KANT and the Prospect of a European Defence Industry

For the international observer, the recent history of the European defence industry is undoubtedly characterised by failed attempts. Despite having around 400 ongoing bilateral and multilateral projects in 2015, military production in the European Union (EU) remains stuck with ad hoc cooperation, fragmentation and slow rates. Transnational programs like the Tiger helicopter or the A400M airlifter were indeed noticeable successes, but they must not hide the recurrent incapacity of the EU arms industry to engage in more consolidation. A 2012 failed collaboration between Airbus, at that time called EADS, and BAE Systems, a British defence group, perfectly displayed the clash of interests between European defence firms and states’ politics: Germany refused to lower its 15% share in EADS, as required by the Pentagon, the main client of BAE, prior to the merger and consequently abandoned the deal.

Image Courtesy of Rama, © 2006, some rights reserved.

Image Courtesy of Rama, © 2006, some rights reserved.

This bleak trend seemed to shake slightly 29 July 2015, when Nexter and Krauss-Maffei Wegmann (KMW), the major French and German land-system manufacturers, announced their fusion in a holding called KANT, for “KMW And Nexter Together”. Enthusiasts would consider this deal as a further step towards a long-awaited consolidation of the oversized European defence industry, recalling, with a sense of proportion, Airbus’ success story. Newborn KANT will be the de facto leader of land-system production in continental Europe, associating two of the biggest EU economies in a joint effort of development and echoing the Pooling & Sharing initiative, dear to defenders of the EU Common Security and Defence Policy. In a June 2014 interview[1], Nexter’s CEO Jean-Patrick Baillet spoke enthusiastically about the economies of scale, mutualisation of investments and extended commercial print allowed by a fusion with KMW. However, the merger between Nexter and KMW hides less attractive realities about the state of European defence industry and policy.

Interestingly, Nexter and KMW present many similarities beyond the mere quality of their productions. They are both constrained by a single entity: the French state for the former and Wegmann & Co. GmBH for the latter. Tanks, armoured vehicles, artillery, and ammunitions have the largest share of their production, completely absent from the civilian sector. Nexter furnishes Leclerc tanks and the Véhicule blindé de combat d’infantrie (VBCI) model used by the French army while KMW traditionally supplies NATO member states with its best-seller Leopard battle-tank. Both companies suffered from governmental credit cuts and, in the case of KMW, self-restrictions on exportations established by the German government towards instable regions. Such rules notably prevented KMW from dealing with Saudi Arabia, the second most important arms importer in 2014 with $2.6 billion of acquisitions.[2] Nexter and KMW employ around 3000 workers, and delivered €800 million in turnover in 2013. Both praised 29 July 2015 their “complementarities” in terms of R&D and export policies.[3] However, Tom Waldwyn and Douglas Barrie of the International Institute for Strategic Studies, a London-based think tank, insist that they will need to expound serious effort “deconflicting current programme timelines” and “[managing] differing approaches to the export arena.”[4] To put it more bluntly, it should be said that Nexter and KMW face challenges in the pursuit of their economical viability.

The first of these challenges is the limitation of military budgets. Austerity throughout Europe is a growing burden for national defence industries, which struggle to maintain economies of scale. Between 2001 and 2010, the EU’s defence expenditures decreased by €57 billion from €251 billion to €194 billion. France and Germany in particular repeatedly fail to devote 2% of their GDP to their defence budgets, in accordance with NATO’s rules. Furthermore, Nexter and KMW occupy the worst affected segment of the defence industry: land weapons. Opening Nexter’s capital to private investors was actually part of the 6 August 2015 Macron law aimed at liberalising the French market.[5] Besides, the last French White Paper on national defence, released in 2013, defined targets for the army at an all-time low, with 66,000 soldiers and 200 heavy battle-tanks. Germany’s next White Paper, scheduled for 2016, will probably follow the same path with more attention given to counterterrorism and cyber warfare with less to land capabilities, already considered over-scaled and obsolete. Moreover, KMW feels a greater burden due to the severe export limitations imposed by German government to its arms industry.

