SOME RECENT DEVELOPMENT IN ITALIAN DEFENCE INDUSTRY (WITH A SPECIAL FOCUS ON FINMECCANICA GROUP) Raul Caruso* and Andrea Locatelli
INTRODUCTION In the realm of international politics, Italy is traditionally considered as a middle power1. This assessment is usually based on political and economic considerations, but also on Italy‟s defence industrial base – ranking fourth in Europe, seventh in the world. This is the result of deep changes occurred since the end of the Cold War, both in the Defence Industry and in government expenditure. The purpose of this paper is to highlight the fundamental changes occurred with a special focus on the major arms producer, namely Finmeccanica. Although the article is mainly descriptive in purpose, we will also try to draw some inferences: in particular, as Mampaey (2008) points out, the main fact that needs to be analysed is the relationship between the state and arms producers. In fact, in spite of a state ownership, it had been maintained that the strategy of Finmeccanica in recent years had been also shaped by a punctual business strategy rather than by political considerations. There are not many recent comprehensive studies on economic aspects of Italian defence industry. In fact, while Italian defence and security policies have recently attracted some attention (among others, see: Villani, 2006; Croci, 2003; Stanglini, 2001), the economic aspect of defence spurred very little debate (exceptions are: Zamagni, 2009; Nones, 2006; Onida and Viesti, 1996; Graziola et al., 1996). Indeed, economic surveys are made particularly difficult by the lack and/or opaqueness of data. This is true for both the private sector, where information is always difficult to access (Brauer, 2002), and public spending, since the Ministry of Defence budget covers only a portion of military expenditures (for instance, some R&D costs are covered by the Ministry of Economic Development, while a law passed in 2008 established that international military missions should be funded by other governmental sources; IISS, 2010, 114). In the light of these considerations, this paper first provides up-to-date macro and micro economic indicators and eventually sheds light on parallel trends between government spending and the main industrial group, namely Finmeccanica. In order to provide accurate information, we will rely first on primary sources – mainly data made available by the Italian Ministry of Defence – then on secondary sources and well established governmental and non-governmental think tanks, like SIPRI, Istituto Affari Internazionali (IAI), IISS and the European Defence Agency (henceforth EDA). We start by observing the main trends in military spending and arms procurement in the past twenty years. In particular, we will trace the main features of the Italian defence policy in a period of significant change. Italy had to adapt to a *
CSEA, Università Cattolica del Sacro Cuore, Milan (Italy). Corresponding author: e-mail:
[email protected]. Department of Political Science, Università Cattolica del Sacro Cuore, Milan (Italy). 1 For comprehensive discussions on this point see Andreatta (2001) and Santoro (1991).
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different security scenario, and in doing so it followed a similar path to other European states. In the next section, we will focus on the main Italian arms producer: Finmeccanica. According to SIPRI, Finmeccanica is the 8th major arms company on a global scale2. As a result, we won‟t just consider its economic performance (sales, export, etc.), but we will also discuss its main business strategies starting from the early 2000s. Finally, section three will feature some tentative conclusions about the complex relationship between defence policy and military industry. MILITARY SPENDING AND ARMS PROCUREMENT: THE SCENARIO The Italian defence policy after the Cold War is marked by two imperatives: firstly, the will to grasp the peace dividend – in practical terms, reducing the defence budget to a minimum; secondly, adapting to the new security context originating from the demise of the Soviet Union. On the wake of the 1991 Gulf War, both the end of the Soviet threat and the advances in military technology made European armed forces rapidly obsolete (Locatelli, 2009, p. 11). In this sense, Italy made no exception. The Italian army, based on low-skilled, poorly equipped mass conscripts, could have served in defending national borders from a Soviet invasion, but a new scenario was now emerging: the lesson drawn from the Iraqi war, and even more from the wars in former Yugoslavia, Somalia and civil wars around the world led policy-makers to the conclusion that future military missions would have taken the shape of „low-intensity‟ conflicts (Kaldor 1999; Vickers 2001; Yost 1993). Accordingly, this implied to reform the armed forces in order to make them expeditionary, joint, and technologically advanced (Heisbourg, 2002; Andréani, Bertram and Grant, 2001; Howorth 2006). As expounded in Hartley (2000/2003), in the aftermath of the Cold War, the defence equipment markets in Europe were characterized by a pervasive inefficiency3. Therefore, like many other European countries, Italy undertook a process of reform covering any aspect of the army and defence industry. In this process we can trace three different phases (Haltiner and Klein 2005). The first step (from 1990 to 1995), consisted in cutting military expenditures. In the attempt to grasp the peace dividend (Intriligator, 1998; Gleditsch et al., 1996), most European states cut their defence budget even in the absence of a new strategic vision. As a result, most measures did nothing but reducing structures and operations: all over Europe barracks were closed or merged, service duration shortened (in Italy it was reduced from 12 to 10 months), and heavy ground-war platforms severely reduced. It was the second wave of reform (1996-2001 ca.) that appeared to bring back strategic considerations into the reform process. After the wars in Bosnia and Kosovo, the Italian government realised that its own army was ill-prepared to operate in the post-Cold War environment. As noted above, a new awareness emerged, namely that multinational military missions would have become a recurring feature of international politics. Eventually, the third phase, starting in 2001 and somehow still under way, is marked by a process of professionalization and specialisation. Since the number of conscripts far exceeded the security needs of the country (proving on the contrary of little help in 2
http://www.sipri.org/research/armaments/production/Top100 (accessed on 3 may 2010) Consider also that Finmeccanica was ranked 9th in 2007. 3 Hartley (2003) also notes that in the absence of a collective defence system, in aggregate the EU‟s armed forces in 1999 were larger than the US. In particular, largest concentrations of military personnel were in France, UK, Germany and Italy.
