Dr. Peter Lock
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A Paradigm of Restructuring of the Defence Sector in Germany

Discussion paper

This text was prepared under the European Commission´s Targeted Socio-Economic Research Programme, TSER PC Project 1272, Contract SOE1-CT97-1079

Rheinmetall: A paradigm of restructuring of the defence sector in Germany

The recent trend of mergers and acquisitions in the European arms industry may sometimes be a confusing process consisting of many truly strategic moves as well as fallacious mergers and acquisitions which are later to be corrected, often at considerable cost. Mostly the business logic driven by the shareholders´ interest prevailing in the rest of the economy does not seem to apply in the arms industry in the same way. The inevitable reduction of overcapacities throughout Europe is taking long detours. They increasingly entail international mergers and acquisitions within the EU, while the transatlantic dimension of this restructuring process is still marginal, not least because the hurdles of entry into the American procurement market are almost insurmountable for a foreign-owned bidder. In general the defence sector is trailing far behind the civilian industries with respect to the geographic reach of its internationalisation as well as financial pressure to restructure and adapt the capacities to realistic levels.

Even in subsectors where the overcapacities were obvious as early as 1980 production capacities were maintained and bankrupt companies repeatedly refinanced by new patrons, often lavishly helped with tax payers money, as this sector operates outside the competition rules applying within the EU due to article 223, respectively 296 of the Rome and Maastricht treaties. The manufacture of pistols, rifles, submachine guns etc throughout Europe is a perfect example of the extraordinary survivability of excess capacities. Royal Ordnance built an entirely new facility, replacing the traditional site at Enfield towards the very end of the Cold War; GIAT maintains at Versailles-Satory a production facility far beyond effective demand. FN Herstal and Heckler & Koch, but also Beretta in Italy experienced changes in ownership to forestall bankruptcy. But their respective production capacity was maintained. FN Herstal was even saved twice by public funds. On the first occasion the federal government in Belgium provided the funds and after the second bankruptcy the regional government relaunched the company. FN Herstal is presently controlled by GIAT, but is reportedly urgently up for sale again. In the case of Heckler & Koch the French GIAT and the British Royal Ordnance (British Aerospace) were fiercely competing during the early nineties to take over the heavily indebted company, once considered Western Europe's leading manufacturer of sophisticated small arms. At the time the German government steadfastly refused to save the company and stopped financing on-going research and development work of an automatic rifle with caseless ammunition which was heralded to become a new standard weapon within NATO (Gander, Hogg 1995, pp.148f.). Though British Aerospace finally won and integrated H & K into its subsidiary Royal Ordnance. It is presently rumoured that BAe Systems urgently wants to dispose of Heckler & Koch. The American manufacturer Colt is said to be interested, but this seems to be more related to the private market where H & K precision weapons sell as prestige lending gadgets, comparable only to the Glock 9 mm than to public procurement markets. At the same time Heckler & Koch offers an entry into procurement markets for Colt should the on-going liability debate in the United States seriously damage the civilian market (Barrett 1999). The case of Beretta displays a similar pattern including new American ownership.

The path of Rheinmetall as a major European arms manufacturer which is presently positioning itself as one of the most likely survivors and hence oligopolists, if not monopolists, of the on-going shakeout in the European military-industrial sector, will be discussed in this text. The turbulent 110-year history of Rheinmetall as a leading manufacturer of artillery and ammunition suggests the importance of tacit know-how involved in the manufacture of sophisticated artillery tubes and high-performance ammunition. It would explain the astounding re-emergence of Rheinmetall as an internationally leading manufacturer of military hardware following years of enforced closure of the company after the two world wars. This factor, however, is not sufficient to explain the presently strong position of Rheinmetall and its aggressive strategy in the restructuring of the European defence industrial base. When Rheinmetall returned to military production after WW II and supplied the first generation of equipment for the expanding German armed forces, it experienced boom years during the sixties. But already beginning in the early seventies, Rheinmetall systematically diversified its portfolio to include substantial civilian production. One important focus were automotive parts located both in Germany and abroad. Rheinmetall more than halved in this way its share of military production to well below 30 % even before the end of the Cold War.

However, countering the main stream in downsizing military capacities Rheinmetall, from 1992 onwards, began to pursue a strategy of survival amidst the general shrinking of the military sector and the crowding out of the overcapacities throughout Europe. By now it is evident that Rheinmetall envisions to become a truly international player with the necessary critical mass capable of dominating a certain range of military equipment. This is reflected in the selective acquisition of military manufacturing capabilities across the EU and in the future possibly in the United States or rather Canada as well.

