* Fearsome display of weapons on show in Paris
* Western defence cuts force firms to look to export markets
* Industry experts predict mergers, greater cooperation
By Adrian Croft
PARIS, June 14 Behind the wheeling and dealing
at one of the world's biggest arms shows this week, weapons
makers are feeling the strain from shrinking Western defence
budgets and could be forced into mergers or joint projects to
A fearsome array of weapons and military equipment, ranging
from assault rifles to tanks and sophisticated drones, was on
display at Eurosatory, a week-long fair near Paris that defence
firms from around the world use to showcase their wares.
Thousands of visitors, including defence ministry officials
and senior army officers in uniforms dripping with medal ribbons
and gold braid, toured the vast exhibition halls, taking aim
with rifles, examining high-tech missiles and holding hushed
conversations with salesmen.
Some armoured vehicles carried signs saying they were
"combat proven" with the NATO-led force in Afghanistan.
Outside, small all-terrain vehicles and bridge-building
trucks were put through their paces on a churned-up muddy
demonstration ground featuring a mock Afghan village while tiny
drones buzzed overhead filming the action.
Organisers said there were 1,400 exhibitors at the show this
year, up 8 percent from the last show two years ago, suggesting
a sector in rude health.
In reality, European and U.S. defence firms are being hit by
sharp defence cuts their governments are driving through as they
wrestle with economic crisis and budget deficits.
"Particularly in the West and in Europe, defence budgets are
falling and therefore that means it is more competitive ... so
defence companies are definitely feeling the pressure," said
Gordon Lane, managing director, defence, of the British defence
industry trade group ADS.
Consolidation in the worldwide defence industry was
"inevitable" in the next few years, he told Reuters at the show.
Christian-Peter Prinz zu Waldeck, director of the German
defence industry federation BDSV, said budget cuts and the need
to share capabilities would force European firms to cooperate
more on defence projects and lead to more mergers.
"Otherwise, Europe will have no chance in comparison to the
United States," he said.
Analysts believe consolidation between the major defence
contractors is unlikely to take place any time soon but predict
the major players could look to pick off the second tier of
"What you could see is mid-market deals taking place - they
would be substantial multi-billion-dollar deals. The likes of
Britain's Cobham and Ultra Electronics have
attracted admiring glances from some of the bigger players for
some time," said a defence fund manager who declined to be
The United States and Britain jealously guard their national
defence capabilities, making cross-border deals harder than ever
to push through. Transatlantic deals are also unlikely to happen
in a year when the U.S. presidential election will slow
Declining business in their home markets is driving Western
defence firms to look to still buoyant export markets in the
Middle East, Asia and Latin America for their salvation.
The pressure to export is intensifying already fierce
competition in a worldwide market that some estimates say is
worth $1 trillion a year.
"If you read the annual accounts of every major aerospace
company, if you can find a chairman's statement that doesn't say
we are chasing international business strongly, that would be a
very rare company," said Alan Garwood, group business
development director at Britain's BAE Systems, Europe's
biggest defence company.
Competition was intense, "but it has always been like that",
he told Reuters during the show.
With foreign forces due to bow out of combat in Afghanistan
by the end of 2014, a stream of lucrative contracts for Western
defence firms is set to dry up, dealing another setback to the
companies, although one they insist they have planned for.
BAE Systems said last month it would consult unions over 620
potential job losses and the closure of an armoured vehicle
factory in Britain.
EURO ZONE CRISIS
The financial crisis that has lashed Europe since 2007 is
having a severe impact on defence spending there and some
industry players fear more cuts could be on the way.
The International Institute for Strategic Studies, a British
think-tank, said in its Military Balance review this year that
defence spending in European NATO states fell by an average of
7.4 percent per country in real terms between 2008 and 2010,
with double-digit drops in countries such as France, Italy and
Britain is cutting 8 percent in real terms over four years
from its 34 billion pound ($52.7 billion) defence budget.
In the United States, the Pentagon is under orders to cut
spending by $487 billion over the next decade as the government
tries to rein in its trillion-dollar deficit.
By contrast, emerging powers such as China and India - both
of which had companies exhibiting at the Paris show - are
increasing spending on arms.
Waldeck, of the German defence industry group, said European
countries' insistence on different designs for new military
equipment caused wasteful duplication.
"We can't have two tanks because one country would like to
have the driver's seat on the left side and the other country
would like to have the driver's seat in the middle ... These are
really sometimes ridiculous requirements and we have to overcome
this national egotism," he said.
NATO and the European Union's European Defence Agency (EDA)
are trying to increase efficiency by encouraging pooling and
sharing of military capabilities among their members.
NATO approved a package of 20 multinational projects at its
Chicago summit in May while the EDA has commissioned a study on
precision-guided or "smart" munitions that could lead to greater
cooperation in the European industry.
Another example of the trend is a Franco-British plan to
jointly develop a new surveillance drone. A contract with
France's Dassault Aviation and BAE Systems is expected
to be signed in July, industry sources said this week.
Industry experts say defence companies with innovative
technology or a strong position in a niche market continue to do
well. Other companies respond by diversifying into other areas,
such as the broader security market.
AeroGlow, a small British firm exhibiting at Eurosatory for
the first time, is keen to pursue export opportunities for its
products, which include a lighting system that helps soldiers
escape when their armoured vehicle has been hit by a bomb.
"Whilst maybe some of the big markets are contracting, if
you walk around here, there's an awful lot of armoured fighting
vehicle manufacturers ... and as a small company, I still think
we've got a lot of potential to grow over the next couple of
years," AeroGlow business development manager Keith White said.