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Battle for U.S. defense work goes global, flies above issues
(Chicago Tribune (KRT) Via Thomson Dialog NewsEdge) Jul. 23--France and Germany opposed the war in Iraq, but that's not stopping their corporate interests from seeking to arm U.S. troops.
The Franco-German company European Aeronautic Defense and Space Co. (EADS) last month won a helicopter contract from the U.S. Army potentially worth up to $2 billion. And the company isn't stopping there.
It is vying for a contract for a light cargo plane that the Army and Air Force envision as a versatile battlefield transport.
And on the horizon is the biggest prize of all: A pact for hundreds of aerial refueling tankers to be delivered during the next two decades, pitting EADS, the parent company of European jetmaker Airbus SAS, against Chicago-based Boeing Co.
The deals will test the nation's appetite for foreign military suppliers in an increasingly global defense industry. Overseas defense contractors want a bigger piece of the rich American military budget, the largest in the world, but face opposition from national security hawks and other critics who worry about jobs, technology and secrets leaving the country.
To soothe the opposition, the Europeans regularly form alliances with U.S. defense companies and promise to open factories and create jobs on American soil. EADS, for example, will expand a facility in Mississippi to build helicopters currently produced in Germany. One of its partners is American helicopter giant Sikorsky Aircraft.
"In a way, we're not concerned," said John Douglass, president of the Aerospace Industries Association, a U.S. trade group representing Boeing and other U.S. defense companies. "Most of the jobs are staying here in the U.S., and the countries that are doing this are by and large staunch American allies."
The Defense Department, under pressure to rein in skyrocketing weapons costs amid rising federal deficits and ongoing war expenses, supports an international supply base to create as much competition as possible.
"The Department of Defense's acquisition goal is to ensure that the U.S. war-fighter has the most innovative, reliable, effective and affordable defense products in the world," Pentagon spokeswoman Cheryl Irwin said in response to written questions. "To achieve this, the department relies on, to the maximum extent practicable, competitive market forces to shape the industrial environment and on a global commercial and defense industrial base."
However, foreign suppliers are still fighting for trust and respect on Capitol Hill. Some politicians, especially from states like California with big defense industries, want tax dollars, jobs and critical military technologies to stay in the United States.
House Armed Services Committee Chairman Duncan Hunter (R-Calif.) has been the lead backer of tightening "Buy America" rules that require food, clothing, fabrics, specialty metals and certain tools used by the Pentagon to be made in the United States.
Last fall, Hunter and Rep. Norm Dicks (D-Wash.), whose district is home to thousands of Boeing workers, tried to get a provision added to the defense authorization bill that would have severely limited the Pentagon from doing business with firms that receive subsidies. The measure was aimed squarely at Airbus, which makes the commercial planes EADS will modify into military refueling tankers. The European Union and the United States are involved in a bitter trade dispute over subsidies to aircraft-makers.
Under pressure from the Pentagon and other defense contractors, Hunter removed the clause from the legislation. But his intent has sneaked its way into other official proceedings.
In launching the contract for a new refueling tanker earlier this year, the Air Force asked potential bidders for information about subsidies, as well as any potential retaliatory duties that could be imposed by the World Trade Organization.
Even though Boeing must account for such things as government research funds and state tax breaks, it welcomed the additional requirement.
"All we look for is a level playing field," Boeing Chairman and Chief Executive Jim McNerney said recently. "Our government holds us to high standards and transparency.
"We just want our competitor to be held to the same standards. It is not a burden that has been put on a foreign competitor that we don't also bear."
The subsidy debate should be stripped from the tanker contest because the requirement might favor Boeing, said David Oliver, chief operating officer of EADS North America.
EADS has support for its stand from an unlikely source: U.S. defense giant Northrop Grumman Corp. The Los Angeles-based contractor has teamed with EADS to build a tanker that would be a modified version of the Airbus A330 commercial jet. Boeing is expected to offer the 767 as a tanker.
The stakes are huge, as the Air Force looks to replace an aging tanker fleet with hundreds of new planes. Its first purchase could be as large as 189 tankers in a contract worth potentially more than $20 billion. The competition could be decided as early as next summer.
The Europeans are crossing the ocean because the opportunities are greater than they are back home. European defense spending trails far behind that of the United States. In 2004, the U.S. spent $460.5 billion on defense, more than twice as much as the 25 members of the European Union combined, according to the EU's Institute for Security Studies.
To tap into the booming U.S. defense market, European companies have found ways to help their cause and ease concerns that foreign suppliers are helping to shrink the U.S. defense industrial base.
They are building plants here, copying a formula first perfected by the Japanese automakers. In addition to the helicopter plant in Mississippi, EADS plans to assemble and modify tankers in Mobile, Ala., creating up to 1,000 jobs.
On Tuesday, a trans-Atlantic team that includes Boeing and Alenia North America Inc., part of Italian conglomerate Finmeccanica, announced it would assemble a cargo aircraft in Florida for a potential multibillion-dollar program for the Army and Air Force.
"We believe that the best strategy is to cement our presence in the U.S.," said Giuseppe Giordo, president and CEO of Alenia North America, echoing the comments of other European suppliers. "We believe we have to invest in the U.S."
By opening U.S. factories, European contractors are not only creating jobs but also forging all-important political ties. Alabama senators Richard Shelby and Jeff Sessions already have lent their support to EADS in the tanker contest. Sessions is a member of the Senate Armed Services Committee.
It also helps to have an American front man. In the tanker bid, Northrop is the lead contractor, meaning that it would manage the program.
"Had EADS not teamed with Northrop, it would have no chance at the tanker contract," said Loren Thompson, an analyst at the Lexington Institute defense think tank in Arlington, Va.
In joining with Northrop, EADS followed the lead of helicopter-maker AugustaWestland, another Finmeccanica unit. That company teamed with Lockheed Martin Corp. to win a highly competitive deal to build new U.S. presidential helicopters.
If all else fails, buy American companies. England's BAE Systems PLC has acquired several domestic military contractors in recent years, including last year's purchase of United Defense Industries, manufacturer of the Bradley Fighting Vehicle.
The dealmaking and alliances sometimes make it hard to tell what's American and what's not. To wit, the Pentagon says it's difficult to estimate how much of its spending goes to foreign suppliers. Analysts say that with the exception of BAE's U.S. division, which has annual sales of more than $9 billion, foreign suppliers own a small share of the Pentagon's spending.
Even so, the Pentagon has strict rules governing foreign contractors. To participate in classified contracts, a foreign company's U.S.-based operations must have its own board of directors. The U.S. subsidiary also has to monitor communications with the foreign parent company.
Some say national security fears are overblown. BAE Systems, for instance, participates in some of the most secretive intelligence and eavesdropping programs the military has, Thompson said.
Despite the protections, some in Congress resent the foreign influence, especially from countries some see as unreliable allies, such as France and Germany.
Nevertheless, EADS managed to secure the Army helicopter contract in a four-way contest that included two U.S. bidders.
"In defense, we have been the leaders, but in some sectors like light planes and helicopters, the Europeans have made substantial investments in new technology and we have not," said Douglass of the aerospace trade group.
The contract was the first major Pentagon contract EADS has landed and gave a big boost to its ambitions in the American defense market.
"It's a significant win for us," said Oliver. "We believe to provide the U.S. war-fighter with the best capabilities you have to look at the entire global industrial base."
asachdev@tribune.com
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