AIRBUS AND BAe SYSTEMS - THE REAL BOTTOM LINE

Reports that BAe Systems is to sell its 20% stake in Airbus to the EADS, the European aerospace and defence consortium confirmed.....

What some Pundits Think.

Press and City responses to the decision by BAe Systems to sell its 20% stake in Airbus to what will be a Franco-German controlled enterprise have been relatively muted:

• Some commentators have taken an investment market view and congratulated BAe on making a smart move getting out of Airbus at a time that the civil aircraft business may be about to enter a cyclical decline. These pundits also observe with some relish that BAe Systems will now have a 'War Chest' of several billions to pursue US defence acquisitions.
• Others dismiss the potential impacts on the UK public interest and employment by taking a determinedly upbeat 'market forces will settle all' approach. The Financial Times leader of April 8^th is of this ilk: Eventually, perhaps, when Airbus, at the turn of the next decade (2011? - author), decides on a successor to the A320, there may be a pressure to site wing-making elsewhere, especially from the Germans, who have long coveted the UK speciality in Airbus construction.
  At that point, the UK part of Airbus may have to fight for its work share. It should not rely only on the UK government to brandish its sunk investment in Airbus, though London has already used this to negotiate certain safeguards about jobs and work share in the UK. Rather it will be up to Airbus' UK factories to prove their mettle and keep their own work share on their own industrial merits. Equally, however, EADS shareholders will have to show that they recognise such merits.

What Are they on about??

At this stage, we feel an uncontrollable need to interject........ Readers may wish to go back and read the last bullet point before reflecting on the following:
Airbus is about to become a Franco-German controlled enterprise. The French and German governments have a strong interest in the company.
UK companies, investors and the UK government are about to lose any significant say in what Airbus Industrie does by way of strategic decision-making. Anybody who has worked outside the confines of newspaper leader writing will know that the location of design, development and manufacturing are decisions made in corporate headquarters, and factories don't get much of a say.
Furthermore, we are now talking about the Franco-German Airbus Industrie, which will be much influenced by the national interests of its dominant partners. Market forces will play little or no part in long-term decisions as to where wing design and manufacturing will be located. To consign the jobs and well-being of more than a hundred thousand skilled people to the mercy of 'market forces', the goodwill of the French and German governments - and then to assume that all will be for the best in the best of all free-market worlds seems grossly naïve.
Our bet is that there will be a progressive move of wing design, development and probably manufacturing from Britain to Germany or France over the next 10 to 15 years - which is of course way beyond the horizons of most journalists and institutional investors.

Another Marconi?

There is possibly a whiff of a 'Marconi' in BAe's intent to sell out of a business in which they have a long and successful track record and embark on a string of foreign acquisitions. We would not expect the scale of the disaster to be of Marconi scale proportions, but foreign acquisitions seldom match the ambitions of the acquirers or create serious value.
But BAe's strategy has more risks attached than simply the difficulties of making acquisitions pay, as the next section will demonstrate.......

The Real Bottom Line.

Our biggest concerns are more fundamental than those raised in the press - more even than where wing-making for the world's biggest civil aircraft company will be located, important though this is.
We are concerned that BAe's decision will at a stroke put vital British interests at peril:

The long-term future of an advanced technology moves into Franco-German hands and will almost certainly leave the UK.
The UK has developed the world's most advanced skills in the design, engineering and manufacturing of large aircraft wings. This expertise has developed over many decades of experience and innovation. It will almost certainly 'leak' from the UK in future years, thus still further weakening the UK's position in advanced technologies and Chancellor Gordon Brown's vision of Britain as a world centre for advanced technology.

Further Loosening of the UK's European business links.....
Airbus is one of the world's most successful companies - it has become a truly formidable rival to Boeing of the US. It is also an outstanding example of international co-operation, said by the pundits to be a model for future large-scale technological enterprises. BAe Systems, and thus the UK, are turning away from all of that to pursue US acquisitions.
BAe's sale of its Airbus stake to its European partners will not only take the UK out of a major European joint venture but further loosen economic ties with Europe.....

Whilst increasing dependence on the U.S for defence and foreign policy......

• BAe Systems is known to have touted itself around to potential American partners a few years ago, only to be rejected because it had a rather difficult portfolio of businesses. One of the most difficult elements was its involvement with Airbus, the only serious competitor for US civil and military contractor Boeing. The sale of the awkward Airbus stake cleans up the portfolio and reduces the bad taste to potential US 'partners'.
• BAe will have a war chest which it is said to be interested in using to make US defence acquisitions. Can it bid for a major US prime contractor? Not on your life! Far too expensive AND the US government wouldn't dream of letting foreigners into the heart of its defence industry.
• BAe will only be permitted to buy sub-contractors or companies outside the zone of sensitive technologies. They will be dependent upon US prime contractors, which do as they are bid by the Department of Defense. This makes BAe Systems crucially dependent on the goodwill of the US defence establishment - and of course the US government which is absolutely sensitive about defence - to hell with market forces.
• Suppose now that a future UK government wishes to abandon the rather servile stance adopted by Tony Blair's New Labour and behave as a good ally should by disagreeing with, say, a future 'Iraq'.
  An early casualty of such an incident would be BAe System's future U.S defence projects.

The Final Solution

But, there is a way round such a problem - a 'merger' or 'joint venture' with a US prime contractor. This would of course be the thin end of a wedge that would take control of BAe Systems across the Atlantic. If anyone were to tell us that such a notion hadn't crossed the minds of BAe's top managers our reaction would be amused disbelief.

Politicians will Stand Aside

One thing is guaranteed - neither major UK political party will raise a squeak - they are far too enamoured of the US 'special relationship' to bother much about European partnerships, maintaining independence of mind in international relations or their ability to promote UK high-tech in the public interest.
The validity of our convictions will only be evident in the long term - over say, 7 to 10 years and thus way beyond the time horizons of most politicians and commentators. Maybe somebody will at a time in the future remember what was predicted on this site!