network

3.1 Companies

The German defence industry features rather distinct actors as primary contractors as well as second and third tier suppliers. This fact suggests that the typically heavy handed, bureaucratic and largely non-market form of procurement did not produce a homogeneous group of suppliers in the private sector. The different types of primary contractors emerged most likely as a result of the relative technological maturity of the suppliers when they entered military production some 40 years ago.

Early on the procurement strategy of the German government focused on the private sector and likewise most of the military R & D expenditures took the form of contracts with the private sector. By the early seventies even the military-oriented Fraunhofer institutes came under pressure to win research contracts, because the guidelines for the Fraunhofer institutes foresaw three sources of income for every institute, basic government support, R & D contracts from public sector agents and R & D contracts from the private sector. Even in the periods of lavish procurement budgets during which the armed forces spent money for weapon systems which were not yet operational, the government clearly signalled to the industry that they could not expect to be bailed out from mismanagement by the government. The risk was to be borne by the private sector. Before privatisation became the dominant paradigm along with neo-liberal economics the federal government and several "Länder" sold their share, often a majority, in companies involved in military production. In most cases the government ownership had been the result of industrial policy during the early post-war reconstruction.

Particularly in the aerospace sector the privatisation and the intended consolidation were a complicated and much delayed process in which the top brass of German industry, including Siemens, was solicited by the government to take on the job. Finally Daimler-Benz stepped in and consolidated most of the sector under the labels of DASA and MTU. At the time Daimler-Benz pursued a course of industrial diversification under its former CEO Reuter which has since been reversed by the present CEO Schremp. The rumours that Daimler-Chrysler might shed DASA and concentrate on its core business, suggests that in todayÕs business climate the government would have had difficulties to find a "national" buyer. The Howaldt Werke, a major producer of naval ships, among others conventional submarines, is another interesting case. Schleswig-Holstein, once the majority owner of this yard, sold its share to the private sector and dedicated the proceeds to the formation of a foundation tasked with supporting innovation, particularly information technology, in the private sector in Schleswig-Holstein. It was a deliberate decision of the local government (Land) to cast off the responsibility for safeguarding jobs, the market would shed and opt for the modernisation of the industry in the region.

An important factor determining the type of primary suppliers in different segments of military procurement was certainly the relative industrial maturity in the respective segments and whether the government saw the need to use military procurement as a means to bolster the competitive position of the supplier in civilian markets. The aerospace industry was shut down by allied regulations for ten years and later controlled through the WEU making sure that no strategic systems and weapons of mass destruction were built. These ten years between 1945 and 1955 were marked by particularly fast technological advances like jet propulsion and advancement of aerodynamics. But the German government was resolved to lead the aerospace industry back to a competitive standard. Military production was but one element in this strategy. In the course of events the German government enthusiastically supported and open-handedly subsidised the emerging airbus project, though the German participants did not yet command the leading edge technologies. To improve this situation the German government acted like every late-comer industry did at the time, it attempted to foster import substitution of sophisticated components and technologies through license production. Military co-production projects like the MRCA Tornado were particularly important because the competing European producers could not easily deny the transfer of technology to the German side as long as the German financial contribution was essential for the project and the project indispensable for the survival of the other participating companies. The necessary consolidation of the German aerospace industry was retarded by the save-our-job resistance of several "Länder" which resisted the sale of their stake until 1989. Most importantly support for R & D in aerospace was periodically co-ordinated at the ministerial level to allow for optimal synergies between military and civilian programs (Altmann 2000). Most of the second tier suppliers were following the same entrepreneurial logic, namely seeking civilian-military synergies and operating in both markets. However, a number of second tier suppliers have not transcended the stage of, mostly American, license production of specific components and are increasingly at risk to have to exit the market because the demand is too periodic and shrinking to stay profitable. Also DASA is such a dominant actor that it can no longer be forced to maintain traditional supply chains while the procurement bureaucracy has largely lost its leverage vis-a-vis Daimler-Chrysler.

