Despite a large number of procurement opportunities, Europe’s armoured vehicle sector is over-supplied to an almost ludicrous degree. In a sector which screams for consolidation in order to remain competitive, do recent commercial developments and mergers within France, Germany and the UK plot a route to a more sustainable sector and a less crowded market?
For a region that spends only 1.6% of GDP on defence compared to 4.3% of GDP spent in the US, the EU (still including the UK as well as Switzerland in this context) has a surprising number of armoured vehicle manufacturers. In fact, there are at least 18 manufacturers of tracked and/or wheeled military vehicles, excluding manufacturers of protected MRAPs, trucks or other light vehicles. From the ‘Big 3’ (France, UK and Germany), through Italy, Spain, Sweden, Poland and Switzerland all the way through to MSM Group in Slovakia, Romarm in Romania and Patria in Finland to name but 3, the market for European armoured vehicles is a distinctly crowded one.
While the over-capacity of combat aircraft options in Europe has often been highlighted, as a sector combat air has nothing on armoured vehicles. Although armies require large amounts of tanks, armoured fighting vehicles, mechanised troop carriers and a host of specialist vehicles for combat engineering, command and control and the like, even the combined number of required vehicles for the whole of the EU would still leave the segment considerably over-supplied.
Furthermore, the evolution of modern warfare and especially the dual development of the threat of sophisticated IEDs in counter-insurgency combined with the resurgence of state-on-state warfare as a potential threat means that quality and capability are now more important than they have been for some time.
Following the end of the Cold War, the combat operations that took place were largely against inferior equipment (e.g. Gulf War I) or against highly limited opponents (e.g. Yugoslavia, Kosovo etc.). The early stages of Gulf War II seemed to confirm this but the development of IED tactics by insurgents there and in Afghanistan led to a realisation that protection was inadequate on many Cold War era vehicles. The continued investment and development of Russian armoured technology has given further impetus to the need for European armies to update their armoured vehicle fleets.
For example, until the very recent arrival of Ajax, the UK has relied on a fleet of armoured vehicles entirely of Cold War vintage, some of them over 40 years old. Trying to procure large scale replacements in an era of constant combat operations and a fluid threat environment meant that, despite several concept development iterations and expensive assessment contracts, no major replacement has taken place despite the requirement having first been identified back in 1999.
Some European armies, for various reasons, have updated elements of their armoured vehicle fleet, but two key questions have caused an acceleration in those plans and a realisation that the situation needs to change. Those two questions:
- “Can this vehicle and its crew survive driving past an IED?” and…
- “Will this vehicle survive an encounter with the latest Russian hardware?”
For many European land forces, the clear answer to this dual assessment is currently negative.
Strong Demand Fundamentals
As a result, there are numerous opportunities for armoured vehicle manufacturers, it’s just there are too many of them for all of them to prosper even in this benign demand environment.
In the tracked vehicle segment where some of the most ancient machinery is in operation, there are currently 8 countries in Europe that plan to replace tracked armoured personal carriers (APC), 5 that plan to acquire Infantry Fighting Vehicles (IFV) and 6 that aim to purchase armoured recovery vehicles. In the wheeled segment, 15 countries have a stated requirement for wheeled APCs, 6 for IFVs and 9 more to buy wheeled recovery or engineering vehicles. In addition, there are a large number of significant mid-life (or, more accurately, ‘end-of-life’) upgrade programmes such as Warrior, Challenger, M-113, BMP-1, CV-90 and others.
Consolidation Moves: Nexter & Krauss Maffei Wegmann (KNDS)
In this environment, the market has seen some important consolidation developments. The most noteworthy was the decision, backed by the German and French governments, for Nexter and Krauss Maffei Wegmann to ‘merge’ and become KNDS. ‘Merge’ covers a broad range of association in this case as, in truth, the relationship at the moment is just that, an association and not much more.
While the arrangement has been hailed as potentially a new ‘Airbus for Armoured Vehicles’ and may indeed in time come to resemble the success of Airbus in aerospace, currently the ambitions for the group are much more modest. The companies have a 50% holding each in the holding company (HQ’d in neutral Netherlands) and have agreed to pool certain functions such as international marketing and sales, communication, supply chain management and R&D. No common programmes are being worked on although it is clear that there is an intention to offer a joint solution for the replacement of the Leclerc and Leopard main battle tanks (MBT) around 2030.