The history of Rheinmetall will be analysed in some detail, in order to show that the company reflects typical features of what has been labelled as "Rhenanian capitalism". It will be argued that elements of this particular industrial culture and ownership structure are linked to the strategy Rheinmetall is presently pursuing.

Rheinmetall: a history of rises and falls

The rise of Rheinmetall to become a leading manufacturer of artillery before WW I was the single-handed achievement of its founder Heinrich Erhardt. He was an ideal-type industrialist of the late-coming manufacturing boom in Germany during the second half of the nineteenth century. He was born in 1840 in Thuringia where early manufacturing industries in Germany were concentrated. His engineering career started as an apprentice at a renowned rifle manufacturer, which forty years later (1901) in his career he would acquire and integrate into his booming Rheinische Metallwaaren und Maschinenfakrik. He moved on to a machine building factory. Following the war of 1866 which boosted the industrial expansion of Prussia Ehrhart moved to the Prussian Rhineprovince which rapidly turned into the industrial heartland of the German Reich in the aftermath of the German-French war of 1870/71. He founded his first company in 1878 in Düsseldorf which engaged in producing special tools and machine tools.

Erhardt was able to continuously expand during the boom and bust years of the time. In 1889 he won a huge contract to supply ammunition and founded in 1889 the "Rheinische Metallwaaren und Maschinenfabrik" with the explicit purpose to carry out this contract and establish himself as a military supplier. He was extremely successful, he revolutionised the production process of the cases and established large-scale manufacturing of ammunition. From then on he moved from success to success during the boom of military procurement in Germany in the decades preceding WW I. He expanded his military-industrial activities vertically to include the manufacture of special steel, detonators etc. His factories came to dominate the expanding industrial quarters of Düsseldorf. In 1896 Erhardt designed an innovative 7.5 mm field canon which was adopted by many European armed forces. Canons of all calibres became the trade mark of Rheinmetall. Ehrhardt rented a large area in the Lüneburger Heide, an underdeveloped region between Hamburg and Hannover, as a test range. The land was eventually donated to the company by the Kaiser. Today it is still one of the largest test ranges in Europe, being used by Rheinmetall as well as leased to foreign customers.

Being located close to the former German-German border after WWII the area became eligible to substantial subsidies and tax exemptions until unification which prompted Rheinmetall to establish in 1986 a heavily subsidised (co-financed by the state of Lower Saxony) technology park (TZN = Technologiezentrum Niedersachsen) which attracted various other companies. Rheinmetall eventually (1992) also transferred its military research and development and military production from its traditional location Düsseldorf to Unterlüß (Lüneburger Heide).

At the beginning of WW I Rheinmetall employed 8000 people. This figure went up to 48 000 until 1918. With the end of WW I military production came to a complete halt and 22 000 people were immediately made redundant. A frantic search for non-military production began. A classical range of conversion products emerged: agricultural machinery, heavy steam plough, railway wagons, locomotives in the Düsseldorf plants, typewriters, calculators and automotive parts in Thuringia. From 1921 onwards the production of limited numbers of medium calibre weapons was again permitted. However, the combination of hyperinflation and the French occupation of the Rhineland eliminated the markets for the civilian range of conversion products. By 1925 most of the production had come to a halt. The government had acquired in the meantime the majority of shares in a manoeuvre to protect its military potential. At the time the Reichswehr had already begun to implement a secret plan for rearmament involving extra-territorial joint ventures in the Soviet Union among others. High-ranking active and retired officers of the Reichswehr were involved in promoting the export of German arms on all continents, in order to maintain capacities until the restrictions of the Versailles Treaty would be overcome. In an operation, co-ordinated by von Seeckt after his retirement, not unlike the notorious Executive Outcomes of South Africa, German arms, training and advice were supplied to the nationalist party in the Chinese civil war. In todays speak deals with rogue states helped the German arms industry, including Rheinmetall, to be well prepared for the coming boom from 1933 onwards (Lock 1999 p.12).

The turmoil during the economic crisis offered Rheinmetall in 1933 the chance to acquire the famous manufacturer of locomotives etc. Borsig which was about to be liquidated. With the rearmament boom under Nazi-rule the Rheimetall-Borsig conglomerate prospered, in 1939 total employment was 48 000, it rose to 83 000 towards the end of WW II. The product range extended from machine guns to the heaviest canons. Rheinmetall developed the MG42, the precursor of cheap mass production with low tolerances due to the use of stampings rather than forging. This technology was a priority on the confiscation list of the U.S: army in 1945. Cold stamping of steel became the universal standard in the production of small calibre automatic weapons.