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overseas missions), the decision was finally taken to abolish the draft. The law, originally ratified in 2001, was implemented in 2005. Parallel with that, European policy-makers developed a growing consciousness that collaborative procurement programs could have become a more efficient option than national procurement. This led to several initiatives within the EU framework aimed at pooling resources, avoid wastes, and develop specialisation of given functions (Flournoy, Smith 2005). Table 1. Italian military expenditure since 1991
(current million Euros)*
% of GDP**
(US million $, constant 2005)***
growth rate (%)****
1991 1992 1993 1994 1995 1996 1997 1998 1999
12636 12662 13201 13514 13415 16132 16041 16004 15935
1.7 1.62 1.64 1.58 1.45 1.64 1.56 1.49 1.44
29627 28775 28929 28214 25768 28404 29781 30763 31969
-2.88 0.54 -2.47 -8.67 10.23 4.85 3.30 3.92
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
16993 17777 19025 19376 19811 19022 17782 20195 21132 20294
1.48 1.47 1.51 1.45 1.43 1.34 1.20 1.31 1.32 1.24
34102 33543 34459 34739 34853 33531 32445 32998 32103 --
6.67 -1.64 2.73 0.81 0.33 -3.79 -3.24 1.70 -2.71 --
*Source: Ministry of Defence, (only armed forces); ** the ratio of military expenditures to GDP is calculated from current data drawn from Ministry of Defence; ***Source: SIPRI; **** growth rate is calculated from data by SIPRI
To summarise, the Italian armed forces has been severely re-structured since the end of Cold War, but this did not decrease military expenditures. Table 1 reports the figures of Italian military expenditures since 1991. In 1991, the defence budget as a percentage of GDP amounted to 1.7%. According to the Ministry of Defence, with a 1.24% Defence Budget over GDP ratio, in 2009 Italy was below the 1.63% EU average. However, the latter figure includes only the expenditure for traditional armed forces. By contrast, data extracted from SIPRI, which includes a broader definition of military expenditures, show a long-run slight positive trend (+8% between 1991 and 2008).
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The most severe change has been the reduction of military personnel. Even before the abolition of the draft the total figure had dropped from 384.600 in 1988 to 207.200 in 2004 (a 53.8% decrease). As telling as that, the relative number of conscripts as a percentage of the total fell from 60.4% in 1990 to 14,5% in 2004 (both figures are taken from Villani 2006, p. 43). Table 2. Breakdown of Italian Ministry of Defence Expenditures in 2008 (Million Euros) Item: Personnel Operation and Maintainace
Investment
Absolute figure 16.030 Operation Costs (Deployed) Other O&M costs Overall O&M Procurement Research & Development Overall Investment
Other Total Source: EDA, Defence Data for Italy in 2008
% 71
1.008 1.084 2.092 3.050 252 3.302 1.206
15 5
22.630
100
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However, as displayed in table 2, according to EDA, in spite of such severe reduction in military personnel, in 2008 71% of the Ministry of Defence budget was still devoted to personnel spending, while Operation and Maintenance (9%) and Investment (15%) were stretched to a minimum. This makes Italy one of the least efficient European states in military spending. Research and Development attracted just slightly more than 1% of the total. The latter figure, in particular, seems in conflict with the above mentioned search for a technological improvement of military capabilities. However, closer investigation on how investment is actually funded shows a fourth peculiar trend: Italy is by far more inclined to devote resources in European collaborative efforts than other states. As Table 3 displays, in 2008 the share of European collaborative equipment procurement programs as a percentage of total equipment totaled 65.6%. In 2008, Italy devoted to EU-wide programs 2.518 Million Euros (1.948 in 2007), – i.e. roughly 40% more than countries like France and the UK.
Table 3. Italy and other EU countries’ collaborative defense equipment procurement
Amount spent in 2007
European Collaborative Equipment Procurement as a %of total equipment in 2007
4
Amount spent in 2008
European Collaborative Equipment Procurement as a percentage of total equipment in 2008
Belgium Finland France Germany Italy Lithuania
45 35 1.184 756 1.948 4
24.5% 6% 18.3% 18.9% 51.3% 5.00%
61 33 1.802 774 2.518 2
17.6% 5.% 28.8% 13.1% 65.6% 3.4%
Luxembourg Portugal Spain
5 23 938
28.4% 11.2% 39.6%
5 9 935
28.4% 4.3% 36.9%
United Kingdom
1.868
21.3%
1.892
19.8%
Source: EDA, Defence Data of EDA participating Member States in 2008, pp. 31-32; available at: http://www.eda.europa.eu/defencefacts/. [last access May 17, 2010].