In contrast the suppliers of army equipment were not trailing international standards when entering the market again after 1955. In many areas the industry could draw on dual-use components from the thriving automotive and machine tool manufacturing industries. There was hardly a supplier who was not pursuing civilian markets along with procurement. Already in the seventies when the order books were full and prospects for exports were excellent Rheinmetall started a deliberate diversification into civilian markets aiming at a reduction of dependency on military contracts including military exports, others followed suit. With most suppliers being active in civilian markets it was easier in Germany to downsize the capacity with shrinking demand. Often the second tier suppliers simply exited the military market. The smaller the contractors the more dependent they were often on procurement contracts which contributed to the formation of a tightly knit web of lobbyists. They aimed at further intensifying the existing bureaucratic entry barriers to the military "market" by elaborating, often counterproductive military specifications. But in recent years the influx of advanced civilian products, not specifically customised for military applications is rapidly growing, thus eliminating the protected markets for many "traditional" small and medium sized suppliers. This process was reinforced by the dominant primary contractors which increasingly integrated advanced civilian components. A typical example is the tdi-diesel motor of the VW-Golf series which moves the air transportable "Wiesel", a small armoured vehicle. At the same time leading primary contractors began to eye the consolidation of the European market on the basis of a factual monopoly at the national level. Rheinmetall stands for this strategy. This on-going consolidation is exclusively driven by entrepreneurial strategies, the government has no longer control over the military-industrial base. The research in this field was mostly carried out by the industry on the basis of contracts with the procurement body (BWB). One important element of the recent consolidation process is access to advanced technology which meant vertical integration in addition to a horizontal and increasingly international dimension. For example Rheinmetall took control of Atlas Electronic in association with BAe-Systems, in order to maintain its leading position in producing sophisticated ammunition among others.

The naval sector is marked by two distinct processes. While still restricted to building small vessels only in the early years, some yards successfully specialised in building conventional submarines and fast patrol boats as well as minesweepers for the navy, but also for export. They were able to develop their line of production and keep a lead until today . They won a dominant position on the international market, in the early years on the basis of WW II standards. High risk research was financed through contracts with the German navy. At the same time the German government was committed to secure the national know-how by placing additional orders in critical periods and supporting off-set deals related to export orders. Particularly the technology of conventional submarines was tacitly treated as a national asset, eligible to receive support to survive when needed. At one point the present chancellor even asked the conservative government to lift export restrictions and supply Taiwan with submarines. His motive was industrial policy in support of yards in Lower Saxony whose president he was at the time.

As far as larger vessels are concerned the first generation was purchased from the United States, while the orders for the following generations were placed in the context of a deliberate strategy to use military procurement as a means to sustain yards during periods of crisis in civilian markets. The production of a single type was typically spread over three or more yards in different regions (Länder). Since overcapacities were obvious in shipbuilding, a political consensus to privatise the sector early on, meant that the consolidation was taking place in the private sector. Though in the entire industry elevated competing subsidies became international standard. In this politico-industrial climate prevailing in shipbuilding it was taken for granted after unification that Mecklenburg-Vorpommern, one of the new Länder, was entitled to a proportional share of naval contracts as well as lavish subsidies. However, in the murky course of downsizing and restructuring the heavily subsidised shipbuilding sector with EU participation the subsidies for Mecklenburg-Vorpommern were misappropriated by Bremer Vulkan, a once prestigious shipyard which went into bankruptcy in 1995.

In spite of subsidies and non-market contracting the German naval industry was part of the private sector which meant risk reduction through outsourcing. Untypical for naval production vertical integration never took root. As a result the typical value added by the naval yards oscillates between 20 and 35 %. Early on the outsourcing was not limited to the national industry and given the international specialisation (i.e. Hollandse Signaal/Thompson) in the field of naval systems the national component of large vessels may not exceed 50%. The construction of larger vessels was always associated with heavy-handed intervention of the navy and the BWB-bureaucracy. Product development cycles of twenty years were the result. In the context of this established sectoral culture it is not surprising that most multilateral programs failed to enter the production stage. It is apparently the intensive participation of the respective navies in the decade-long planning periods which provides for the respective national excuses needed to go it in the end alone which the ailing yards might favour in any case.