The end of WW II brought all activities to a halt. Some of the machinery was confiscated and removed as reparation by the allied administration. It was not until 1950 that limited civilian production activities were started again. In Düsseldorf initial production included typewriters, shock absorbers etc. plus some more direct conversion products related to the military expertise like bolt fixing devices operating with calibrated ammunition used in the construction industry at the time. The federal government still held the controlling majority of Rheinmetall-Borsig, but it was not before 1956 that the company was fully resuscitated.

With the creation of the Bundeswehr (armed forces) and the ensuing alleviation of allied restrictions the manufacture of arms offered new possibilities. The Röchling family acquired the majority of Rheinmetall-Borsig from the federal government in mid-1956. The Röchling family is one of the German industrial dynasties which emerged with steel and coal in the second half of the 19th century. Originating in the Saar region, Röchling jointly with the Stumm dynasty were the driving forces behind the economic synergies between the Saar region and Alsace-Lorraine (coal and ore) whenever Germany controlled these French regions which was between 1871 and 1918 and 1940 and 1944. The Rheinmetall acquisition was only one early element in the well-targeted transformation of the Röchling group from its traditional businesses of steel and coal to a diversified high-tech manufacturing group. After WW II it pursued a consistent strategy of systematically acquiring so-called "Mittelstand" companies, all of which were innovative niche producers, notably in the emerging applications of electronics and industrial synthetics. Step by step the Röchling group exited from steel and invested the income in modern growth sectors in Germany, Switzerland, France, the United States and later following the German automotive industry in Latin America, South East Asia, Central Europe and China. (see chart of the Röchling group appendix 1).

The Röchling-strategy behind the acquisition of Rheinmetall-Borsig clearly aimed at the emerging military procurement after 1956. It was thus a logical step to almost immediately dispose of the Borsig part of the conglomerate, because the latter was mainly located in West-Berlin where allied regulation forbade any German military-related activity. From the government point of view the sale of Rheinmetall at this crucial juncture followed the tradition of military procurement in Germany since 1871 when the decisive shift from arsenal production to private risk capital took place. Even throughout the two world wars this principle was sustained. It was also coherent in the context of the prevailing economic doctrine and the constitutional philosophy of the early Federal Republic. Both stressed that military procurement should be carried out under civilian authority and in compliance with the declared liberal economic doctrine. As a result the private sector was systematically lured to take up the arms production required to satisfy the demand of the recently created Bundeswehr. The implicit deal between government and industry meant that until well into the eighties the majority of contracts were negotiated and only for marginal standard items open tenders were applied (Petry 1999). These contracts presumably allowed for above average profit margins. In return, however, the government did not offer any support whenever an arms manufacturer ran into financial trouble. Not a single arms manufacturer was saved by nationalisation as happened almost habitually in other European countries until the early eighties. On the other hand, the government was repeatedly using large procurement contracts to support the economy in regions with high rates of unemployment. In this way ship yards with no experience in naval ship building came to build a frigate among others; tank production was also spread to involve various suppliers etc. (Bode 1978:45-69).

Rheinmetall's first mass produced weapon after reinitiating military production was the MG 1 which was, however, only a slightly modified version of the its renowned MG 42 (42 stands for 1942). New versions of its FLAK-canons and canon tubes for the German Leopard tank soon followed among others. The speed with which Rheinmetall was able to manufacture a wide range of weapons for the ground forces which met and often beat international technological standards can only be explained a combination of several factors. The know-how and designs of the sophisticated production in 1944/45 were still at hand, qualified and specifically experienced labour could easily be recruited as the economy was at the time still in the post-Korean War slump. In addition, the government at the time made lavish prepayments for procurement contracts, as German government finances were in surplus at the time. Thus, cheap capital, qualified labour, existing low-cost designs and a lot of tacit production know-how (the latter is still today an effective barrier of entry to the production of large calibre tubes) were at the disposal of Rheinmetall when it re-entered arms production. Some of the products were apparently unrivalled in quality at the time and were accordingly already exported in the early sixties to other European countries where they replaced American and British supplies among others.

Knowing that the government would not bail them out in case of need, Rheinmetall started as early as 1972 to diversify and acquire civilian product lines. The first acquisition was a traditional "Rhenanian" hitherto family controlled company producing sophisticated packaging machinery. But the military markets flourished and Rheinmetall successfully developed a number of innovative weapons, in particular the 120 mm smooth bore canon for the Leopard 2 and later for other tanks as well. In 1970 a first acquisition to vertically complement the military product range was made. Nico Pyrotechnik, a large traditional ammunition manufacturer was taken over. A few years later the ammunition factory NVVM De Kruithorn in the Netherlands also comes under the control of Rheinmetall. The logic of these acquisitions reflects the interplay between tube weapons and increasingly sophisticated ammunition which requires an integration of research and development in these two fields as well as commercial logic.