In conclusion, the Italian defence policy after the Cold War was marked by the need to reform the military. The quick look provided above shows how the Italian response to the new security concerns was shaped by systemic forces and domestic constraints. These factors led Italy to undertake a similar path to other European states – like abolishing the draft, trying to focus on developing capabilities to fit with low-intensity conflicts, and cooperating in EU-wide procurement programs. However, in parallel to this trend, the end of the Cold War also led to a severe re-structuring of arms industry in both US and in Europe. In particular, in Italy, this trend has been characterized by the re-structuring and consolidation of a ‘national champion’, namely the Finmeccanica Group.
FINMECCANICA AS THE ITALIAN NATIONAL CHAMPION At the end of the 2000s, the Italian Defence Industry ranked fourth in Europe (seventh on a world scale), with overall sales exceeding 12 billion Euros and a workforce in the order of 64.000 (of whom, about 80% located in Italy) (AIAD, 2009, p. 11). More in detail, according to the SIPRI Top 100 fact sheet, Italy features 9 companies among the top 100 arms producing corporations in the world: Finmeccanica (ranking 8), DRS Technologies (20), Alenia Aeronatica (46), Agusta Westland (64), SELEX Communications (64), Galileo Avionica (77), Fincantieri (87), Avio (92), Fiat (84) and Iveco (84). All in all, in 2007 their sales totalled 16.090 US$ million. The Italian defence industry is structured as a pyramid, featuring at the top four big corporations (Finmeccanica, Fincantieri, Avio and Iveco). They act as prime contractors, so that their output is made of complex weapon systems. On a second layer we can find a handful of smaller companies (Agusta Westland, Alenia Aeronautica, Ansaldo, Oto Melara, Wass, just to name a few), most of whom are nowadays owned by Finmeccanica. Their main output mainly consists of high-tech sub-systems or single components, like sensors, space and communication systems (the main exception is
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Agusta Westland, for its long history of helicopter production). Finally, the base of the pyramid is made by a hundred of small and medium companies that work as subcontractors for services or components to major companies (Briani, 2009, p. 2). Considering that Alenia Aeronautica, SELEX Communications and Galileo Avionica are all owned by Finmeccanica, this group clearly carries out the lion share of total Italian arms sales (about 72%). For this reason, our description of the Italian defence industry will be focused on Finmeccanica. Since its creation in 1948, Finmeccanica had been one of the largest state-owned companies in Italy4. State ownership is fixed by law. In particular, under article 3 of Decree-law n. 332 of 31 May 1994, converted into act n. 474 of 30 July 1994, «no one, except for the State, public bodies or entities controlled thereby and any other party authorised by law, may possess, on any basis, shares in the Company that constitute a shareholding of more than 3% of the share capital represented by shares with voting rights.5» Such limit holds for both direct and indirect shareholding. That is, nobody could amass a stake higher than 3% through various funds or subsidiaries. In particular, the latter provision is regulated also under article 93 of Testo Unico delle disposizioni in materia di intermediazione finanziaria, contained in legislative decree 58 of 24 February 1998. Eventually, there has been a special law to prevent any possibility or attempt of hostile takeovers or fast-track privatization. In fact, under the Decree of the Prime Minister dated 28 September 1999, the state‟s share cannot be lower than 30%. At the time this article is written6, the Ministry of Economy holds a stake of 30.2% (Finmeccanica, 2009, p. 180) while the remaining shares are traded on the stock market. In particular, 47% of the shares are held from institutional investors (banking firms, pension funds, insurance companies, hedge funds, individual portfolio management companies, mutual fund management companies and so on), whilst 22,8% is held by retail investors. It is interesting to note that, among institutional investors only 12,3% are Italian, whereas 43.3% are from North America, 23% from UK and Ireland and 19.1% from other European countries7. Interestingly, this violates the observed phenomenon of home bias in financial portfolio investments (on this recurring issue in financial markets see Strong and Xu, 2003; Lewis, 1999). Starting in 1990, Finmeccanica re-structured its organization focusing on defence sector. The main guidelines of this new phase can be summarised in four main points: 1) development of the ability to compete on the world market; 2) downsizing or severe reduction of less competitive businesses; 3) focus on the Aerospace, Defence and Security sector; 4) Penetration of attractive markets (in particular US and UK). As evidence of this process of re-structuring take as indicator first the breakdown of turnover for selected years over the period 1987-2007. Table 4 – Finmeccanica: Breakdown of Turnover Aereospace
Defence
Energy
4
Transport
Helicopter
Other
For a general overview on Finmeccanica see Felice (2010). Official translation provided by Finmeccanica available at the adddress www.finmeccanica.it/EN/Common/files/Holding/Corporate/Investor_relations/Corporate_Governance/_o k_By_Laws_Jnuary_29_2010.pdf (last access 17 May 2010). 6 Closed 20 May 2010 7 Data on shareholding are available at the address http://www.finmeccanica.it/Holding/EN/Corporate/Investor_relations/Azionariato/index.sdo (latest access 21 May 2010) 5
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1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
56.15 35.54 29.07 29.38 32.06* 21.09 25.86 29.05 29.74 22.12 23.52
26.69 34.77 36.18 35.52 40.45 33.49 25.97 34.86 39.28 36.91
32.25 27.52 26.46 26.81 25.92 19.28 13.40 11.74 8.26 6.70 7.77
8.95 7.95 7.64 6.50 12.68 14.80 16.11 13.69 10.75 10.05
6.5 12.44 17.12 13.45 21.15 22.07
11.6 1.3 1.75 -
Source: Zamagni (2009); * in 1994 and 1995 the Helicopter sector was included in Aerospace.
