European Shipbuilding Industry

The European naval industry has embarked on gradual restructuring. But with six leading project managers dealing with over twenty major naval shipyards, there was still no comparison with the United States, where the restructurings of the 1990s pared the naval industry down to two major project managers and six yards.

The naval sector had a turnover of around €17 billion in 2010 and employed 83,200 people. The sector provides full services across the entire life cycle of a complex warship from design and construction to integration of systems and support. European companies rank among the world top four suppliers of warships. There were 5 main European shipyards with many other smaller producers and support services spread across the EU.

A comparison with the US underlines however that the EU naval sector has over-capacity operating at a relatively small scale. The EU has 12 major warship building companies versus two in the US, and US naval firms are on average 3.4 times larger than the EU. For EU companies this means less economies of scale and the need to spread R&D costs over small production runs. The naval sector has only limited experience with European collaboration compared to the aerospace sector as, until recently, pressures of R&D and unit production costs tended to be lower than in the aerospace sector.

The “EU-14 shipbuilding industry” countries are Croatia, Denmark, Finland, France, Germany, Greece, Italy, Malta, The Netherlands, Poland, Portugal, Romania, Spain and the United Kingdom. Among NATO countries, Turkey also has a significant shipbuilding industry. The European shipbuilding industry is very diverse in company size and structure. The company workforces range from tens to thousands of employees. Some shipyards focus on new building of ships, others on repair and maintenance. Some shipyards focus on specific innovative ship types, others focus on process innovation, building a variety of ship types. Some shipyards build for commercial clients, others for consumers or governments.

The rapid consolidation of the American defence industry since the 1980s caused political leaders and heads of industry in Europe to go down the road of continent-wide industrial convergence. The process turned out to be far more difficult than in the United States, where restructuring and mergers have taken place between national firms for motives concerned solely with profit.

DCN of France became DCNS after DCN acquired all of Thales Frenchnaval business while Thales acquired a 25 percent stake in DCN with the newly-merged company known as DCNS. Navantia of Spain was formerly Bazan or Izar and has the capability to build aircraft carriers. Similarly, Fincantieri of Italy has an aircraft carrier capability. There are other warship builders in Denmark (Danyard Aalborg/part of Danyard Group); Netherlands(Damen Shipyards: Royal Schelde); and Portugal (ENVC).

The move towards consolidation initiated by the US government and propelled forward by private shareholders' desire to see defence groups increase their profitability in the short and medium term, has been further encouraged by the Administration taking a fairly lenient attitude towards anti-trust machinery and offering generous financial incentives. Moreover, the government agreed to reimburse the cost of such mergers if they could subsequently produce a much higher volume of savings for the Pentagon than the initial outlay.

Europe on the other hand, and this is particularly true of the European naval defence industry today, has to contend with the existence alongside one another of companies of different nationality, subject to different rules and with ties in certain cases to different governments. Market pressure alone is not enough to bring European companies closer together: to make large-scale reorganisation happen, government intervention is necessary.

For mergers across Europe's naval defence industry to be genuinely successful two essential conditions have to be met: firstly, industries need to have the legal capacity to merge with one another and governments have to make it possible for such mergers to work by bringing standards into line, creating opportunities for technology transfer and the like. The LoI (Letter of Intent) addresses these issues and should make their resolution possible.

Questions such as operational convergence and harmonisation of procurement and budgets are more sensitive and have been the subject of research over many years, particularly in WEAG (Western European Armaments Group) and POLARM (the EU working group on armaments policy), without any all-round acceptable solution having been found. Operational convergence and procurement policy are determined by countries' own military culture, their international areas of interest and national defence budgets and, very often, by purely industrial concerns.

Indeed, operational convergence and procurement standardisation are not a structural problem as such in Europe since cooperation programmes have already been implemented successfully. However, they are still a major inhibiting factor to any industrial cooperation. There is a need for countries to reach agreement on common minimum capabilities, which takes time, and on a virtually simultaneous allocation of equipment budgets. The countries concerned must therefore have the same equipment requirements, at the same time, for the same missions.

In short, it is within the European Defence Agency (EDA) that such questions will need to be resolved if a satisfactory outcome is to be achieved for all concerned. This can only be in the medium and longer term. Indeed, the report from the Agency Establishment Team (AET)3 and Annex A to the report (proposed priorities for early activities) puts forward, in the section dealing with the defence industry and market, measures of a general nature, namely: to work on the follow-on to the publication of the Green Paper on Defence Procurement, to launch studies regarding the European capacities of the Defence Industrial Base, to define with LoI (Letter of Intent) nations the use and spreading of selected LoI rules within the EU as a benchmark for how to promote use of the small and medium-sized businesses (SMEs) in the EDEM (European Defence Equipment Market).

The current situation of the defence industry in this area, with overcapacities, subsidies and unclear demand priorities should be addressed. The EDA's 2005 work program, adopted by the Steering Board4 on 22 November 2004, provides inter alia that by the end of the year the agency will have investigated the scope for adding value in as many as possible of the following areas: the Naval Defence Technological and Industrial Base (DTIB); review of anticipated future demand and capacity and current national strategies, and to have made proposals to the Steering Board.

There is a need to give thought to what extent it is in Europe's interest to be reliant on a naval defence industry based on at least two major competitor groups, which, moreover, needs to be able to stand up to transatlantic groupings and at the same time meet countries' requirements and, it goes without saying, ESDP goals. The major players in the field - the industry, the member states and the European Union itself - must all be involved in a project on which both the survival of the industry and the success of the European Security and Defence Policy will depend.