By the end of the seventies more than two thirds Rheinmetall's turnover were military products. A first attempt to reverse this dependence on procurement lead in 1981 to the acquisition of WMF, the foremost manufacturer of cutlery in Germany. But this acquisition did not pass the test of the German cartel office, though the reasons given were not altogether convincing. WMF was finally sold again in 1985. Following this failure of diversification Rheinmetall began systematically to buy itself into the large scale production of automotive parts and complemented its packaging machinery and machine tools activities through significant acquisitions. In a few years only employment doubled to 16 000 in 1989, the 100th year of Rheinmetall's existence. The share of military production fell accordingly. This strategic diversification implemented by Hans U. Brauner, an engineer who was installed as CEO in 1984 and kept this position until 1999 when he moved on chair the board of directors of the Rheinmetall group. He originally came from Bosch, a diversified high-tech group, among others the leading German supplier of automotive electronics with an early global reach. But there can be no doubt that this shift in direction was decided by the "Röchling family", though without the publicity such a step would have gained if taken by a joint stock company.

Without discussing the details of each acquisition it is worth observing that all companies acquired during the diversification drive were traditional family owned enterprises founded well before WW I. All of them operated successfully in a specialised niche market and were recognised internationally as top range producers. They belonged to the class of enterprises often labelled as Mittelstand, which is typical for the German machine tool sector. They were a perfect match for the specific entrepreneurial culture of Rheinmetall which continues to this day to be controlled (approximately 65 % of the shares) by the extended Röchling family. This ownership structure is untypical in the world of M & A of today. Therefore, shareholder value is not a product the management has necessarily to deliver. Not surprisingly the Rheinmetall shares underperform relative to average of the major indices and in comparison to the respective manufacturing branches Rheinmetall belongs to (Röchling 1999).

As a result of these acquisitions Rheinmetall had reinvented itself as a diversified group pursuing an internationalisation of its production well before the end of the Cold War and the ensuing shrinking of military procurement budgets throughout NATO. But from 1992 onwards Rheinmetall clearly pursued a bifurcated strategy. On the one hand diversification into new civilian product lines continued, as for example the acquisition of Mauser Waldeck, an office furniture manufacturer in 1993. The existing fields were expanded through acquisitions like the Kolbenschmidt AG in the automotive sector. Though Rheinmetall also pursued direct conversion of its military-electronic know-how basis into the markets of civilian security technology. This move into new markets led eventually to add-on acquisitions in this field like Heimann Systems in 1993.

But on the other hand Rheinmetall continuously also acquired units of military manufacturing aiming to consolidate its strong position in generally declining markets. The definite decision not to exit military production in spite of shrinking procurement budgets and to create instead critical masses with the aim to dominate certain product ranges in the European context was apparently taken in 1992 by the Röchling finance holding. Major early acquisitions were MAK System in Kiel (armoured cars and tanks) in 1990, WNC-Nitrochemie (precursor production for ammunition) in 1992, Mauser-Werke Oberndorf (medium calibre machine canons, particularly for fighter aircraft) from Diehl (a competitor in many fields) in 1995, Atlas Elektronik jointly with BAe (49%) in 1996. The integration of WNC-Nitrochemie, which is based in Switzerland, clearly heralded as early as 1992 that the Rheinmetall's strategy in the military field was oriented towards forming an international supplier, well ahead of its potential foreign competitors like GIAT, Royal Ordnance and others.

The automotive branch also expanded rapidly. In 1997 Pierburg AG and Kolbenschmidt were fused into Kolbenschmidt Pierburg AG. Rheinmetall attained a turnover of over 8 billion DM. (roughly 4 billion US $). Total employment of the Rheinmetall conglomerate reached 29 000, of which 10 700 worked in the automotive parts sector alone contributing almost 36 % of the total turnover. All civilian sectors have internationally expanded during the nineties, including notable subsidiaries in the United States. In 1998 the foreign turnover exceeded the turnover in Germany for the first time. Roughly one third was generated by defence technology section, while the share of civilian electronics and engineering (Jagenberg AG) as well as automotive parts was also one third each.