The current core-business of Finmeccanica is the technologically advanced defence sector. It increased its relative weight with respect to the other sectors. By contrast, traditional sectors as Energy and Transport decreased severely their relative weight. The strategy chosen is even clearer when considering the expenditures in research and development. As displayed in table 5, in recent years the quota of R&D is almost totally allocated to Defence, Aerospace and Helicopter. Table 5. Finmeccanica: Breakdown (%) of expenditures in R&D
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Aerospace
Defence
Energy
Transport
Helicopter
44.36 29.41 24.67 28.19 31.33 28.55 29.65 23.83 27.66 30.94 27.78 30.85 35.13
45.49 46.02 55.32 46.1 39.48 43.97 39.06 50.05 51.64 43.06 44.14 45.99 43.68
6.94 2.42 1.62 2.04 1.31 0.5 0.59 0.3 0.4 0.61 0.75 0.95 1.09
3.21 2.6 1.48 4.15 3.11 3.77 2.94 2.29 2.48 1.76 2.3 2.24 2.56
19.55 16.91 19.52 24.78 23.21 27.76 23.53 17.83 23.63 25.03 19.97 17.54
Source: Zamagni (2009).
As concerns sales and growth, in the latest twenty years the company has significantly increased its sales, moving on from 6.808,5 in 1990 to 13.429,0 Million Euros in 2007 (figure expressed in constant 2007 price). In particular, apart for a single relevant
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exception (in 1998, when sales dropped by 25%), the trend has been clearly positive, with top increases equal to 31.32% in 1991 and 24.99% in 2005. Obviously, these figures are volatile, since they are affected by mergers and demergers, but in the long run this trend appears to be constant. In particular, starting from the early 2000s, when Finmeccanica assumed a more internationalist stance, sales experienced a prolonged and steady growth. Table 6. Finmeccanica: sales and growth rate (1991-2007)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Current million Euros 3222.2 4092.4 5718.7 5817.4 5744 6421.1 6604 7150 7615 5785 5902 5987 6717 7775 8233 8578.6 11409 12848 13429
millions Euros constant price 2007 5687.8 6808.5 8941.2 8628.9 8176.6 8794.3 8585.2 8946.1 8946.1 6989.4 7019.8 6943.1 7586.9 8572.7 8860.4 9052.1 11836.8 13069 13429
Growth rate (%)* 71.27 19.7 31.32 -3.49 -5.24 7.55 -2.38 4.2 4.2 -25.37 0.44 -1.09 9.27 12.99 3.36 2.16 24.99 10.41 2.75
Source: Zamagni (2009). P. 244-245; * the growth rate is computed from constant data
An additional trend is the increasing weight of external sales in overall sales. A long term approach would show that in the course of its life, Finmeccanica experienced a remarkably regular fluctuation in this indicator. While exports remained a minor fraction of the whole sales until 1970 (about 20-25%), starting from 1971 sales to foreign countries began growing faster than domestic sales, exceeding 50% from 1976 to 1985, when the figure suddenly dropped to 27%. In the period of internal restructuring (1986-1993) export increased, but less than domestic sales. After that date, exports turned to be higher than domestic sales, reaching the highest value in 2002 (71.3%). Finally, as concerns penetration in new markets, Finmeccanica is also looking eastward, in the attempt to create new partnerships and increase its penetration in
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markets like Greece, Malaysia, Turkey and Russia; but also, attention has been recently turned to high potential markets – i.e. Algeria, Chile, Japan, Libya, Saudi Arabia, Singapore, South Korea, United Arab Emirates. (More on this is available in Zamagni, 2009, AIAD, 2009). Table 7. Domestic Sales and Exports
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Domestic sales
Export Sales
(million Euros 2007) 5172 5177 3760 4015 3778 3131 3278 2790 3009 2940 2526 2460 3247 3043
(million Euros 2007) 3770 3452 4416 4780 4808 5815 6088 4199 4010 4003 5061 6112 5613 6428
% Export sales on overall sales 42.16 40 54.01 54.35 56 65 65 60.08 57.13 57.66 66.71 71.3 63.35 67.87
Source: Zamagni (2009).
