Fri. Jul 1st, 2022

On 15 September, Pierre-Eric Pommellet’s Naval Group colleagues were delighted by a long-awaited letter from an Australian government official that the company had completed an important phase of its multi-billion euro submarine contract when it received a phone call telling it that the whole agreement dies.

An Indian-Pacific security alliance signed between the US, the UK and Australia, according to which Washington can supply nuclear-powered boats, has made French vessels redundant, the chief executive of the state-owned company said.

The Franco-Australian submarine agreement “was not just a program, it was a transformation for the business, we projected Naval Group into a new world,” Pommellet told the Financial Times. “It was also a transformation for France. And so everything that happens today is difficult. It’s hard for the team. ”

Some parts of the Australian government were apparently not at stake – hence the unfortunate letter, Pommellet said.

The broken contract will be a painful financial hit for Naval Group, and to a much lesser extent Thales, which owns a 35% stake in the state-owned defense company and has its own agreement to provide electronic systems. Safran, France’s third-largest defense company, which has been assigned to research and development work, said it was analyzing “the consequences” of the termination of its business.

The loss is bad news for French defense exports. Although it has increased over the past few years, largely thanks to Dassault Aviation and Naval Group, regardless of the Australian agreement, orders dropped to an eight-year low last year, according to data from the Ministry 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.

Line graph of total export orders and shipments of € 1 billion showing that French defense exports were on the rise before the pandemic
Line graph of exports by region, Oceania includes Australia and New Zealand, € (m) showing that France has increased its exports to Australia in recent years

Sash Tusa, an aviation and defense analyst at Agency Partners in London, said people fall into two camps when it comes to the cause of contract failure: those who believe it is the product of an “Anglo- US stitch up “, and those who say it was caused by the operational errors of Naval Group. “It’s probably somewhere in between,” Tusa said.

In the Normandy port of Cherbourg, where the French submarines were to be built, the debate hit morale and piqued workers’ pride. “We know this could have an impact on Naval Group’s reputation,” said union member José Baptista. ‘Therefore, we make a great effort to say that it has nothing to do with the quality of our work, and we do everything in our power to ensure that we compensate the loss of the Australian business with new contracts.

In addition to the € 840 million Naval Group received for the portions of work it has already completed, the transaction would have yielded approximately € 500 million in annual revenue, or 10 percent of total revenue, for the “coming years”, according to Pommellet. “It’s a huge crisis,” he said. “But. . . the world is big and there are many people who are interested in what we do. ”

President Emmanuel Macron has taken on the mission to put it bluntly: on Tuesday, he announced a $ 3 billion contract for the delivery of three Belharra frigates to Greece. The ships will be built in France by Naval Group. The Greek agreement represents a “vote of confidence as well as a proof of the quality that France offers”, he said.

France also announced this week that it will sell 52 Caesar artillery rifles to the Czech Republic in a deal worth € 257 million.

Thales must also maintain his reputation. The day after the so-called Aukus deal, the group told investors it would have no material impact and reaffirmed its 2021 profit targets.

Top 10 International Defense Companies By Revenue, $ Billion (2020) G1600_21X

The company received approximately € 65 million in annual earnings before interest and taxes from its interest in the Naval Group pre-pandemic. Thales said the maximum he could get out of the submarine contract in a year via his stake in Naval Group was € 30 million, which is still a fraction of his € 2 billion annual earnings in 2019.

Thales can also still sell electronic components to Lockheed Martin. Although the American defense giant would make the submarines’ combat systems under the French agreement, some analysts believe that it could still become a supplier as part of the Aukus agreement.

The slow pace at which the Naval Group submarine contract is progressing, and a possible loss of credibility in French defense operations, could limit Thales’ growth in Australia, which has become a major market for the company in recent years, some said.

“Whether they like it or not, that’s a black dot for Naval Group,” Tusa said. And for Thales, it represents a ‘momentum loss in the Australian market, taking the wind out of its sails’.

Thales, however, said it was a ‘misunderstanding’.

“We must keep in mind that Thales Australia, with its 3800 employees in 12 major areas, is an Australian company, a leader in industrial defense in the country” and a ‘reliable partner’ that the Australian Army has been using for over 30 years. years serve “, said a spokesman.

As the financial details of a compensation agreement are ironed out by lawyers in Paris and Canberra, French defense companies will seek closer European cooperation, which is an indication of Macron’s pursuit of a more coherent EU strategy. Defense experts have long called for greater consolidation of the fragmented industry in Europe, in part to strengthen national budgets, but sovereignty issues are too difficult to overcome.

“Europe needs to get closer,” a French executive said.

When he announced an investment of € 8 billion in EU defense initiatives over the next six years, Hervé Grandjean, spokesman for the French Ministry of Defense, said that the broken agreement should lead us. . . strengthen our partnerships with European countries ”.

But some EU partners are skeptical. Christian Mölling, research director of the Berlin German Council on Foreign Relations, pointed out that discussions on possible industrial consolidation “have been going on for 30 years and no one has consolidated”.

The French, he added, would never “be willing to integrate what they see as the crown jewels of their defense industry”.

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