oversight

Defense Trade: European Initiatives to Integrate the Defense Market

Published by the Government Accountability Office on 1997-10-29.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO              Report to the Secretary of Defense




October 1997
                 DEFENSE TRADE
                 European Initiatives to
                 Integrate the Defense
                 Market




GAO/NSIAD-98-6
             United States
GAO          General Accounting Office
             Washington, D.C. 20548

             National Security and
             International Affairs Division

             B-276450

             October 29, 1997

             The Honorable William S. Cohen
             The Secretary of Defense

             Dear Mr. Secretary:

             With decreasing U.S. defense procurement budgets since the end of the
             Cold War, U.S. defense companies have been looking for sales in foreign
             markets, and the Department of Defense (DOD) has been attempting to
             increase cooperative programs with its major European allies. At the same
             time, partly in response to their own reduced defense budgets, many
             European countries have taken steps to develop a common armament
             policy and consolidate their defense industrial base to become more
             efficient and competitive in world markets. To provide some insights and
             perspective on the implications these European efforts have on future U.S.
             military procurement options, we have reviewed the changes that have
             taken place in the European defense market over the past 5 years.
             Specifically, our objectives were to examine (1) what actions European
             governments and industry have taken to unify the European defense
             market, (2) how key European countries’ defense procurement practices
             have affected U.S. defense companies’ ability to compete on major weapon
             competitions in Europe, and (3) how the U.S. government and industry
             have adapted their policies or practices to the changing European defense
             environment. Our review focused on the buying practices of five European
             countries—France, Germany, Italy, the Netherlands, and the United
             Kingdom.


             Global exports of defense equipment have decreased significantly since
Background   the end of the Cold War in the late 1980s. Major arms producing countries,
             such as the United States and those in Western Europe, have reduced their
             procurement of defense equipment by about one-quarter of 1986 levels
             based on constant dollars. Overall, European nations have decreased their
             defense research and development spending over the last 3 years, which is
             one-third of the relatively stable U.S. research and development funding.
             Defense exports have declined over 70 percent between 1987 and 1994. In
             response to decreased demand in the U.S. defense market, U.S. defense
             companies have consolidated, merged with other companies, or sold off
             their less profitable divisions, and they are seeking sales in international
             markets to make up lost revenue. These companies often compete with




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                   European defense companies for sales in Europe and in other parts of the
                   world.

                   The U.S. government, led by DOD, has maintained bilateral trade
                   agreements with 21 of its allies, including most European countries, to
                   address barriers to defense trade and international cooperation. No
                   multilateral agreement exists on defense trade issues. Bilateral agreements
                   have been established to provide a framework for discussions about
                   opening defense markets with those countries as a way of improving the
                   interoperability and standardization of equipment among North Atlantic
                   Treaty Organization (NATO) allies. The United States has enjoyed a
                   favorable balance of defense trade, which is still an issue of contention
                   with some of the major arms producing countries in Europe.1 This trade
                   imbalance was cited in a 1990 U.S. government study as a justification for
                   European governments requiring defense offsets.2 However, because
                   European investment in defense research and development is significantly
                   below U.S. levels, a Department of Commerce official stated that
                   European industry is at a competitive disadvantage in meeting future
                   military performance requirements.

                   Reciprocal trade agreements recognize the need to develop and maintain
                   an advanced technological capability for NATO and enhance equipment
                   cooperation among the individual European member nations. A senior
                   NATO official stated that Europe’s ability to develop an independent
                   security capability within NATO and meet its fair share of alliance
                   obligations is contingent on its ability to consolidate its defense industrial
                   base. This official indicated that if such a consolidation does not occur,
                   then European governments may be less willing to meet their NATO
                   obligations.