To conclude, a broader look at the whole Italian military industry shows similar trends. Since 2000, the amount of exports increased steadily (the only exception being in 2005). According to Law 185, dated 9 July 1990 (then updated with Law 148, 17 June 2003), export of arms and defence-related products is subject to governmental authorization and must comply with domestic restrictions (art. 1.6, Law 185/1990, as amended by Law 148/2003) international and Communitarian law (like the Council Common Position 2008/944/CFSP)8. Therefore, the actual number and value of authorizations are an indicator of the number and value of contracts with foreign buyers on a yearly basis. In particular, in 2009 the actual number of authorisations rose from 1880 in 2008 (worth 3046 million Euros) to 2181 (worth 4914 million Euros). Likewise, export rose to 2.205 million Euros. Note that since most authorizations are given for long-term contracts, the revenues (cash inflows) are spread over a number of years. Export revenues instead are
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The authorisation procedure involves a variety of governmental bodies from the Ministries of Foreign Affairs, Defence, Economy and Home Office. Particularly relevant are the Ufficio di Coordinamento della Produzione dei Materiali di Armamento (UCPMA) within the Presidency of the Council of Ministers and Unità per le Autorizzazioni di Materiali d‟Armamento (UAMA) within the Ministry of Foreign Affairs.
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registered on a yearly basis. This explains why the value of authorizations exceeds that of exports. The recent increase in authorisations (61.32%) is exceptional and is led by Finmeccanica-related companies: as of 2009, the share of Finmeccanica group over total authorisations accounted for 72% of total export. Among them, Alenia Aeronautica accounted for 1546 million Euros (22.97% of total export), Agusta for 985 million Euros (14.63%), SELEX Galileo for 201 million Euros (2.99%), Oto Melara for 198 million Euros (2.94%), SELEX Communications for 88.7 million Euros (1.32%), and SELEX Sistemi Integrati for 65 million Euros (0.97%). Beyond Finmeccanica, the main exporters were Avio (811 million Euros, 12.04%), Fincantieri (271 million Euros, 4.03%), IVECO (75 million Euros, 1.12%) and Elettronica (48 million Euros, 0.72%). As concerns destination countries, NATO-EU partners confirmed themselves as Italy‟s preferential market, representing 46.81% of total authorisations). Compared to previous years, sales towards Northern Africa and the Middle East rose from 6% to 28% (Senato della Repubblica, 2010a: 26-35; 2010b: 4-5; 128-131). It would be difficult to give a final assessment of this last phase without taking into consideration the main steps undertaken to consolidate the group on the global stage, namely a series of mergers, acquisititions and joint-ventures agreements. In fact, Finmeccanica started its own process of transformation in the 1990s, following the restructuring, the technological advancements and the internationalization of defence industry which began in the aftermath of the Cold War (Gold, 1994; Reppy, 1994; Skons and Wulf, 1994). However, it must be highlighted that the process had been driven first by domestic factors. In fact, in 1992, in the midst of the financial crises, Italy launched a large-scale privatization program which turned to be the most severe amongst OECD countries. This severely changed the industrial landscape in Italy (Barucci and Pierobon, 2007; Goldstein, 2003). Re-structuring of Finmeccanica, took shape in that scenario. Eventually, since 2002, Finmeccanica tried to establish its status as hightechnology player in the defence industry. In fact, in the early 2000s, the downsizing phase in arms industry was coming to an end, so eventually introducing the new military environment focused on high-technology advancements of electronics, communications and IT (Sköns at al. 2004). Therefore, in the light of this trend, Finmeccanica began its consolidation9. Then, as noted above, a series of mergers and joint-ventures agreements were put in place. The economic rationale of this process is clear. In general, large-scale production is expected to result in economies of scale, so lowering costs and increasing efficiency. Secondly, Finmeccanica was willing to put in place a number of synergies so as to magnify its continuous investment in research and development. Eventually, by means of such operations Finmeccanica also secured access to profitable markets. A concise picture of Finmeccanica‟s main acquisitions and joint ventures is available in Figure 1.
Figure 1. Main connections among EU defence companies as of 2007
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Interesting to note is that in April 2002 the board of directors changed.
