French defense groups look to Macron to redress the reputation of a submarine
On September 15, colleagues at Pierre-Eric Pommellet Naval Group were delighted with a long-awaited letter from an Australian government official claiming that the company had completed an important phase of its multibillion-euro submarine contract when he got a phone call telling him that the whole deal was dead.
An Indo-Pacific security alliance signed between the United States, the United Kingdom and Australia under which Washington would supply nuclear-powered submarines has laid off the French ships, the chief executive of the company has been informed. of public defense.
The Franco-Australian submarine deal “was not just a program, it was a transformation for the company, we were projecting Naval Group into a new world,” Pommellet told the Financial Times. “It was a transformation for France too. And so everything that is happening today is difficult. It’s hard for the team.
Parts of the Australian government had apparently not been made aware – hence the unfortunate letter, Pommellet said.
The breach of the contract will be a financial blow for Naval Group and, to a much lesser extent, Thales, which owns 35% of the capital of the public defense company and had its own agreement for the supply of electronic systems. Safran, the third French player in defense, which had been entrusted with research and development work, declared “to analyze the effects” of the termination on its activity.
This loss is bad news for French defense exports. Although they have increased in recent years thanks in large part to Dassault Aviation and Naval Group, regardless of the Australian deal, orders fell to their lowest level in eight years last year, according to data from the Department of defense. It also comes two months after the Swiss government chose Lockheed Martin’s F-35 against competition from Dassault’s Rafale and Eurofighter.
Sash Tusa, aerospace and defense analyst at Agency Partners in London, said people fall into two camps when it comes to what caused the contract to fail: those who believe that it is the product of an “Anglo-American quilting”, and those who say it was caused by operational faults of Naval Group. “It’s probably somewhere in between,” Tusa said.
In the Norman port of Cherbourg, where French submarines were to be built, the debate touched the morale and piqued the pride of the workers. “We know that this could have an impact on the reputation of Naval Group,” said José Baptista, union member. “That is why we are making a big effort to say that it has nothing to do with the quality of our work and we are doing everything possible to make sure that we compensate for the loss of the Australian business with new contracts.”
In addition to the 840 million euros received by Naval Group for the work sections already carried out, the operation would have generated around 500 million euros in annual turnover, or 10% of total turnover, for the “years to come”, according to Pommellet. “It’s a huge crisis,” he said. “But … the world is big and many people are interested in what we do.
President Emmanuel Macron has made it his mission to show it precisely: on Tuesday he announced a contract of 3 billion dollars for the delivery of three Belharra frigates to Greece. The ships will be built in France by Naval Group. The Greek agreement represented a “vote of confidence as well as a demonstration of the quality offered by France”, he said.
France also announced this week that it will sell 52 Caesar artillery guns to the Czech Republic for € 257 million.
Thales must also preserve its reputation. In the aftermath of the so-called Aukus deal, the group told investors it would have no material impact and confirmed its profit targets for 2021.
The company received around 65 million euros in annual profit before interest and taxes from its stake in Naval Group before the pandemic. Thales said the maximum it could earn in one year from the submarine contract through its stake in Naval Group was € 30 million, which is still a fraction of its € 2 billion in annual revenue in 2019.
Thales could also still sell electronic components to Lockheed Martin. While the US defense giant was to manufacture submarine combat systems as part of the French deal, some analysts believe it could still become a supplier under the Aukus deal.
However, the slow progress of the Naval Group submarine contract, and a potential loss of credibility in France’s defense operations, could limit the growth of Thales in Australia, which has become a key market for the company these days. recent years, according to some.
“Whether they like it or not, it’s a black mark for Naval Group,” Tusa said. And, for Thales, it is a “loss of speed on the Australian market, which takes its breath away”.
However Thales said it was a “misunderstanding”.
“It should be borne in mind that Thales Australia, with its 3,800 employees spread over 12 major sites, is an Australian company, an industrial leader in defense in the country” and is a “trusted partner in the service of the Australian Defense Force for over 30 years. Said a spokesperson.
As the financial details of a compensation deal are worked out by lawyers in Paris and Canberra, French defense firms will seek closer European cooperation, reflecting Macron’s desire for a more cohesive European strategy. Defense experts have long called for further consolidation of Europe’s fragmented defense industry, in part to help boost national budgets, but sovereignty issues have proven too difficult to overcome.
“Europe must come closer,” said a French leader.
As he announced an investment of 8 billion euros in EU defense initiatives over the next six years, Hervé Grandjean, spokesman for the French Ministry of Defense, said the rupture of the agreement should ‘lead us to. . . strengthen our partnerships with European countries ”.
But some EU partners are skeptical. Christian Mölling, research director at the Berlin-based German Council on Foreign Relations, stressed that discussions on potential industrial consolidation have been going on “for 30 years and no one has consolidated.”
The French, he added, will never be “willing to integrate what they consider to be the crown jewels of their defense industry”.