                   Pressure to develop a unified European armament procurement policy and
Results in Brief   related industrial base is increasing, as most nations can no longer afford
                   to develop and procure defense items solely from their own domestic
                   companies. European governments have taken several initiatives to
                   integrate the defense market, including the formation of two new

                   1
                    According to a DOD official, data showed that the balance of defense trade with Europe was about 2
                   to 1 in the U.S. favor. Although the accuracy of DOD’s defense trade estimates has been questioned,
                   alternative estimates support a U.S. trade advantage. See European Initiatives: Implications for U.S.
                   Defense Trade and Cooperation (GAO/NSIAD-91-167, Apr. 4, 1991).
                   2
                    Offsets are defined as the entire range of industrial and commercial compensation benefits provided
                   to foreign governments and firms as inducements or conditions for the purchase of military goods and
                   services.



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organizations to improve armament cooperation. European government
officials remain committed to cooperative programs, which have long
been the impetus for cross-border defense cooperation at the industry
level. Some European defense companies are initiating cross-border
mergers that are not tied to government cooperative programs. Although
some progress toward regionalization is occurring, European government
and industry officials told us that national sovereignty issues and complex
ownership structures may inhibit European defense consolidation from
occurring to the extent that is needed to be competitive.

Until European governments agree on a unified armament policy,
individual European countries will retain their own procurement policies.
Like the United States, European countries tend to purchase major
defense equipment from their domestic companies when such options
exist. When national options do not exist, key European countries vary in
their willingness to buy major U.S. weapon systems. For example, the
United Kingdom and the Netherlands have often selected U.S. products
over European products, while France has only purchased major U.S.
defense items when a comparable French or European option was not
available.

Transatlantic industrial partnerships appear to be evolving more readily
than transatlantic cooperative programs that are led by governments. U.S.
defense companies have established these transatlantic partnerships
largely to maintain market access in Europe. U.S. defense company
officials say they cannot export major defense items to Europe without
involving European defense companies in the production of those items.
Some U.S. defense companies are seeking long-term partnerships with
European companies to develop a defense product line that will meet
requirements in Europe or other defense markets. They believe such
industrial interdependence can also help counter any efforts toward U.S.
or European protectionism and may increase transatlantic defense trade.
The U.S. government has taken several steps over the last few years to
improve defense trade and transatlantic cooperation, but some observers
point to practical and cultural impediments that affect U.S.-European
cooperation on major weapon programs.




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                         European governments have made slow gradual progress in developing
Europe Has Taken         and implementing unified armament initiatives. These initiatives are slow
Steps to Integrate Its   to evolve because the individual European nations often have conflicting
Defense Industry, but    goals and views on implementing procedures and a reluctance to yield
                         national sovereignty. In addition, the various European defense
Progress Is Slow         organizations do not include all of the same member countries, making it
                         difficult to establish a pan-European armament policy.

                         European officials see the formation of a more unified European defense
                         market as crucial to the survival of their defense industries as well as their
                         ability to maintain an independent foreign and security policy. Individual
                         national markets are seen as too small to support an efficient industry,
                         particularly in light of declining defense budgets. At the same time,
                         mergers and consolidations of U.S. defense companies are generating
                         concern about the long-term competitiveness of a smaller, fragmented
                         European defense industry.

                         In the past, European governments made several attempts to integrate the
                         European defense market using a variety of organizations. The Western
                         European Union (WEU), the European Union, and NATO are among the
                         institutions composed of different member nations that have addressed
                         European armament policy issues (see fig. 1). For example, in 1976, the
                         defense ministers of the European NATO nations established the
                         Independent European Program Group as a forum for armament
                         cooperation. This group operated without a legal charter, and its decisions
                         were not binding among the member nations. In 1992, the European
                         defense ministers decided that the group’s functions should be transferred
                         to WEU, and the Western European Armaments Group was later created as
                         the forum within WEU for armament cooperation.