Interestingly outside government sponsored programs Blohm & Voß as well as Lärssen designed frigates and patrol boats which borrowed design principles and technology from the civilian shipbuilding which found many foreign customers. In the case of the frigate the competitive advantage derived from the flexibility in construction achieved through a complete modulisation of the design. These cases of successful independent specialisation in naval production for export lend themselves to speculate that governmental "tutoring" impedes efficient designing and cost effective production.

Comparing the mergers during the last decade in the three segments of the German military industry different motives can be identified. The aerospace sector was considered by the government as a strategic sector. It received comprehensive support by all governments since the early sixties. The emphasis was clearly on positioning the German industry globally in civilian markets. For a long time the military segment was instrumental to achieve the declared end. Consequently the German aerospace industry never pushed a national military project in aerospace beyond the design board. The only major system developed independently was a helicopter which was more geared towards the civilian market than any military role. With a clear focus on civilian markets DASA has a mixed record of attempting to expand internationally as well as its product range. Fokker and Dornier were abandoned, an envisioned European consolidation jointly with BAe Systems was aborted and now EADS is about to be formed. However, transatlantic mergers focusing on the civilian side of the market are clearly on the agenda, while the integration of the military "market" faces possibly insurmountable political hurdles, above all in the United States. It is noteworthy that DASA consolidated its French partnerships and accepted a French leadership, i.e. helicopters, keeping a minority stake only. Some observers speculate that Daimler-Chrysler might eventually concentrate on its core business and shed DASA or its share in EADS, but this speculation so far lacks the imagination which player could be big enough to step in. What this speculation suggests, however, is that the government has little, if any leverage over its once "pampered" national champion.

Most of the second tier suppliers in aerospace are specialist companies which operate in diversified markets, often including the automotive sector. As a rule they are strategically oriented towards the European market, particularly with their non-military production and have often already a record of acquisitions in other European countries. Some have a foreign, including American ownership. In a few cases military projects are jointly run with Canadian, British, French and other companies, though these projects usually also have a civilian application.

After a long paralysis the consolidation of the industrial segment supplying the ground forces has advanced in recent years. In the case of vehicles Rheinmetall and Wegmann/Krauss-Maffai now control the entire spectrum of vehicles and artillery. Rheinmetall in particular vies for a dominant position in the EU and is engaged in a process of strategic foreign acquisitions. Other equipment is produced by contractors which are broadly diversified in civilian markets in addition to their military production.

The naval yards can be classified in three groups. All German yards expect and often receive their share of maintenance contracts and in periods of crisis contracts to build major vessels were spread to several yards. The second group is led by Howaldt and focuses on maintaining its leading position in building conventional submarines. Carefully timed contracts to develop and build submarines for the German navy are an important asset. Recently a joint operation including the Swedish Kockums yard, formerly an important competitor was announced which is a first indication of a consolidation of the industry within the EU where Howaldt appears poised to take a leading position. The third group is formed by Lärssen and Blohm & Voss, both of which have successfully accessed important niche markets which they continue to pursue without any indication of European mergers in the offing, possibly their major markets are overseas.

3.2 Public agencies

Against the background of GermanyÕs record in civil-military relations great care was taken to have a civilian body prominently involved in the procurement process. As a result an independent civilian body, the BWB (Procurement office of the armed forces) was instituted. It developed into a huge bureaucracy with about 20 000 personnel during the eighties. Cold War secrecy and the imposition of military specifications covering even the simplest commodities consumed by the armed forces provided the leverage for the counterproductive growth of the BWB over the years. The BWB controlled and interfered with the development and production of weapon systems and maintained several control laboratories. The web of regulations developed over the years, seriously impeded political oversight over the execution of procurement. Thus, procurement is dealt with by a ministerial hierarchy while the execution is the task of the BWB. In the process effective political control is often being lost as the web of bureaucratic actors and industrial lobbyists are versed to create seeming imperatives (Sachzwänge).