At the military side Rheinmetall's expansion in the nineties helped to consolidate its position in the military procurement markets through targeted vertical integration (from basic chemical production to applied electronics) in fields of established competence, but it also allowed for military-civil synergies in the field of maritime electronics and civilian security devices. Though these synergies were apparently a one-time win because military and civilian activities in the area of electronics at Atlas Elektronik were eventually separated into a military and a civilian organisation respectively. In a next step Rheinmetall took over all defence activities of Buck Werke GmbH & Co. which specialised in sophisticated ammunition, electronic protection devices, fog grenades etc. Buck Werke itself was among the enterprises which had used dynamic demand in the former GDR after unification to expand into civilian markets. Among others Buck had successfully entered the huge market for insulated windows after unification.

The selection of the winning consortium for the manufacture of the joint armoured battlefield vehicle in late 1998 accelerated the consolidation process of the German military-industrial sector. One after the other big player sold its armaments subsidiaries. Thyssen sold its tank production, Henschel in Kassel to Kuka, itself a subsidiary of IWKA. Kuka and Henschel belonged to the losing consortium of the above mentioned competition. Krauss Maffei, itself a subsidary of Mannesmann and producer of the Leopard tank among others formed part of the winning consortium, jointly with Rheinmetall and Wegmann as German participants. It nevertheless withdrew from the military market and sold 51 % of its activities to Wegmann. Rheinmetall, in turn, took over Kuka and Henschel (almost 1000 employees) from IWKA, like Krauss-Maffei one of the major German military suppliers for more than 100 years. As a result of this consolidation so far only two major suppliers of the ground forces Rheinmetall and Wegmann are left. There can be little doubt that Diehl having sold already part of its military manufacturing to Rheinmetall and a few other marginal players will come under pressure to sell their military units or even simply exit from military manufacturing. Diehl, a Bavarian military manufacturer whose ascension falls into the Strau§ era, like other German medium-sized military suppliers, had successfully diversified into civilian niche markets before the military markets collapsed.

It is noteworthy that little capital has been raised to bring about this sweeping consolidation. Wegmann which is a private company and Krauss-Maffei formed a 51 % 49 % consortium in which Krauss-Maffei surprisingly withdrew from the industrial leadership role. One may speculate why the big player left the leadership to the smaller partner. One hypothesis would be that Mannesmann wants to exit arms manufacture for reasons of image and/or market assessment. But it may also be that the partners concluded that the relative secretiveness of the status of a private company offers substantial advantages in the politically sensitive field of military production and exports.

In the case of Rheinmetall's takeover of Kuka/Henschel form IWKA the engineering branch of Rheinmetall Jagenberg was sold to IWKA. Observers of the deal classified this transaction as a swapping of units. For Rheinmetall this step meant a partial reversal of the systematic diversification undertaken throughout the eighties which might be interpreted as a partial reconversion to military production.

But the true entrepreneurial target of the expansionist consolidation of Rheinmetall's military activities was implicitly announced in the second half 1999 when it was made public that the military production of the internationally operating Swiss manufacturer Oerlikon Contraves would be acquired from Oerlikon & Böhrle by Rheinmetall. Oerlikon Contraves was a major competitor in international markets in the fields of medium calibre canons, anti-aircraft weapons and sophisticated ammunition. Oerlikon Contraves has production facilities in Switzerland, Germany, Italy and Canada with a workforce of 2000. Also in this case the price to be paid by Rheinmetall is modest, because Rheinmetall will offer 40 % of Contraves to the main Swiss military-industrial holding Ruag. This step will qualify Rheinmetall as a privileged supplier of the Swiss armed forces. Analysts put the price of this transaction between 120-250 million DM. Apart from enhancing its dominant role in many fields, it is not yet known whether significant synergies can be effected and to what extent a contraction of the surplus capacity at the European level will result from this takeover.

In the field of special ammunition another long-time competitor Eurometaal in the Netherlands has also been acquired. At the same time it was rumoured that Rheinmetall was also interested in taking over Royal Ordnance from BAe-Systems. But this was before the surprise deal with Oerlikon & Böhrle was struck. For the time being observers do not believe that Rheinmetall continues to pursue its interest in British Ordnance. Conflicting reasons were cited in the press. Some observers insisted that Rheinmetall wanted a secure commitment of the British government to guarantee privileged procurement from Royal Ordnance, whereas others argued that Rheinmetall was nervous because it would be faced with tacit government interference concerning the maintenance of production capacities on British soil. More generally BMW's difficulties with turning its Rover subsidiary around and the high exchange rate of the British pound are likely to discourage foreign suitors of British companies.