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Figure 1: Organizations Addressing European Armament Policy Issues




                                                                                         EU

                                                                     Austria (2)
                                                                     Sweden (2)


        NATO                   Belgium
                         Denmark (2) France
        Canada          Germany Greece Italy
                     Luxenbourg The Netherlands                                                    Ireland (2)
         USA
                           Portugal Spain
                           United Kingdom


               Czech Republic (3,4)                    Finland (2)
                  Poland (3,4)
                  Hungary (3,4)
                   Iceland (1)

               Norway (1) Turkey (1)
                                                                                                            WEU


                            Bulgaria (3) Estonia (3)
                            Latvia (3) Lithuania (3)
                           Romania (3) Slovakia (3)



                                               Slovenia (3)




                                           EU: European Union
                                           NATO: North Atlantic Treaty Organization
                                           WEU: Western European Union

                                           Notes:
                                           (1) Associate Members of WEU
                                           (2) Observers of WEU
                                           (3) Associate Partners of WEU
                                           (4) Invited to begin accession negotiations with NATO




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                        In 1991, WEU3 called for an examination of opportunities to enhance
                        armament cooperation with the goal of creating a European armaments
                        agency. WEU declared that it would develop as the defense component of
                        the European Union and would formulate a common European defense
                        policy. It also agreed to strengthen the European pillar within NATO. Under
                        WEU, the Western European Armaments Group studied development of an
                        armaments agency that would undertake procurement on behalf of
                        member nations, but agreement could not be reached on the procurement
                        procedures such an agency would follow. Appendix I is a chronology of
                        key events associated with the development of an integrated European
                        defense market.


Two Armament Agencies   In 1996, two new armament agencies were formed. OCCAR4 was created as
Created                 a joint management organization for France, Germany, Italy, and the
                        United Kingdom, and the Western European Armaments Organization
                        (WEAO) was created as a subsidiary body of WEU. As shown in table 1, the
                        two agencies are separate entities with different functions.




                        3
                         WEU, which was established in 1955, serves a unique role between the European Union and NATO in
                        addressing defense and security matters since it is the only European organization that can carry out
                        military operations.
                        4
                         OCCAR is the French acronym for Organisme Conjoint de Coopération en Matière d’Armement.



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Table 1: Selected Characteristics of
OCCAR and WEAO                                                        OCCAR                         WEAO
                                       Principles/goals               • Consolidate program         Promote European
                                                                      management.                   armament cooperation,
                                                                      • Coordinate long-term        strengthen the European
                                                                      requirements and develop a    defense technology base
                                                                      common investment policy.     and create a European
                                                                      • Improve European            defense market. Offer an
                                                                      industrial base               appropriate legal framework
                                                                      competitiveness.              for a future European
                                                                      • Replace the program         armament agency.
                                                                      specific “juste retour”
                                                                      concept (work share in
                                                                      proportion to funds
                                                                      contributed) with an
                                                                      equitable balance over
                                                                      multiple programs and
                                                                      years.
                                                                      • Open membership to
                                                                      European countries that
                                                                      accept these principles and
                                                                      plan to participate in a
                                                                      major cooperative program.
                                                                      • Give preference to
                                                                      equipment to whose
                                                                      development a country has
                                                                      contributed within OCCAR.
                                       Programs                       Milan and Hot antitank        Existing defense research
                                       to be administered             missile systems, Roland       and technology projects.
                                                                      surface-to-air missile
                                                                      system, Tiger combat
                                                                      helicopter, and Brevel
                                                                      surveillance and
                                                                      reconnaissance drone
                                                                      program.
                                       Membership                     France, Germany, Italy, and Belgium, Denmark, France,
                                                                      the United Kingdom.         Germany, Greece, Italy,
                                                                                                  Luxembourg, Netherlands,
                                                                                                  Norway, Portugal, Spain,
                                                                                                  Turkey, and the United
                                                                                                  Kingdom.
                                       Organizational status          A management organization     A WEU subsidiary located
                                                                      located in Bonn, Germany,     in Brussels, Belgium, with
                                                                      with no legal charter to      legal authority to administer
                                                                      administer contracts.         contracts.
                                       Source: Our analysis of OCCAR and WEU documents.



                                       OCCAR was created as a result of French and German dissatisfaction with
                                       the lack of progress WEU was making in establishing a European
                                       armaments agency. Joined by Italy and the United Kingdom, the four



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nations agreed on November 12, 1996, to form OCCAR as a management
organization for joint programs involving two or more member nations.
OCCAR’s goals are to create greater efficiency in program management and
facilitate emergence of a more unified market.

