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The decision of U.S. Secretary of Defense Robert Gates to set aside the award of the U.S. Air Force’s gigantic new air tanker contract to the European Aeronautic Defence and Space Company (EADS) and its American partner Northrop Grumman dealt a body-blow to the principles of free trade and mutual cooperation in defense procurement in the Atlantic Alliance. But major European defense contractors should not despair: To a much greater degree than most people realize there remains a wide spectrum of opportunities for the Europeans to boost their exports to the United States and thereby simultaneously strengthen defense capabilities on both sides of the Atlantic.

In overturning the tanker award and reopening the bid, the election-wary Bush administration apparently felt vulnerable to the argument that they were undermining the U.S. high-tech defense industrial base by awarding contracts overseas to a company that was already the main global rival for Boeing, America’s one remaining premier airliner exporter and manufacturer.

Does this, therefore, mean that the U.S. military procurement market is going to be off-limits for European manufacturers? The answer is “no,” for several reasons. European defense contractors already have a big and growing foothold in the U.S. market. U.S. budgetary constraints will enable Europeans to make some offers that the Pentagon cannot refuse. The strong euro offers takeover opportunities to enterprising European defense contractors. And the processes of “structural disarmament” by Pentagon planners have left big gaps that no U.S. contractor can fill or even compete for.

One leading European defense contractor already has established itself as a major player in the U.S. market. That, of course, is Britain’s BAE Systems. In a study released in June 2008, the New America Foundation, a Washington think tank, ranked BAE Systems among the top 10 defense contractors for the U.S. government. Department of Defense contracts for BAE rose from $4.7 billion in 2006 to $9.8 billion in 2007, a sales increase of $5.1 billion – the largest increase by any manufacturer that year. The second-biggest “gainer” was the U.S.-based General Dynamics, which could “only” boast an increase in sales over the previous year of $4.1 billion – $1 billion less than BAE.

How did BAE Systems do so extraordinarily well in the U.S. market? And how did it do so without provoking the protectionist and nationalist, quasi-isolationist fury in the United States that has, initially at least, derailed the Northrop Grumman-EADS deal?

First, BAE focused on a relatively low-tech area where U.S. domestic industrial production capacity was lacking and urgently needed to be expanded – the “up-armoring” of poorly-protected (and entirely U.S.-produced) vehicles such as the Bradley Fighting Vehicle. With this retrofitted improvement, these vehicles afford a much-demanded additional degree of protection for combat troops in Iraq and Afghanistan.

Second, BAE moved to establish a long-lasting and secure foothold in this sector by buying Armor Holdings Inc, which already manufactured the mine-resistant ambush protected vehicle (MRAP). And as the NAF study noted, the production of MRAPs in 2007 had the biggest growth in Pentagon prime-contract awards.

Nor has BAE Systems sat back. In June 2008, BAE Systems announced it had completed the acquisition of MTC Technologies Inc. in Ohio for $450 million. MTC specializes in providing technologies to modernize the U.S. armed forces and intelligence agencies, an obviously different area of specialization from Armor Holdings.
The most important lesson European defense contractors should learn from the Northrop Grumman-EADS KC-45 debacle is that their export efforts in the U.S. market should be wary of prestigious areas which major U.S. corporations continue to dominate. Instead, they should identify the many areas where the U.S. military-industrial colossus is no longer competitive, or areas where it lacks a sufficiently large manufacturing-base to meet the needs of its own military. There are areas of relatively low tech but still important weapons systems that have been abandoned by major U.S. manufacturers entirely.

BAE’s achievement in winning a significant share of the market in producing MRAPs (and upgrading General Dynamics’ Abrams Main Battle Tanks) provides a graphic example of how European arms firms can win major and lucrative contracts from the Pentagon and from large U.S. contractors – without setting off political fire-storms of accusations (however misleading) that they are trying to undermine the U.S. high-tech base and steal thousands of well-paying defense industry jobs away from Americans.

Identifying and fulfilling large specialist niche markets that U.S. companies themselves have already abandoned is an even more important and productive opportunity for boosting European defense exports to the United States. Perhaps the most striking example of this may be in the area of providing electric-diesel drive submarines to the U.S. Navy.