The present minister of defence is apparently convinced that there is no fast track to reform the existing procedures. He has opted instead to create a private agency which will contract the private sector for the broad range of activities which are to be outsourced like maintenance, logistics, and real estate. A former top manager from Daimler Benz and a well-respected financial expert from within the ruling party are jointly to head the new agency which will begin to operate mid-year 2000. While this is a formidable signal to reform procurement, it is far from clear what will happen in the course with the still oversize BWB. Though after many years of delay reforms are starting now, not least because the budget remains tightly controlled which will suffocate the present armed forces unless they rapidly restructure and downsize significantly. The resistance will be formidable from all entrenched quarters, it is therefore at present risky to make any prediction where the reform will the armed forces lead to. But it is beyond doubt that profound changes will take place.

The German government succeeded in organising the resources for its national defence largely within the private sector. Even the number and size of research under the auspices of government research laboratories is limited on the one hand to a few relatively small institutes, mostly part of the Fraunhofer Gesellschaft and on the other there are institutions whose focus is civilian research receiving limited amounts out of the defence budget for basically dual-use research. The German situation is different from most other countries in that there does not exist a central institution for military research, like DERA or DGA.

The military services are formulating the parameters of weapon systems to be procured on the basis of the perceived doctrine and the existing organisation which determines the absorptive capacity. It is noteworthy that the three forces, air, land, sea maintain separate planning procedures. Not surprisingly the climate within the armed forces is competitive with respect to potential resources and the parties involved independently seek their constituencies in the political sphere. Under these circumstances that all three have their independent air wing etc. Given the competition over resources it is safe to assume that tactical alliances between the military services and their preferred suppliers influence the procurement process. The juxtaposition of the public service, which commands a confusing web of bureaucratic rules accumulated over 40 years often allowing for arbitrary discretion, with a private sector, used to play the basically non-market rules, provides ample space for corruption. Only a radical reform can lead procurement out of the present quagmire. A fully privatised defence-industrial sector in Germany requires a procurement system which allows markets to operate.

3.3 Relationships

Many established suppliers of the armed forces have long since taken the realistic view that they can not rely on defence contracts any longer for their companyÕs survival. Therefore many well entrenched supplier relationships which were characteristic for the procurement systems in Germany over many years were dissolved. In many cases the supplier exited the market, because the minimum level of orders was not any longer forthcoming. The bulk of procurement money is absorbed by a few big, mostly international projects, like the Eurofighter. These projects derive their "budgetary" strength from their dual-use or the tacit non-military dimension as well as from their international connectedness. In the case of the Euofighter it was apparently of significant importance that the project supports DASA and indirectly the Airbus competition with Boeing. Two political aims are achieved simultaneously which gives particular strength to this project which will be militarily outdated even before the first serial aircraft will be built in series and does not supply value for the money still to be spent.

The submarine sector is marked by close relationships between the navy personnel which is not surprising since there are no alternative suppliers. But in other fields the times are over when retired officers were offered well paid advisory jobs in the military industry upon their retirement. In general a fight for survival marks the procurement climate, not only for the contractors, but for the institutional players hitherto in full command of the procurement process as well. The black hole of informal power beyond effective political control will move, but it is not yet clear whether it will be located closer to Brussels (EU) or closer to the headquarters of the primary contractors.

3.3 Internationalisation

In general the German arms industry is less export dependent than its counterparts in France and Britain. Furthermore the arms export statistics during the last decade do not reflect the role of the exports for German arms manufacturing, because the sale of surplus equipment considerably inflated the figures. However, some companies have been focusing on positioning themselves globally and are seeking even global technological leadership in their product niche. Howaldt Werke (conventional submarines); Rheinmetall (smooth bore canons among others); Blohm & Voss (customised frigates) and possibly Lärssen (small naval boats) are targeting markets well beyond NATO. To consolidate their position they are either already in the process or likely to make foreign acquisitions and form alliances with some of their competitors. But these are purely entrepreneurial strategies which receive little, if any government support. Though the navy and local politicians are likely to lobby on behalf of the naval industry in continuation of industrial policies at the regional level. The navy, the naval industry and the respective regions form a "natural" alliance, They are keen to sustain each other as launch customers, guarantor of a well equipped navy and motor of the regional economy.