By the end of 1999 Rheinmetall has expanded and significantly internationalised its "DEfence TEChnology group" with a significant operational base outside the EU and even some footholds on the North American continent. The military turnover is somewhere between 4 and 5 billion DM with a clear upward tendency, once all recent acquisition will be included in Rheinmetall's accounts. The DEfence TEChnology group is convinced that its products and technologies will be in strong demand in the on-going process of preparing the armed forces for out-of-area operations and humanitarian missions (Rheinmetall Geschäftsbericht 1999). Rheinmetall also offers by now technologies of demining, decommissioning of military hardware and ammunition as well as large scale reconversion of Cold War ammunition stocks for use in military exercises. While the Leopard tank remains in the domain of Wegmann, except for the 120 mm smooth bore barrel which falls into Rheinmetall's product portfolio, the company is now commanding the production of all other classes of armoured vehicles. It is likely that Rheinmetall will further consolidate its strong position as a supplier of land forces while maintaining its role as niche supplier of naval components, fighter aircraft weapons and military simulators, mostly on the basis of synergies between the different segments.

In certain fields there remain two less powerful competitors in Germany, Wegmann (Leopard tank) and Diehl, a leading producer of tank chains as well as many military electronic specialities. Conditions are set that Wegmann and Rheinmetall will "co-operatively" control the "market" and jointly try to prevail throughout Europe with their product range. The situation for Diehl is more ambiguous. On the one hand Diehl has partly reinvented itself into a diversified group focusing on the civilian side on automotive parts and special metals for coins, on the other hand for all its excellence in a few niches combining ammunition and highly specialised electronics Diehl does not reach the critical mass generally considered indispensable to survive as an independent player in national and international procurement markets. A few products directly compete with Rheinmetall. For example both have developed a heavy mine clearing system for post-conflict mine clearing. Consolidation in these fields in one way or another seems inevitable.

The land warfare supply in Germany is now dominated by two family owned private companies, Wegmann and Diehl, with limited obligations of reporting, and Rheinmetall which is a joint stock company whose majority is however controlled by the Röchling family. Diehl has transformed itself into a foundation which controls a diversified conglomerate of small and medium sized companies, organised in four independent groups. This step was taken by the Diehl family in reaction to the decline of prosperous procurement contracts obtained in a largely non-market world of political lobbying and a national military-industrial policy based on outdated assumptions of supply requirements during times of war. The founder of the company was already a ruthless profiteer of the arms boom during WW II. The extraordinary expansion of Diehl after WW II was again based on military procurement. In post-war times Diehl represented a prototype of Bavarian companies whose success was based on the close political linkages with the CSU under Franz-Josef Strauß, the influential one-time minister of defence (Lock/Voß 1994 p.346). Reacting to the declining military procurement Diehl converted itself from a private, family controlled company into a foundation. The foundation as the command centre of conglomerate will give Diehl the flexibility to create joint stock companies and to be able to attract (foreign) capital partnerships. Presently it seems likely that Diehl will make use of its historical role as the preferred license producer of American technology procured by the Bundeswehr (Sidewinder, Stinger etc.) to sell itself as bridgehead for so-called transatlantic alliances through which American producers seek entry in European procurement markets. The existing links (license production among others) with Lockheed will provide a test case during the forthcoming evolution of transatlantic strategies in the arms industry. Alternatively further military units of Diehl will either end up with Rheinmetall or close down.

The future of Wegmann - Krauss-Maffei is slightly more fuzzy, because it is presently a strong, though more or less one product actor (main battle tank) in the military procurement markets. In its present structure it seems impossible to defend this strong position, should a new generation of tank technology ever come to be demanded by the armed forces. As a private company it would lack both the critical mass and the capital required to launch an entirely new generation of tanks. Thus, consolidation, most likely a merger with the much stronger Rheinmetall would become imperative, in the unlikely case that third or fourth generation major battle tanks should still have a military future.

A strategy in the German context Comparing

Rheinmetalls strategy with companies across Europe which had the same roots, several properties are noteworthy. The company did not come under state control after WW II., due to a clear governmental strategy throughout the last 40 years not to bail out ailing military suppliers. However, this seemingly tough governmental policy was considerably softened by the actual procedures of contracting which allowed for political lobbying. The fact that Diehl, one of the surviving suppliers, still maintains "independent" (see: website www.diehl-gruppe.de) liaison offices in Bonn (where the ministry of defence continues to operate) and Koblenz (where the BWB, the civilian procurement bureaucracy resides), documents the procurement culture in Germany. Secondly, the meantime survivors Rheinmetall and Diehl strategically incorporated early on the major change in the defence-technological paradigm into their product designs, both focused on the development and integration of electronic devices.

