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Thales caught in all too familiar French political trap
The EADS story is all too familiar. For years, the European aerospace and defence group has been hamstrung by its French and German political masters. But these days it seems that the French government has decided to delegate responsibility to its French and German core industrial shareholders – Lagardère and Daimler – put in place by Paris and Berlin a decade or so ago. The problem is that both Lagardère and Daimler now want to pull out, making it all the more difficult for EADS to invest in the future.
Over at Thales, meanwhile, a similar scenario is being played out. Last year, the French government orchestrated the entry of Dassault Aviation as the defence company’s core industrial shareholder to replace Alcatel-Lucent. Paris has long sought to make Thales its new defence champion at a time when it feels it does not have full control at EADS, given Germany’s assertive role in the company.
Indeed, EADS on several occasions proposed acquiring Thales as part of its efforts to expand its defence activities, reduce its dependence on Airbus, and create a more balanced aerospace and defence portfolio to compete against its main rival Boeing.
But first Berlin and then Paris blocked the deal, fearing a merger risked strengthening either the French or the German hand on the EADS controls.
President Nicolas Sarkozy with his fondness for family-owned companies felt Dassault was the ideal shareholder for Thales to promote French interests in the defence industry. But to persuade Dassault to buy nearly 26 per cent of Thales, the government agreed to Dassault’s demand that Denis Ranque, the long-serving Thales boss, should go.
So, after a long and unseemly wrestling match, Luc Vigneron, the former head of state-owned tank maker Nexter, was last year appointed to the helm of Thales. From that moment on, the government appears to have felt it had done its job and washed its hands of any future interest. After all, Dassault, maker of Rafale combat aircraft and Falcon executive jets, was now in the cockpit.
But questions are beginning to emerge over whether Dassault’s presence is helping or hindering the defence electronics group. Dassault wants a return for its investment and has made that clear to Mr Vigneron. In turn, the new Thales boss is taking the machete to costs that has many company insiders worried. Indeed, internal morale is understood to be at rock bottom these days.
Of course, the world economic situation, and especially that of the aerospace sector, is dire. And it is also perhaps true that Thales executives were not particularly known for their penny pinching. But this has long been a characteristic of defence companies. That said, there is a question of just how far the focus on cost-cutting should go. Mr Vigneron argues that Thales margins are substantially lower than rivals’, partly because the group took unnecessary risks on some contracts involving ground-breaking technologies.
But equally, some criticise the former management for not taking enough risks. For example, Thales was outmanoeuvred by Finmeccanica in the bidding contest for the US defence group DRS Technologies. The Italians were criticised at the time for paying too much (about $5.2bn), but the US deal has since helped them weather the crisis better than most of their rivals.
Investors were initially pleased with Mr Vigneron’s plan to cut costs, but have since taken fright at the company’s performance last year and at the picture painted by the new boss of its immediate challenges. But though Thales could be criticised on its margins, it has been remarkably successful up to now in building a globally profitable business.
The risk for the new management is if it slashes costs too far. In a sector such as aerospace and defence, it might eventually find it no longer meets the demands of its clients for innovative products, and is jeopardising growth.
Gerard Mestrallet has no intention of seeing his GDF-Suez group playing second fiddle to rival EDF in France’s nuclear power industry. Henri Proglio, EDF’s new chairman, has been arguing that his state-controlled utility should be given undisputed leadership of the nuclear sector to strengthen the country’s chances of winning big export contracts.
But Mr Mestrallet believes France stands to gain more by having two competing nuclear champions rather than one. So much so that he is seeking government approval to build a new generation nuclear plant in the Rhone valley, showcasing the Atmea reactor being jointly developed by Areva of France and its Japanese partner Mitsubishi Industries.
By Paul Betts – Financial Times