10
33% (2005)
Vega
(2008)
Electronics
100%
Thales 67% (2005)
100% (1990)
Planes
Electronics
(2008)
33%
Telespazio
Aerospace
Finmeccanica 100%
67%
Thales Alenia Space
Aerospace
100%
Alenia Aeronautica
21% (1986)
Eurofighter
33%
BAe Systems 37,5%
25%
Missiles
(2001)
DRS 100% (2005-2010)
Helicopters
(2004)
Communication, C4ISR, Avionics
Agusta Westland
SELEX Galileo, SELEX Sistemi integrati, SELEX Communications
20%
Saab
MBDA 37,5%
100%
Stn Atlas
100%
Airbus
46%
EADS 46%
Dassault
100% 32% (1992)
62,5%
NHI
Eurocopter
Source: Zamagni, 2009: 134. Authors‟ elaboration. Take the Helicopter sector first. A critical step in the consolidation of Finmeccanica took place in September 2004, when the group took over the entire stake of Agusta Westland. This operation proved remarkably successful (Nones, 2004, quoted in Zamagni, 2009). Finmeccanica originally had acquired Agusta in 1994, as part of a deep restructuring of the helicopter producer. The Agusta Westland joint venture, however, came at a later time: as part of the internationalisation strategy of Finmeccanica, Gknowned Westland was supposed to be the ideal partner for Agusta, as they had been cooperating for a long time in previous years. So, in 1998 a Memorandum of understanding was signed between Agusta and Westland. Yet, since Agusta was valued higher than the counterpart, the joint venture came into force only three years later, with a number of problems in governance issues. The decision to take over from Gkn the remaining 50% of the joint venture – an operation worth 1.5 billion Euros – paved the way to an enhanced role for Finmeccanica in the helicopter sector, as witnessed a few months later by the White House‟s decision to procure 23 US101 helicopters from a consortium made by Bell Helicopters, Lockeed Martin, and Agusta Westland (Graziola and Parazzini, 2006, pp. 248-250). As concerns the defence sector, before the consolidation the group was fragmented in a variety of small-size segments that prevented the company from gaining a proper competitive position in the global market (Zamagni, 2009, p. 124). In 1998 a joint venture with Gec Marconi led to the establishment of Alenia Marconi Systems (AMS), to whom Finmeccanica allocated the production of missiles, radars and naval systems. When BAe took over the British counterpart, one year later, two options seemed available: either buying out BAe‟s stocks of AMS, or bringing cooperation to
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the next level. As a result, the missile system division of AMS was merged into MBDA, a joint venture between BAe, Mantra (then EADS), and Finmeccanica. The agreement, signed on December 18th 2001, established the main European and world‟s second largest missile producer (Rivers, 2002). Although the shares held by Finmeccanica amounted to 25%, whereas the partners held 37.5% each. Despite this asymmetry, the governance structure was designed as an equal shareholding with equal voting rights (in order to balance the voting rights Finmeccanica paid 700 million euros). Another sector in which Finmeccanica improved its position is the aerospace sector. Indeed, regardless of its advanced know-how, Finmeccanica was too small to compete on the international market. After the failed merger between Alenia and Astrium (a branch of the EADS group), the main step in this area was the 2002 takeover of Telespazio from the Telecom Italia group, an operation worth 127 Million Euros cash, plus 113 Million Euros debt. Since Telespazio was undersized to become an effective global player, other partners were needed to create a competitive joint venture. The search terminated in 2005 with the French corporation Alcatel. Two joint ventures were established: Alcatel Alenia Space, in which Alcatel had 67% and Finmeccanica 33%; and Telespazio Holding with reversed shareholding. This established an equal partnership. In 2007, since Alcatel made over the space sector to Thales, the first joint venture was renamed Thales Alenia Space, and it is now Europe‟s leading company in aerospace. Eventually, as concerns the telecommunication and the electronics sectors, Finmeccanica undertook two major initiatives. The first one was the takeover in 2002 of Marconi Italiana, one of the many companies demerged from Gec Marconi group as a result of the BAe acquisition. The operation, worth 571 Million Euros, led to the establishment in January 2003 of Marconi Selenia Communications. Strengthened by this consolidation in the communication sector, Finmeccanica made its second move with BAe within the Eurosystem transaction (Zamagni, 2009, pp. 125-126). This operation, which was closed in 2005, brought together the Communication, C4ISR and Avionics sectors of the two companies. As a detailed discussion of the final deal would be impossible here, suffice to say that the end result was the creation of the SELEX joint venture. The SELEX brand would encompass a variety of sectors: so, Avionics would be merged into SELEX Sensors and Airborne Systems (SELEX S&AS), that Finmeccanica owned by 75% (by paying BAe 400 Million Euros, the Italian company bought the remaining 25% in March 2007). As for Communications, Selenia Communications acquired system portions of BAe Systems and AMS, and was soon renamed SELEX Communications. With reference to C4ISR, the Italian operations of AMS became a wholly owned subsidiary of Finmeccanica under the name SELEX Sistemi Integrati. Finally, in 2010 SELEX S&AS and Galileo Avionica – both under exclusive Italian control – have been officially renamed SELEX Galileo. Borrowing the words of the 2005 Balance sheet, “by concluding this operation, Finmeccanica has become Europe’s second largest player, and the world sixth player in Defence electronics” (Finmeccanica, 2006, p. 6). More recently, the main effort has been devoted to defence electronics, in which the main steps were the acquisition of the British company Vega (an operation worth 90 Million Euros) and the takeover, in May 2008, of the American company DRS (3.4 Billion Euros). As noted by Perlo-Freeman (2009; 276), this was “by far the biggest transatlantic deal in 2008, [...] the first major acquisition of a US arms-producing company by a non-British European company”. Being this business at the cutting edge
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of advanced technologies in a variety of products (from tactical UAVs to night vision devices), Finmeccanica was clearly willing to develop high added-value products in one of the most rewarding sectors and also to establish a significant presence in US which is the largest market in the world.