The last annual report of Rheinmetall emphasises this point: "In the field of electronics, which we continue to systematically expand, we enlarge continuously our position through profound knowledge and the internal know-how transfer and the projects of innovation which embrace both our civilian and military-technological businesses." (Rheinmetall 1999, p.12). The annual report continues: "We are after 20 years of structural change a risk-diversified enterprise active in the fields of automotive parts, electronics, defence and engineering (see appendix 2). We are not a conglomerate. We stand by our "roots in defence" (It is noteworthy that the word defence as opposed to Verteidigung is being used in the German text. This seems to be oriented towards internationalisation and at the same time plays down the military dimension in the German context. P.L.), but we are not any longer an "armaments share". We derive 80 % of our profits from civilian businesses (implying that the defence activities presently underperform. P.L.). We must and we will without compromise grow, because "the critical mass" of all our business activities is unrepentantly growing.Ó (Rheinmetall 1999, p.12).

Rheinmetall's research and development is oriented towards highest international standards. In the early nineties the CEO of Rheinmetall emphasised this point and even derided the German procurement bureaucracy in public arguing that it was not demanding enough and that the armed forces were satisfied with military specifications which were clearly second-rate if compared with current standards of many civilian systems. While many observers were shocked by this statement, its logic was already anticipating the requirements for Rheinmetall to succeed as a leading international player in a consolidated European market, which as he clearly anticipated would demand solutions far beyond the Cold War horizons dominating the routine of procurement procedures at the time. (Germershausen 1993). A more general interpretation of this statement would be that the chairman highlighted the need to open military technology towards faster absorption of technological innovation in the civilian sector of the global economy.

By the end of this century the leading German industrial groups, even those whose roots were in arms, have exited from the military sector. This list includes such conspicuous names like Siemens, Thyssen, Krupp, IWKA, Mannesmann - Krauss-Maffei, Ruhrstahl etc., Daimler-Chrysler which controls DASA being an exception. But in the case of DASA it may be argued that the main strategic thrust is civil aviation and space and that contracts for military aircraft are but a specific form of subsidising the aviation industry beyond the limits the EU has committed itself in an agreement with the United States. In Germany even naval construction is spread over many yards with the aim to secure the survival of the shipyards in the highly competitive and volatile civilian markets. A notable exception is LŸrssen, again a secretive private company, which specialises in small military craft mainly for export, but has also diversified into the construction of luxury yachts for exotic magnates.

The strong historical linkage between steel, machine building and arms production in Germany after 1871 does not any longer exist. Arms production in the German context after WW II never acquired more than a niche status, not least because manufacturing in general was a much larger component of the economy than in other European countries. A volume qualifying only for a niche status in German manufacturing amounts to an already significant branch in the much smaller British or French manufacturing sectors. In contrast the political rhetoric surrounding arms manufacturing portrayed a self-image of an essential, forward looking element of Germanys status as a global industrial powerhouse. The myths claiming leadership in technological innovation slowly subsided during the last 25 years. A more realistic approach was reflected in the transformation and expansion of the Fraunhofer Gesellschaft into a major element in the German innovation system. While it is true that most steel and machine tool manufacturers with a historic role in armaments put a limited stake into procurement during the first fifteen years, many began to exit the field by 1970 either by simply closing production lines or by selling off the respective plants. It was in this way the Bavarian Diehl company turned into the foremost producer of chains for tracked military vehicles with the plant being located in the very heart of the Ruhr area and disposed of by Ruhrstahl.

The saga of the military-industrial lobby in Germany insists that the restrictive arms export policy hampered the development of the industry. However, the industries supplying land forces achieved a dominant position as an exporter within European NATO with a broad range of products from the Leopard tank to the G-3 and the naval industry outpaced its British and French rivals in international markets. Since their was no autonomous fighter aircraft production in Germany, exports were carried out by the partner countries of the co-production schemes. Thus, except for the admittedly profitable markets in countries opposing Israel which for political reasons remained by and large off limits for German arms exports, only a very few attractive export opportunities were missed by the German military manufacturers as a result of the supposedly restrictive export regulations.

By 1980 virtually all manufacturers had started to diversify into civilian markets, mostly by buying themselves into civilian production. And it was only during the nineties when companies like Rheinmetall and Diehl started to intensively explore synergies between their military know how and civilian applications. The obvious fields were control and observation technology applicable in the rapidly growing civilian security market. Though these efforts were only met with modest success.

Military aviation industry is a case apart. It lagged far behind the UK and France. Even today the independent technological competence of DASA does not fully match the standing of their British and French partners. The question of diversification does not apply and virtually all products, civilian and military, are co-produced internationally.