Although press accounts raised concerns that OCCAR member countries
would give preference to European products, no such preference was
included in OCCAR’s procurement principles. Instead, it was agreed that an
OCCAR member would give preference to procuring equipment that it
helped to develop. In establishing OCCAR, the Defense ministers of the
member countries agreed that OCCAR was to have a competitive
procurement policy. Competition is to be open to all 13 member countries
of the Western European Armaments Group. Other countries, including
the United States, will be invited to compete when OCCAR program
participants unanimously agree to open competitions to these countries
based on reciprocity. OCCAR officials have indicated that procedures for
implementing the competition policy, including criteria for evaluating
reciprocity, have not yet been defined. According to some U.S.
government and industry officials, issues to consider will include whether
U.S. companies will be excluded from OCCAR procurement or whether
OCCAR procurement policy will be consistent with the reciprocal trade
agreements between member countries and the United States.

OCCAR’s impact on the European defense market will largely depend on the
number of programs that it manages. OCCAR members are discussing
integrating additional programs5 in the future but are expected to only
administer joint programs involving participating nations, thereby
excluding transatlantic, NATO, or European cooperative programs involving
non-OCCAR nations. Some European nations, such as France and Germany,
are committed to undertaking new programs on a cooperative basis. While
intra-European cooperation is not new, French Ministry of Defense
officials have indicated that this represents a change for France because
they no longer intend to develop a wide range of weapon programs on
their own.

On November 19, 1996, a week after OCCAR was created, the WEU
Ministerial Council established WEAO to improve coordination of
collaborative defense research projects by creating a single contracting
entity. As a WEU subsidiary body, WEAO has legal authority to administer
contracts, unlike OCCAR, which operates without a legal charter and has no

5
 These programs include a range of products, including a counter battery radar, armored vehicles, an
antiship weapon system, a satellite communication system, an observation satellite, surface-to-air
missiles, and a self-propelled howitzer.



Page 8                                                             GAO/NSIAD-98-6 Defense Trade
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                     authority to sign contracts for the programs it is to administer. WEAO’s
                     initial task is to manage the Western European Armaments Group’s
                     research and technology activities, while OCCAR is to manage the
                     development and procurement of weapon systems. The WEAO executive
                     body has responsibility for soliciting and evaluating bids and awarding
                     contracts for common research activities. This single contracting entity
                     eliminated the need to administer contracts through the different national
                     contracting authorities. According to WEAO documentation, the
                     organization was intentionally designed to allow it to evolve into a
                     European armaments agency. However, it may take several years before
                     the effect of OCCAR and WEAO procurement policies can be fully assessed.
                     Some European government officials also told us that OCCAR’s ability to
                     centrally administer contracts is curtailed until OCCAR obtains legal
                     authority.

                     U.S. government and industry officials are watching to see whether OCCAR
                     and other initiatives are fostering political pressure and tendencies toward
                     pan-European exclusivity. As membership of the various European
                     organizations expands, pressure to buy European defense equipment may
                     increase. For example, according to some industry officials, the new
                     European members of NATO are already being encouraged by some
                     Western European governments to buy European defense products to ease
                     their entry into other European organizations.


European Defense     While European government initiatives appear to be making slow, gradual
Industry Begins to   progress, the European defense industry is attempting to consolidate and
Restructure          restructure through national and cross-border mergers, acquisitions, joint
                     ventures, and consortia. European government and industry observers
                     have noted that European defense industry is reacting to pressures from
                     rapid U.S. defense industry consolidation, tighter defense budgets, and
                     stronger competition in the global defense market. Even with such
                     pressures, other observers have noted that European defense companies
                     are consolidating at a slower pace than U.S. defense companies.

                     The combined defense expenditures of Western Europe are about
                     60 percent of the U.S. defense budget, but Western Europe has two to
                     three times more suppliers, according to a 1997 Merrill Lynch study.6 For
                     example, the United States will have two major suppliers in the military
                     aircraft sector (once proposed mergers are approved), while six European
                     nations each have at least one major supplier of military combat aircraft.

                     6
                      Barnaby Wiener, British Aerospace, Merrill Lynch, Pierce, Fenner and Smith Limited (Mar. 1997).



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                                In terms of defense revenues, U.S. defense companies tend to outpace
                                European defense companies. Among the world’s top 10 arms producing
                                companies in 1994, 8 were U.S. companies and 2 were European
                                companies.

