“Too many manufacturers are producing too many systems in too many EU States”

EDM: What would you say are the main challenges - structural, technological, political - European defence producers are facing today and how are KMW and KNDS (your joint venture with Nexter) taking them on?

Frank Haun: At the moment, people don’t yet like to talk about a common European army. However, EU Commission President Jean-Claude Juncker said at the end of last year in Berlin that the defence of Europe must be organised differently than in the past. Europe’s challenges in terms of security policy are almost impossible to overcome without interoperable armed forces and a fully integrated leadership. That means consolidation: firstly, consolidation of the procurement system in Europe, because the procurement requirements dictated to us by the current external and safety policy situation have become almost impossible to finance at a national level. Secondly, streamlining the processes because, while the sharpening of our external and security policy situation is continually accelerating, large arms projects need more and more time to move from design to fitness for operation. All across Europe we have to employ every means possible to close this gap once again. Thirdly, consolidation of the provider side, because the necessary cutting-edge technology can only be developed by a high-performance industry that is willing and able to cooperate. For KMW and Nexter, this was the reason for a partnership to make us competitive together at the international level in the long term. That is the first step in leading the arms industry away from overcapacity, fragmentation and non-transparent regulations.
 

That is not yet clearly visible. At least the political public in Europe is again aware that peace, prosperity, democracy and safety do not guarantee themselves. We must be able defend Europe and we have the duty to also protect others from wrongful violence. That includes appropriate financial provisions. Just 30 years ago, Germany for example had some 2.8% of its gross domestic product available as a defence budget without its armed forces ever taking part in a single foreign deployment. Germany’s current defence budget stands at 1.2% of GDP and the German army is part of large-scale deployments from the Hindu Kush to Mali. The voluntary agreement to achieve 2% of GDP again by 2024 is necessary; however, the most important issue is how the money is spent. At the moment, Germany’s arms investment stands at 16%, while the target was 30% of the defence budget.

How will the European Commission’s Defence Action Plan (EDAP) help your company and the defence industry in general to meet these challenges? What’s your assessment of EDAP?

The Action Plan is raising hope for the first time. President Juncker declared in his State of the Union Speech that Europe must be able to defend itself internally and abroad and that this goal is not possible without cooperation, innovation and investment. Otherwise it would not be possible for Europe to fulfil more voluntary strategic responsibilities. As regards establishing a European defence fund as envisaged in the Action Plan, I am as sceptical as I am about many other political interventions in market processes. We don’t need any new subsidies, but instead fair market conditions in the entire EU if we want the best competitors and technologies to triumph. More market also means: shake-out. This is urgently needed if we’re going to be globally competitive and if the aim within the EU is more standardisation and more interoperability. Nowadays, too many manufacturers are producing too many systems in too many EU Member States and they are then, unavoidably, too expensive. 
 

As you know, the EDA is working to enhance and deepen the structured dialogue with industry. What would be your recommendation to make the best of it?

Industry is already pretty involved in many studies in the capability and technology domains of the EDA. What should be enhanced is a dialogue between these CAPTECHs. We have to become better at converting documents into hardware. That would certainly be helped by an increased budget for the EDA.
 

Some analysts say that the creation of KNDS in late 2015 has set a trend for the future which more European defence producers will have to go if they want to remain competitive, namely one of cooperation and consolidation. Would you agree? 

Absolutely. Europe will only be capable of defending itself if its defence industry consolidates. Consolidation means: shake-out and cooperation, flanked by denationalisation. That is the way chosen by the owners of KMW and Nexter when they founded KNDS. France made a particularly large contribution to that process. It requires a great deal of trust to place half of a 350-year-old state enterprise in the hands of 27 German families. Vice versa, the owners of KMW also placed half of almost 180 years of exclusive family ownership in the hands of the French state. That is what having the courage to face the future looks like, and we would bet anything that this nucleus of a European national system of consolidation will win more partners. It is also essential that the politicians play their role. A construct such as this will only be successful if work on sensitive technologies is permitted across national borders and if a unified export right applies to the products that result. I can see too little improvement on these issues.
 

It was said at the time that KNDS would serve as ‘platform’ to integrate other manufacturers. How much has this project advanced and could it one day become the ‘Airbus of the land systems sector’ as some have suggested? 

Our sector has to reorganise itself. The idea of a single leadership of European armed forces - without even talking about a single European army - can only be realised if Europe pulls more tightly together, including in the defence industry. It is no secret that the KNDS doors are open to other partners. We are receiving reports from various sources that people would like to speak to us about common future prospects. Airbus has its own story – but just look at the highs and lows the company has gone through to be where it is today. It was worth every effort – and yet Europe still finances three different fighter jets.

The efficiency and interoperability of Member States’ Armed Forces suffer from today’s fragmentation of the EU defence market and the high variety of systems in operation. Is there anything the industry can and wants to do to change that situation?

We absolutely want that to change; we are suffering ourselves under the continued absence of the effects of scale and under an immense number of development variants of many products, depending on which customer state they are delivered to. The consolidation on the provider side must therefore go hand in hand with a consolidation on the purchaser side: Europe needs a harmonised management of military needs and requirements, harmonised procurement cycles, uniform standards and norms. The industry can contribute by using consolidation to limit options - but the arms trade is an interdependent system and therefore only performs optimally if all its subsystems are properly attuned to each other.
 

A McKinsey study found that European MoDs could save up to 30% of their annual defence spending through more pooling of procurement. Are you not worried that more pooling could mean less sales and margins for the industry? 

 Certainly not. Firstly, you have to acknowledge that we are lacking equipment: there is too little of everything. Therefore, before we can talk about pooling, we first have to set priorities and rebuild our military deterrent potential which we have now been phasing out for two decades. We at KMW know that significant cost advantages can be achieved if states work together: we can see this in the Leopard user association with 13 members in the EU alone. Did that lead us to ruin? No, on the contrary. It saves us a great deal of useless effort. We are trying the same with the Boxer, a highly protected 8x8 vehicle. The Boxer is currently used by the Netherlands and Germany (soon to be joined by Lithuania) – everything under the umbrella of an OCCAR contractual framework. The British are very seriously considering signing on to this contract as well. Then four European nations can set a new standard and save a lot of money in doing so.