U.S. admirals have a traditional fetish of an all-nuclear-powered navy (a heritage from the late Admiral Hyman Rickover). Given the record federal budget deficit to be inherited by the next U.S. administration, expanding nuclear capabilities in the oceans – and especially under them – no longer is going to be a fiscally realistic option. In 2006, when the United States built a single nuclear-powered strategic submarine, China, however, built 14 subs – all diesel-powered and smaller but also infinitely cheaper.

Both main U.S. candidates have said remarkably similar things about the need to rein in U.S. defense spending after the Rumsfeld binge, but they have been similarly scant on specifics about how to find $500 billion in savings. The coming months could be a period of great opportunity for European defense manufacturers to identify key areas in U.S. defense procurement where they can offer components or full systems that are vastly cheaper than those currently produced in the U.S. Better still, Europeans could offer systems such as diesel subs that the United States does not make at all.

Germany and France both already produce excellent, cost-effective electric-diesel subs. Germany has supplied Israel with at least three Dolphin-class subs that carry nuclear-capable cruise missiles for Israel’s survivable second-strike retaliatory capability. France rebuilds state of the art electric-diesel Scorpenes which it has sold to the Indian Navy, and India uses them for the survivable second strike purpose against Pakistan as Israel does against Iran.

Yet not a single U.S. shipyard has any longer the capability to build non-nuclear submarines. This is not because of any complacency or incompetence on the part of U.S. naval shipbuilders such as Northrop Grumman or General Dynamics Electric Boat. The U.S. contractors were bullied out of the market decades ago by the U.S. Navy. The USN admirals did not want cost-cutting enthusiasts in Congress to be able to argue that they could order smaller, vastly cheaper diesel subs instead of the nuclear giants they insisted upon. Destroying the domestic U.S. capability to build non-nuclear submarines was seen therefore as the surest way to ensure the continued funding of the U.S. undersea nuclear fleet.

During the Cold War, when the old Soviet Navy was seriously seeking to contest global strategic dominance with the USN, this policy appeared to make sense. But in the nearly 17 years since the collapse of communism at the end of 1991, it has become an obsolete relic of far-off times.

Advances initially developed in Sweden have allowed the latest electric-diesel propulsion systems to be far quieter and faster underwater for extended periods of time than appeared possible in the 1980’s. Both Russia and China have invested heavily in these new designs and U.S. naval planners acknowledge that the threats posed by this new generation of small, fast, non-nuclear and very hard to detect subs poses a significant threat to global U.S. sea communications and even to the USN’s 80,000-ton-plus nuclear powered aircraft carriers of the Nimitz class.

De-gauzed minesweepers (that is to say, minesweepers that have been designed and treated so that they cannot detonate magnetic mines), small anti-submarine warfare ships and the modern equivalent of World War II U.S. PT boats and German E-boats are other opportunities.
With the dollar plunging in value against the euro, major European corporations will have many additional opportunities to purchase outright or buy controlling interests in small specialist or middle-sized U.S. defense firms.

Such purchases will not be remotely controversial compared with the possibility that Middle Eastern or Chinese companies might seek to make such purchases. And insofar as new European owners will keep these companies going when they otherwise might have been forced to go out of business or lay off thousands of workers, such purchases will bring home to the American public the fact that transatlantic business in defense contractors and weapons procurement is a two-way street, with European investments building up American industry rather than undermining it.

The U.S. armed forces and the Department of Defense urgently need to expand their domestic production capabilities in areas such as the manufacture of ammunition, MRAPs, armor and small non-nuclear warships, especially vessels for coastal defense and anti-submarine warfare and electric-diesel drive submarines.

Many U.S. defense manufacturers urgently need infusions of capital at a time when the U.S. defense budget faces major cuts. On the other side of the Atlantic, major European defense corporations are often little known and under-estimated within the United States, but they are eager to expand into the enormous U.S defense market and lack the scale of orders necessary to grow significantly from their own European base.

Protectionist pressures will still come from congressmen and senators looking to protect companies in their districts. But in a political climate where hundreds of billions of dollars are going to have to be cut from defense-procurement budgets every year, no secretary of defense will be in a position to turn down any proposal that offers many more weapons, far more cheaply, especially when U.S. companies do not even produce the systems themselves.

Martin Sieff is Defense Industry Editor for United Press International.