FINMECCANICA BETWEEN CONCENTRATION AND EUROPEANISATION In the previous sections we have analysed two interrelated trends. The first was the strong commitment of Italian policy makers to the integration of defence policy at European level. As indicator of this trend, we assumed the share of European collaborative procurement over total equipment: as of 2008, Italy signed agreements with other EU states for contracts worth 2.1 billion Euros, equal to 65.6% of the whole procurement costs (see Table 3 above). The second trend, as embodied by Finmeccanica, is in line with the effort of other European corporations to compete on a world stage. Like its European counterparts, in the early 2000s, the Italian group undertook a series of mergers and acquisitions aimed at implementing the aforementioned strategic lines, namely the focus on the core business of defence, electronics and aerospace systems, a superior efficiency and productivity, and eventually an enhanced penetration in attractive markets (as US and UK). The two mentioned trends appear to be therefore different in nature. While the first one involved essentially political considerations, involving state cooperation, the second one appears to be mainly driven by economic competition. At a deeper analysis, however, they seem to be strictly interrelated and in some respect mutually reinforcing. As concerns defence policy, what had been noted above about the governance of Finmeccanica appears to be a clear indicator of the Italian propensity to stick to the traditional concept of national interest and security. Admittedly, of the several issue areas involved in the European integration, defence is probably the least successful. Indeed, for a long time states proved to be particularly jealous of their sovereignty in this sector, so preventing any serious initiative by communitarian institutions. In this sense, national procurement was indicative: like many other European countries, Italy used the national security exception (art. 296 EC of the EC Treaty, now art. 346 of the TFEU) to protect its own industrial base from Common Market trade rules (Flournoy and Smith, 2005, pp. 74-75). In other words, for purported “essential” and “security” interests, Italy often committed most of its procurement programs to national companies (Nones, 1996; Pianta and Perani, 1991). However, since the late 1990s, the EU initiated some remarkable attempts to promote defence integration. In 2001, for instance, at the Laeken summit EU leaders agreed to establish a European Capabilities Action Plan (ECAP) aimed at addressing the capability shortfalls related to the so-called Petersberg Tasks10; in 2004, the EU launched the Headlines Goal 2010 initiative, which led to the drafting of a Force Catalogue; also in 2004, the European Defence Agency was created, whose goals included fostering procurement cooperation and enhancing defence capabilities (for a discussion of these and other initiatives, see Locatelli, 2008, 73-80); more recently, the 2007 European Commission‟s initiative Defence Package led to the adoption in 2009 of two Directives (2009/43/CE and 2009/81/CE) regulating transfers of defence-related products and procurement procedures (Anthony and Bauer, 2009: 10
As originally framed in 1992 by the Western European Union, then included in the Amsterdam and Lisbon Treaties, Petersberg Tasks included: (a) humanitarian and rescue mission; (b) peacekeeping; (c) crisis management, including peace-making.
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476-478; Di Lenna, 2009). The marginal impact of any singular initiative may be limited, but taken together they have contributed to promote cooperative procurement. As noted among others by Hartley (2003), there is evidence of growing coordination in defence policy, and this is already affecting the defence industry of European states. Thus, the Italian attempt to coordinate its defence policy with other EU states can be explained in terms of economic calculation. In its European orientation, Italy tried to grasp the potential benefits of such coordination, like building systems for collective defence, specialisation by comparative advantage, economies of scale and scope, and better resource allocation (Hartley, 2003: 111; 2006: 478-479). Beyond that, Italy is experiencing what political scientists call “Europeanisation” of defence policy (see, among others, Irondelle, 2003; Locatelli, 2009; Rieker, 2006; Risse and Borzel, 2000). The logic of this argument is that the growing relevance of the European system of governance forces states to adjust national policies along common lines. Thanks to the growing interaction at the EU level, European states have created shared meanings and cognitive frameworks, which in turn have led to policy isomorphism (Radaelli, 1997). In other words, even without direct influence of EU institutions, the defence policies of EU member states follow similar paths, just because policymakers tend to share the same Europeanised identity. As concerns Italy, Europeanisation explains the Italian involvement in European cooperative defence programs not just as a response to domestic pressures or economic considerations, but as a more radical change of vision. If this view is correct, the effects of such a process will further increase the Italian propensity to engage in collaborative projects. Admittedly, Europeanisation cannot account for all the aspects related to defence policy, from military posture to R&D and personnel policy. Nonetheless, for our purposes it is useful as long as it provides a rationale for the Italian commitment to EU cooperative programs. Whenever we take into consideration the evolution of arms industry, The Italian policymakers certainly favoured the attempts to become competitive on the world market, but it seems they had no direct influence on the mergers and acquisition strategy of Finmeccanica. Moreover, if relating this with the above mentioned change in defence policy, it is evident that the moves undertaken by Finmeccanica somewhat anticipated some steps undertaken by the government. As a matter of fact, while the evolution of the group structure began in 2002, changes in defence policy came at a later time: more in detail, while cooperative efforts took place in the late 1990s – the main examples being the Western Armament Group (WEAG), the Western European Armament Organization (WEAO), and the Organisation Conjointe de Coopération en matière d‟armement (OCCAR) (Locatelli, 2008) – these did not significantly change course to the Italian defence policy. Italy embraced a more European-oriented approach only in 2007: it is only at that time that the amount of money devoted to European collaborative defence equipment procurement, shifted from 397 to 1948.1 Million Euros (EDA, 2008, p. 32). However, a broader look at the European context would show that Finmeccanica was not alone in Europe in its search for consolidation. Other European companies undertook similar steps, in the attempt to consolidate their position vis-à-vis foreign competitors. Seen in this perspective, Finmeccanica is part of a larger process of concentration of the European defence industry. So, the main spring for mergers and acquisitions originated in the world market, as a result of the competition among major players.