A common feature of those German companies left in the field of equipment for the land forces is either private ownership (Wegmann, Diehl) or quasi private control of a joint stock company (Rheinmetall). Secondly, all three have a sound record in diversification into civilian markets initiated long before the end of the Cold War which provides them with considerable flexibility in reacting to the contracting military demand . The resolve to survive and eventually expand during the foreseeable process of consolidation of arms manufacturing within the EU and beyond turns out to be costly. Sustaining such a strategy negatively effects the current results compared to industry averages. As private or quasi-private companies they are not exposed to shareholders who generally insist on immediate value. The argument here is that Rheinmetall operates with a longer time horizon than normal joint stock companies do, almost like a private company. Another important factor would be the imperative to achieve the necessary critical mass before being crowded out as an integrator of military systems. Here Rheinmetall appears to have clearly taken the lead, particularly with respect to the already achieved international profile of its military business, if compared with its German rivals Wegmann and Diehl. More generally, in order to succeed in the battle to survive as an integrator of weapon systems in the European procurement market in ten-years time, extraordinary financial resources and entrepreneurial stamina are needed. Regular financial markets are not easily convinced to provide the indispensable financial backing for the implied extended time horizon. Two alternative sources of lending the resources seem feasible: either substantial government subsidies for "national champions" in disguised form or a stable, protected market with high margins. Both are basically political issues. Will the next governments still play the national card and pamper "national champions" as in the past? And will the weapon-devouring dictatorships in oil-exporting countries continue to provide privileged markets for certain companies?

More general parameters to be considered are the entry barriers for newcomers related to tacit know-how required to master certain elements of production or the opposite development that civilian high-tech will eventually prevail over the specificity of military designs. Though it seems that this dichotomy oversimplifies the issues at stake, a careful observation of these issues will help to trace the logic of the continued profound changes in the way the member states of the EU will procure their weapons.

From a German perspective the properties of the "Rhenanian capitalism" and the traditions of "Mittelstand" have not yet lost all their significance against the massive onslaught of financial capital, perceived as Anglo-Saxon, as the sole determinant of economic destiny.

Appendix 1: Röchling Gruppe

19th century vertically expanding Steel "dynasty" originating in Völklingen (Saar region) with interests in Lorraine Post-1945: organised as a family holding, difficult restart due to the separation of the Saar region until 1954 1954-2000 almost full "conversion from a German steel company to a diversified high-tech holding with a global reach.

The family holding (183 parties in 1999*) controls two groups
Gebr, Röchling Mannheim
family holding: 100 %
Röchling Industrieverwaltung GmbH Mannheim
family holding: 100 % ordinary shares + 50 % preference shares
Communication technology Control technology Synthetics Wood, metall Automation Rheinmetall
Postalia GmbH
Voigt & Haeffner
Camille Bauer (CH)
Bertram GmbH
Wilh.Lambrecht GmbH
Röchling Haren
Sustaplast KG
Depalor S.A.(F)
CDMLaminates (Canada)
Röchling Kalt- Walzwerk KG
Röchling Getriebe
Funke + Huster
Fernsig GmbH
Röchling Techn.
see appendix 2

Total (1998): workforce ca.40 000; turnover 11 billion DM, more than 50 % abroad.

steel-related manufacturing (in possession before WWII)

Source: Röchling 1999, Röchling-Gruppe 1998.

Appendix 2: Organisation of the Rheinmetall Group

Röchling Industrial Administration GmbH <RIF> (65% of voting shares, 9.2 % of non-voting shares

Kolbenschmidt-Pierburg Rheinmet Rheinmetall Elektronik AG Rheinmetall DeTec AG Jagenberg
74 % Rheinmetall
(electronic; civilian security)
67 % Rheinmetall
33 % Energie Baden-Würtem-berg AG
(military technology)
100 % Rheinmetall
sold in 1999 to IWKA in exchange for Mauser
    Weapons and ammunition Systems and appliances Oerlikon-Contravez (Switzerland, Italy) Mauser (Oberndorf) not yet included in the consolidated balance. Eurometaal (Netherlands) not yet included in the consolidated balance.
STN Atlas Electronik 51%, BAe-Systems 49 % Turnover: 1,6 billion DM Employees: 4 400 Naval Systems Systems for ground- and air forces Simulation Naval electronics
Turnover: 3 billion DM Turnover: 1,4 billion DM Turnover: 3,6 billion DM Turnover: 1 billion DM
Employees: 10.200 Employees: 6.000 Employees (STN Atlas not included): 12.500 Employees: 3.600


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