                                While economic pressures to consolidate exist, European defense
                                companies face several obstacles, according to European government and
                                industry officials. For example, national governments, which greatly
                                influence the defense industry and often regard their defense companies
                                as sovereign assets, may not want a cross-border consolidation to occur
                                because it could reduce the national defense industrial base or make it too
                                specialized. National governments further impede defense industrial
                                integration by establishing different defense equipment requirements.
                                Complex ownership structures also make cross-border mergers difficult
                                because many of the larger European defense companies are state-owned
                                or part of larger conglomerates.

Restructuring Within National   To varying degrees, defense industry restructuring has occurred within the
Borders                         borders of major European defense producing nations, including France,
                                Germany, Italy, and the United Kingdom. In France, Thomson CSF and
                                Aerospatiale formed a company, Sextant Avionique, that regrouped and
                                merged their avionics and flight electronics activities. The French
                                government initiated discussions in 1996 about the merger of the aviation
                                companies Aerospatiale and Dassault, but negotiations are ongoing. In
                                Germany, restructuring has primarily occurred in the aerospace sector. In
                                1995, Deutsche Aerospace became Daimler-Benz Aerospace, which
                                includes about 80 percent of German industrial capabilities in aerospace.
                                In Italy, by 1995 Finmeccanica had gained control of about three-quarters
                                of the Italian defense industry, including Italy’s major helicopter
                                manufacturer Agusta and aircraft manufacturer Alenia. In the United
                                Kingdom, a number of mergers and acquisitions have occurred. For
                                example, GKN purchased the helicopter manufacturer Westland and GEC
                                purchased the military vehicle and shipbuilder VSEL in 1994.

Restructuring Across Borders    European companies have long partnered on cooperative armament
                                programs for the development and production of large complex weapon
                                systems in Europe. Often, a central management company has been
                                created to manage the relationship between partners. For example, major
                                aerospace companies from the United Kingdom, Germany, Italy, and Spain
                                have created a consortium to work on the Eurofighter 2000 program.
                                Another cooperative venture is the development of the European military
                                transport aircraft known as the Future Large Aircraft. Companies from a



                                Page 10                                          GAO/NSIAD-98-6 Defense Trade
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                                number of European nations are forming a joint venture company for the
                                development and production of this aircraft. Project based joint ventures
                                are typically industry led, but they are established with the consent of the
                                governments involved. (See table 2 for examples of European defense
                                company cooperative business activities for major weapon programs.)

Table 2: Examples of European
Defense Company Transnational                        Company participants
Cooperative Activities                               and percentage              Countries
                                Joint company        shareholdinga               involved            Product
                                Airbus Military      Aerospatiale (37.9%),       France, Germany,    Future Large
                                Company              Daimler-Benz Aerospace      Italy, Spain, and   Aircraft (planned)
                                                     (37.9%), British            the United
                                                     Aerospace (20%), CASA       Kingdom
                                                     (4.2%), Alenia (Associate
                                                     Member)
                                Eurocopter Holding   Aerospatiale (60%),    France and               Tiger helicopter
                                                     Daimler-Benz Aerospace Germany                  and various
                                                     (40%)                                           military and civilian
                                                                                                     helicopters
                                Eurodrone            Matra Hachette (50%),       France and          Brevel surveillance
                                                     STN Altas Elektronik        Germany             and
                                                     (50%)                                           reconnaissance
                                                                                                     drone
                                Eurofighter          Daimler-Benz Aerospace Germany, Italy,          Eurofighter 2000
                                Jagdflugzeug         (30%), Alenia (19.5%), Spain, and the
                                                     British Aerospace      United Kingdom
                                                     (37.5%), CASA (13%)
                                Eurojet Turbo        MTU (33%), Fiat Avio     Germany, Italy,        Turbo jet engines
                                                     (21%), Industria de      Spain, and the         for the Eurofighter
                                                     Turbo Propulsores        United Kingdom         2000
                                                     (13%), Rolls Royce (33%)
                                Euromissile          Aerospatiale (50%),    France and               Milan and Hot
                                                     Daimler-Benz Aerospace Germany                  antitank missiles
                                                     (50%)                                           and Roland air
                                                                                                     defense missile
                                European Helicopter Agusta (50%), GKN            Italy and the       EH-101 helicopter
                                Industries          Westland Helicopters         United Kingdom
                                                    (50%)
                                Eurosam              Thomson-CSF (33.3%),        France and Italy    Future
                                                     Aerospatiale (33.3%),                           surface-to-air
                                                     Alenia (33.3%)                                  family of missiles
                                                                                                             (continued)