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Table 7. Change in concentration ratios, SIPRI Top 100 companies - Concentration ratios – arms sales (% of combined total of Top 100)
Company section
1990
1995
2000
2005
5 largest companies
22
28
42
41.1
10 largest companies
37
42
58
59.1
20 largest companies
57
61
72
74
Source: Adapted from SIPRI Yearbook 2002: 327; and SIPRI Yearbook 2009: 269.
As shown in table 7, the post-Cold War period witnessed an increase in the rate of concentration among the top 100 arms manufacturers. While in 1990 the 5 top companies accounted for just 22% of the top 100 overall sales, ten years later this figure almost doubled, reaching 42%. Such an increase was less conspicuous for other groups, but still, compared to the 57% share of the 20 largest companies in 1990, the 72% figure in 2000 represents an evidence of concentration. Moreover, table 7 shows how this increase was initially quite slow, but suddenly accelerated in the second half of the 1990s. The companies that led this process were American: starting from the early 1990s, large groups found that the key to success was R&D in advanced technologies (Ricks and Harris, 1994; Mampaey, 2008, 32-43). In order to improve their competitiveness, they undertook a series of mergers and acquisitions that ultimately led to the creation of four major groups (Boeing, Lockheed Martin, Northrop Grumman and Raytheon). In Europe, a similar process took shape few years later, since the late 1990s, leading to the consolidation of four main groups (EADS, BAe Systems, Finmeccanica and Thales) (Perlo-Freeman, 2009: 268-270). Therefore, the internationalisation strategy of Finmeccanica can be also interpreted in the light of this trends. Moreover, the initiatives undertaken by Finmeccanica, therefore, cannot be understood exclusively as a business strategy, neither as a result of political considerations. These two rationales, on the contrary, seem to converge towards a common interest. While Finmeccanica competes on the world market in search for profit, Italy also supports it as its national champion. In other words, compared to the Cold War era, state-industry relations in Italy have become more complex, but substantially unaltered: while Finmeccanica now operates according to corporate business principles, the Italian government still maintains a close – albeit less direct – control on the group. (for a broader discussions on this point see Dunne and Sköns, 2009; Sköns 2008; Hartley, Bellais, and Hébert, 2008). In conclusion, although it is probably too early for a final verdict, it appears that the two trends considered above contribute to significantly alter not just the Italian, but the European military industry. In particular, as a response to the concentration of the
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market initiated in the US, European main manufacturers have created an oligopoly. Finmeccanica remains Italy‟s „national champion‟, as confirmed by the fact that the Ministry of Economy is still the major shareholder. So, even the recent Italian commitment towards defence integration in Europe can be interpreted as an attempt to favour the consolidation of Finmeccanica11. In other words, the newest Europeanised turn in Italian procurement and the consolidation of Finmeccanica are parallel and selfreinforcing processes. CONCLUSION Like most other European states, Italy had to adjust its own security strategy to the postCold War security context. This led to momentous choices, like the demise of the draft and the shift to a professional army. In terms of industrial policy, the main changes concerned Finmeccanica, Italy‟s greatest defence industrial group. Starting from the early 2000s, the group significantly altered its own strategy and alliance structure. Both public and private sectors proved to be part of broader changes, that affected respectively European states and companies. As concerns the former, the lesson of recent conflicts and an enhanced stimulus from the European Union led to a restructuring of the armed forces. Moving to the latter, the big wave of mergers and acquisitions initiated in the US forced European companies to follow suit, leading to the rise of four major groups. In this article we provided first a description of these trends in the Italian defence industry and policy. Secondly, we tried to elaborate some considerations on the relationship between reforms in the private and public sector. The Italian military industry has become more competitive on the world stage compared to the past. Parallel to this, in line with the European integration process in the defence sector, Italy showed to be particularly inclined to adopt a more cooperative approach to procurement. Seen in this perspective, these trends proved to be self-reinforcing: as a result, expectation for the future is that as long as Finmeccanica keeps on striving to consolidate its world class position, so Italy will also get more and more involved in collaborative procurement.
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