France's Big War Companies Asked to Love Each Other

FRANCE wants to stem the monster deficits of its state-owned defense industries while preserving as much of the nation's traditional self-reliance in military production as possible.

Reaching that twin goal, set in February by conservative President Jacques Chirac, will not be easy. For one thing, a major element in Mr. Chirac's agenda, a marriage of France's biggest aerospace firms, is meeting strong resistance.

The French president wants fiercely independent Dassault Aviation to agree to general merger terms with state-owned Aerospatiale by June 30. But according to unconfirmed reports this week, talks have yet to get off the ground.

A key issue is the difficulty of merging two corporate cultures.

"We're a private company; Aerospatiale is state-owned. We've had to make a profit year after year; they've been bailed out by the government. We've cut our employees by a half, from 18,000 to 9,000 since 1986, they've cut only about a quarter," says a Dassault spokesman.

No overlapping products

On paper, the Dassault-Aerospatiale merger makes sense, some industry analysts say. Aerospatiale and Dassault both produce aircraft and have no overlapping product lines.

French governments have been trying, without success, to merge the two companies since 1977. But the government brings new resources to its latest attempt to force Dassault to accept a merger, including a 46 percent stake in Dassault and the ability to slow up orders for Dassault's Rafale combat jet, scheduled to enter service in 1999. The Rafale is critical to Dassault's future, and the French government is its major customer.

Other analysts say the French firms would be better off partnering with European firms outside France - a view shared by many top French defense leaders but not by the French government.

"The massive restructuring of the American [defense] industry is a formidable challenge for us," Aerospatiale chief executive officer Louis Gallois told the French daily Le Figaro last month. "European industry can only face that challenge by merging to form comparable groups. It has very little time to do that."

Another defense CEO, Alain Gomez of Thomson, publicly called for a partnership with the British GEC group. Mr. Gomez resigned his post hours after the Chirac's announcement of a new defense strategy that includes privatization of his company.

Dassault, meanwhile, has been prospecting a research partnership with British Aerospace.

French government officials insist that French defense companies must first consolidate with each other before taking on new European or foreign partners.

But the government is under pressure to bring spending down. The costs of maintaining Europe's largest defense establishment are no longer possible to sustain.

Since the 1960s, defense autonomy has been a primary objective of French government strategy. When other European countries reduced military spending after the end of the cold war, France increased it. Germany produces about 45 percent of its own military requirements; France, 90 percent, including combat fighters, helicopters, nuclear missiles, nuclear-powered aircraft carriers, conventional arms, and space-based intelligence.

About three-fourths of France's defense companies are state owned - and are producing huge deficits. For example, a producer of land-based armaments, Giat Industries, has accumulated $2.4 billion in losses in the last five years, and claims it will need another $1.4 billion in state subsidies to be viable. Aircraft and missile manufacturer Aerospatiale ran a deficit of $196 million last year and has asked the government for $2 billion in new subsidies.

To qualify for entry into a single European currency system, France needs to cut its budget deficit from more than 5 percent of gross domestic product in 1995 to 3 percent in 1997. Money-losing defense industries are an obvious place to cut.

Chirac's personal ties

A wild card in the game is Chirac's own ties to the Dassault family and his willingness to use government clout to force the family to accept a deal with Aerospatiale. Marcel Dassault, the father of current Dassault Chairman Serge Dassault, helped give Chirac his start in politics, including financing early campaigns and recommending Chirac in 1962 for a key post overseeing aeronautics policy in the cabinet of then-Prime Minister Georges Pompidou.

Industry analysts say that the current financial crisis leaves the government few options.

"It's not in the French tradition to be guided by financial constraints, but this government has no choice. Defense restructuring must be done," says Jacques de Greling, an analyst at Transbourse, a Paris brokerage firm.