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                            Company participants
                            and percentage           Countries
Joint company               shareholdinga            involved              Product
GTK/MRAV/VBCI               Two competing            France, Germany,      Family of wheeled
                            consortium:b (1) GKN     and the United        armored vehicles
                            Defense, Krauss-Maffei   Kingdom
                            Wehrtechnik, Giat
                            Industries, Wegmann &
                            Co., MaK System (2)
                            Henschel Wehrtechnik,
                            Alvis, Vickers Defense
                            Systems, Panhard &
                            Lavassar, KUKA
                            Wehrtechnik
Horizon International Direction des                  France, Italy, and    Horizon frigate
Joint Venture         Constructions Navales          the United
                      (33.3%),                       Kingdom
                      Fincantieri (33.3%),
                      GEC-Marconi Naval
                      Systems (33.3%)
NH Industries               Eurocopter (66.4%),      France, Germany,      NH-90 helicopter
                            Fokker Aerostructures    Italy, and the
                            (6.7%), Agusta (26.9%)   Netherlands
Panavia Aircraft            Daimler-Benz Aerospace Germany, Italy,         Tornado combat
                            (42.5%), British       and the United          aircraft
                            Aerospace (42.5%),     Kingdom
                            Alenia (15%)

a
Company participants and shareholdings obtained from Forecast International.
b
    Data on shareholdings are not available.



Although most cross-border industry cooperation is project specific,
European defense companies are also acquiring companies or establishing
joint ventures or cross-share holdings that are not tied to a particular
program. Some cross-border European consolidation has occurred in
missiles, defense electronics, and space systems. For example, in 1996,
Matra (France) and British Aerospace (United Kingdom) merged their
missile activities to form Matra BAe Dynamics. Both companies retained a
50-percent share in the joint venture, but they have a single management
structure and a plan to gradually integrate their missile manufacturing
facilities. Figure 2 highlights some examples of consolidation in specific
defense sectors.




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Figure 2: Examples of European Defense Company Cross-Border Consolidation



      British Aerospace                      Matra                           GEC Marconi                     Thomson-CSF
             (U.K.)                         (France)                           (U.K.)                          (France)                Parent
                                                                                                                                       Companies




                 50%              50%             51%                 49%            49.9%                    50.1%



                         Matra BAe                         Matra Marconi                   Thomson Marconi
                         Dynamics                             Space                            Sonar

                   Product Line: Missiles              Product Line: Space                Product Line: Sonar         Consolidated
                   Type: Joint Venture                 Systems                            Systems                     Companies
                   Year Formed: 1996                   Type: Joint Venture                Type: Holding Company
                                                       Year Formed: 1989                  Year Formed: 1996




                                                       Despite attempts to develop a unified European armament policy,
Key European                                           individual European governments still retain their own defense
Countries Vary in                                      procurement policies. Key European countries,7 including France,
Their Willingness to                                   Germany, Italy, the Netherlands, and the United Kingdom, vary in their
                                                       willingness to purchase major U.S. defense equipment. These countries
Purchase Major U.S.                                    have been involved in efforts to form a unified European defense market,
Defense Items                                          which some observers believe may lead to excluding U.S. defense
                                                       companies from participating in that market. However, U.S. defense
                                                       companies continue to sell significant defense equipment to certain
                                                       European countries in certain product lines.