The second challenge guiding the fusion of Nexter and KMW is the fragmentation of the EU defence market. With 28 member states, the EU struggles to develop a strong and coherent foreign policy. Such a lack was ostensibly exposed by the 2011 Franco-British intervention in Libya, which was opposed by Germany, or the incapacity of the Union to decisively back the French military effort in Sub-Saharan Africa in 2013. Consequently, EU states keep relying in large measures on national programs responding to domestic security issues. European R&D, considering the intrinsic resources of the continent, is notoriously small and fragmented, dwarfed most notably by the United States. The European Defence Agency, an agency of the European Council evaluated at €7.5 billion (4% of total defence budgets) and representing the cumulated R&D expenditure of the EU member states for 2013[6], hardly compares with the $63 billion R&D budget of the United States Department of Defence for 2014.[7] Nexter and KMW severly suffer from such lack of investments, and have already capitalised on their merger to launch new projects. KANT’s star-project is the development of a new generation of battle-tank replacing the Leclerc and Leopard II models, due to be completed by 2030. Frank Haun, KMW’s CEO, reckoned on 14 January 2015 in front of the French Defence Commission, that the success of KANT will be determined by the ability of France and Germany to coordinate orders and reinforce interoperability between their armed forces.[8]

Competition in land-weapon development is tougher than for cutting-edge technologies, like those in the aeronautic sector. Developing countries wanting to climb the ladder of weapon production generally start by designing armoured vehicles. Nexter and KMW, unlike BAE Systems or Lockheed Martin, are entirely specialised on one segment of arms production. They are therefore particularly exposed to international competition from the United States, Russia, or China. Russia’s new T-14 Armata battle-tank impressed many during an annual military parade in Moscow 9 May 2015, while the Chinese company Norinco boasts its VT-4 model as being as efficient as its Russian counterpart. South Korea’s K2 Black Panther, developed by Hyundai Rotem, intends to compete on the same level, while Israel, Brazil and Singapore are progressing on land-systems design. The general withdrawal of land-warfare systems in western national armed forces, coupled with the rise of new industrial actors, put the entire industry at risk of overcapacity.

Presented by their leaders as a decisive step towards a long-expected unified European defence industry, the fusion of Nexter and KMW is actually grounded on grimmer realities. Confronted by decreasing budgets and fierce international competition, they both struggle primarily for mere survival. The reunion of two companies manufacturing weapons as symbolic for their respective nations as the Leclerc and Leopard battle-tanks is certainly significant in the pursuit of a transeuropean arms industry. France and Germany will be compelled to cooperate in land-armament programs and consequently to develop their armies’ interoperability. Nevertheless, symbols should not hide the daily preoccupations of companies like Nexter and KMW, for which budget-cuts, lack of investments and multiplication of competitors are existential threats. Rather than trying to contribute to a Pan-European political-industrial project, Nexter and KMW prosaically expect to attain a sufficient size through KANT to stay relevant amidst global competition.

[1] Hassan Meddah, « Nexter-KMW: « Dans l’armement terrestre, l’effet de taille est incontournable », selon Jean-Patrick Baillet, » Usine Nouvelle, June 20, 2014.

[2] SIPRI Arms Transfers Database.

[3] Communiqué de presse, « Signature du contrat qui scelle l’alliance de Nexter Systems et de Krauss-Maffei Wegmann, » Munich/Versailles, July 29, 2015.

[4] Tom Waldwyn and Douglas Barrie, “European defence-industrial consolidation and the Nexter-KMW merger,” International Institute for Security Studies, August 10, 2015.

[5] LOI n° 2015-990 du 6 août 2015 pour la croissance, l’activité et l’égalité des chances économiques : Article 189.

[6] Eric Platteau (edited by), EU Defence Data 2013 (Brussels: European Defence Agency, 2015).

[7] Fiscal Year 2015 Budget Request (Washington: United States Department of Defense, March 2014).

[8] Patricia Adam (presided by), « Audition de MM. Frank Haun, president-directeur-général de Krauss-Maffei Wegmann, et Philippe Burtin, president-directeur-général de Nexter, sur le projet KANT, » Commission de la défense nationale et des forces armées, January 14, 2015.