With the evolution of common European standards for arms export however, the national networks are likely to lose their currency and military-industrial lobbying will also gravitate around Brussels. Not least for political reasons Germany spends an ever increasing share of its procurement budget on international collaborative projects. In the past virtually all collaborative projects were initiated at the governmental level and the respective political networks, presently there are many indications that the industry in the private sector will take the lead. The Howaldt-Kockum alliance is a recent harbinger of this trend.

Finally with the clear trend towards increased spinning-in of civilian technology in military systems the strong position of German component suppliers throughout Europe is likely to be reinforced because their strength derives from their often dominant position in civilian markets (i.e. Renk heavy gear boxes). But as mechanical components are increasingly replaced by electronic devices the chain of upstream suppliers is bound to change and other companies, possibly even located abroad, might take large shares of the value added embodied in military products.

4. Defence Science and Technology

Military innovation is concentrated in the private sector. In Germany governmental laboratories play a marginal role at best. Thirty years ago the government portrayed itself still in the role of a shepherd guiding and controlling military innovation in the private sector. Throughout the last ten years the MoD was limited to the role of an observer, nervously preparing a confidential annual report on the remaining technological capacities in the various subsectors of military manufacturing. This annual reporting serves to optimise national strategies in the international policy networks where permanently the "juste retour" in collaborative projects is being negotiated. In the future, however, these reports will simply inform the MoD about the on-going consolidation at the European level, which is being driven by strategies of the private sector operating in a global context.

In terms of technology acquisition German companies were certainly net winners in collaborative projects. But this is certainly a feature of the past, because leading edge technologies are increasingly controlled by the dominant companies which can not any longer be forced to share their knowledge in internationally administered projects. The German arms manufacturing, driven by the private sector, is about to transcend the "made in Germany" paradigm. The major players are oriented towards international markets, with only the US-market largely remaining off-limits (for the time being?) due to the prohibitive political entry barriers. Increasingly entrepreneurial logic will prevail and the label "made in Germany" will be replaced by "made by Rheinmetall" for example.

Since the relative strength of German arms manufacturers was traditionally based on civil-military integration, the strategic question for the German players is whether they can spearhead the integration of electronic devices at all levels into the next generation of weapons, because this capacity is likely to be the key to success. Given the short innovation cycles in the electronic field, by definition civilian electronics will be spun-in. In the machine tool sector the SME enterprises succeeded in blending their traditional mechanical skills with sophisticated electronics against many predictions in the seventies based on the Japanese model at the time. It remains to be seen whether the traditional second and third tier military suppliers will master the technological shift from machine tooled metal to electronic chips. Most likely there will be important changes because the electronic substitutes will no longer be customised devices. In other words civil-military integration is likely to expand more rapidly than in the past. If the evolution of Rheinmetall (i.e. acquisition of Atlas Electronik) is an indication some German companies are well positioned to survive the europeanisation or even internationalisation of the procurement markets.

5. Towards an integrated European defence industry.

The national consolidation of military manufacturing was long delayed, because many observers believed that the government would eventually increase the procurement budget again. As this hope faded the consolidation became a dynamic process with many second and third tier suppliers exiting from military production. Rheinmetall was probably the forerunner in picking up the spoils and targeting to dominate the emerging European market. Political resistance to the clear trend of deterritorialising military production will be limited to local and regional protests of the losers and their voices in parliament. In general the government will go along with the internationalisation. A critical point might be reached if Daimler-Chrysler were to decide to sell DASA to a foreign suitor. But this will not be primarily linked to its role in military manufacturing, but rather to the strategic role of civilian aircraft manufacturing and whether this role remains compatible with Daimler-ChryslerÕs core business, car manufacturing. In terms of a likely time frame for profound changes to come, it should not be underestimated that a large proportion of future procurement budgets will continue to be absorbed by on-going projects which still reflect the age of politically engendered diseconomies. It will take years to rid military investment decisions from the burden of the past. Ê


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