March 21, 2013 / 11:41 AM / 5 years ago

UPDATE 2-EADS CEO predicts more defence industry consolidation

* EADS CEO sees gloomy outlook for European defence industry

* European defence spending set to decline further, he says

By Adrian Croft

BRUSSELS, March 21 (Reuters) - The chief executive of European aerospace firm EADS, predicted more shake-ups in the defence industry on Thursday as he painted a gloomy outlook for the sector both domestically and in export markets.

“I think there will be more consolidation happening, but we had one prominent example last year where industry tried to provide some meaningful consolidation and politics interfered,” CEO Tom Enders said, speaking at the European Defence Agency’s annual conference.

He was referring to last year’s failed $45 billion merger between EADS and Britain’s BAE Systems. The deal, which would have created a European defence and aerospace giant, collapsed in the face of political differences between the three governments involved - Germany, France and Britain.

The squeeze on European governments’ finances meant the continent’s defence industry faced further declines in government defence spending, he said.

“Our assessment by and large in Europe is that we will have to face a decade with no growth, more likely further decline in defence budgets,” Enders said.

“We reckon industry has (to face) a further decline of the defence budgets. I think that is very important and all of us are drawing conclusions from that.”

He said EADS was in a fortunate position because it made products that armed forces needed, such as air transport and refuelling planes, and the company could in addition re-adjust resources from military to commercial products. EADS also makes Airbus airliners.

Many European governments have slashed defence spending in response to the financial crisis. Only a handful of NATO countries meet the alliance’s target of spending 2 percent of their Gross Domestic Product on defence, and Enders said he believed defence spending by Britain and France, Europe’s military heavyweights, would probably fall below that level.

Trying to compensate for European weakness by focusing on export markets outside Europe, was “very difficult because that smart idea is on everybody’s mind”, he said.

“The Americans, the Europeans and everybody who has a defence business goes to the growth markets and guess what? It is always the same countries, it’s India, it’s Brazil, it’s the Middle East where we all meet and have a cut-throat competition, so that is not an easy thing,” he said.

“On top of that, those countries (leading emerging economies) are increasingly raising the hurdles - technology transfer, production transfer, all of that. It is much less a business case to do that than it was 10, 20 years ago.”

“The clock is more than ticking. It is not about strengthening the (European) defence industrial base, we should talk about the further erosion that is happening and in my view it is unlikely to stop,” he said.

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