At the moment, what has taken place is a statement of intent as much as anything. France and increasingly Germany see European consolidation as the only option for a competitive defence industry but both countries are equally determined not to give up domestic production, sovereign capability and key influence over future systems’ requirements.
In truth, the main source of friction will likely be over international exports. Nexter’s and KMW’s portfolio are not completely complementary. Both manufacture an MBT although as both are coming to the end of their operational lives the Leclerc and Leopard will not likely compete head-to-head between now and when the replacement is chosen. However, both also make IFVs, APCs and mobile artillery.
It is the case that Nexter’s main point of differentiation is in weapons and turrets whereas KMW is strong in hulls, drivetrains and generally the lower part of the vehicle. While both companies no doubt hope to gain from having new points of access to new customers through the rapprochement, the decision to deal with overseas sales on a case-by-case basis as to which product within the broad KNDS portfolio is offered in any given competition, this indicates that few tangible benefits of consolidation will be realised anytime soon.
Consolidation Moves II: BAE Systems Land Vehicles UK & Rheinmetall (RBSL)
A further complication is that whereas Nexter has mainly developed its vehicles alone, KMW has developed several of its key products in cooperation with their much large German partner, Rheinmettal. The Boxer IFV, PzH 2000 and the Puma (IFV) are developed through joint ventures with Rheinmettal.
This presents a problem for Nexter and the French government because not only is Rheinmettal a competitor in weapon and turret expertise, but Rheinmettal has recently become much more ambitious regarding its growth. The business sees an opportunity to dominate the European market and much of the global market as well and has backed this up by acquiring BAE Systems UK Land Vehicles business (not BAE Systems’ US Land vehicles business) which BAE Systems has been wanting to be rid of for years if only HMG would allow it. This JV (of which Rheinmettal has a 51% stake) is founded on three significant projects. Firstly, Boxer is inked-in to meet the British Army’s requirement for a Mechanised Infantry Vehicle (initially 500 units). Secondly, the Challenger II requires a substantial upgrade and finally the Warrior is due a further mid-life upgrade of its own.
Consolidation Moves III: Rheinmetall & KMW
With the deal confirmed, Rheinmettal has also made known its desire to absorb KMW as well to consolidate German armoured vehicles manufacturers but also now incorporating Nexter’s business. This has led to some nervousness, not to say resistance, from France. Firstly, such a tie-up would significantly reduce Nexter’s influence. Together, KNDS has about €2 billion revenues compared to Rheinmettal’s €6.5 billion.
Secondly, the rationale of putting together a turret and weapons specialist and a chassis and propulsion expert in the forms of Nexter and KMW is somewhat overthrown if the business is then owned by Rheinmettal, who previously had contributed to their various JVs with KMW precisely the expertise that Nexter is supposed to bring to KNDS.
Ultimately, the French fear is that Nexter’s influence and contribution would be severely diminished if the two German vehicle manufacturers were to consolidate. Furthermore, in the near term the potential for Boxer (KMW and Rheinmettal) to edge VCBI (Nexter) out of most competitions for IFV and other similar armoured roles must make Nexter very nervous about how this relationship will develop. In such a scenario, KMW’s position has the potential to be somewhat conflicted, to put it mildly.
What’s the Likely Outcome?
How this conundrum will work itself out is unclear and the potential for the ambitions of both Rheinmettal and KNDS to be thwarted by political or even familial politics (KMW is owned by 26 silent partners from 4 families) is high.
For the KNDS partners, the association may have been an obvious defensive move especially given Nexter’s position. But given the state of overcapacity in the market as well as the increasing dominance in terms of size and position in Germany and the UK of Rheinmettal, standing still is not an option however difficult concrete moves to making the merger a reality may be.
Interested in defence commercial strategy?
Contact: Chris Cradock, Partner (Aerospace, Security and Defence)
Call: +44(0)20 8996 5088 or +44(0) 799 0581 701