                                                       Europe has a large, diverse defense industrial base on which key
                                                       European nations rely for purchases of major defense equipment. As in the
                                                       United States, these European countries purchase the majority of their
                                                       defense equipment from national sources. For example, the United
                                                       Kingdom aims to competitively award about three-quarters of its defense
                                                       contracts, with U.K. companies winning at least 90 percent of the

                                                       7
                                                        France, Germany, and the United Kingdom have the largest defense budgets in Europe and their
                                                       defense industries comprise 85 percent of European defense production. Italy and the Netherlands are
                                                       also significant defense producers and buyers of defense equipment.



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contracts over the past several years. According to French Ministry of
Defense officials, imports represented only 2 percent of France’s total
defense procurements over the past 5 years. Germany and Italy each
produced at least 80 percent of their national requirements for military
equipment over the past several years. Despite its relatively small size, the
Dutch defense industry supplied the majority of defense items to the
Netherlands.

Notwithstanding European preference for domestically developed
weapons, U.S. defense companies have sold a significant amount of
weapons to Western European countries either directly or through the
U.S. government’s Foreign Military Sales program. These sales tended to
be concentrated in certain countries and products. U.S. foreign military
sales8 of defense equipment to Europe accounted for about $20 billion
from 1992 to 1996. Europe was the second largest purchaser of U.S.
defense items based on arms delivery data, following the Middle East. The
leading European purchasers of U.S. defense equipment were Turkey,
Finland, Greece, Switzerland, the Netherlands, and the United Kingdom.
U.S. defense companies had greater success in selling aircraft and missiles
to Western Europe than they did for tanks and ships. Of the almost
$20 billion of U.S. foreign military sales, about $15 billion, or 75 percent,
was for sales of military aircraft, aircraft spares, and aircraft
modifications. About $3 billion, or 13 percent of total equipment sales, was
for sales of missiles. Ships and military vehicles accounted for
$552 million, or less than 3 percent of the total U.S. defense equipment
sales. Figure 3 shows U.S. defense equipment sales to Western Europe by
major weapon categories. According to U.S. defense company officials,
sales of military aircraft to Europe are expected to be important in future
competitions, particularly in the emerging defense markets in central
Europe. Competition between major U.S. and European defense
companies for aircraft sales in these markets is expected to be intense.




8
 Only data on sales made through the Foreign Military Sales program were available by weapons
category. Direct commercial sales data, which is tracked by the Department of State through export
licenses, were not organized by weapon categories. However, we reviewed congressional notification
records for direct commercial sales over $14 million for the last 5 years to supplement our analysis of
foreign military sales data. While direct commercial sales amounts can be significant for certain
countries that prefer this purchasing method, exports sold through the Foreign Military Sales program
still make up the majority of U.S. defense export sales.



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Figure 3: U.S. Defense Equipment
Sales to Western Europe by Major
Weapon Categories
                                   Aircraft




                                                                                   Ships
                                                                                   Vehicles


                                                                                   Weapons

                                                                                Other equipment


                                                                     Missiles




United Kingdom and the             U.S. defense companies varied in their success in winning the major
Netherlands                        European defense competitions that were open to foreign bidders. The
                                   Netherlands and the United Kingdom have bought major U.S. weapon
                                   systems over the last 5 years, even when European options were available.
                                   The United States is the largest supplier of defense imports to both the
                                   Netherlands and the United Kingdom. Both of these countries have stated
                                   open competition policies that seek the best defense equipment for the
                                   best value. In the major defense competitions in these countries in which
                                   U.S. companies won, U.S. industry and government officials stated that the
                                   factors that contributed to the success included the uniqueness and
                                   technical sophistication of the U.S. systems, industrial participation
                                   opportunities offered to local companies, and no domestically developed
                                   product was in the competition. For example, in the sale of the U.S.
                                   Apache helicopter to the Netherlands and the United Kingdom, there was
                                   no competing domestically developed national option, the product was
                                   technically sophisticated, and significant industrial participation was
                                   offered to domestic defense companies.

                                   In the major defense competitions in which U.S. companies competed in
                                   the United Kingdom over the last 5 years, the U.K. government tended to
                                   chose a domestically developed product when one existed. In some cases,
                                   these products contained significant U.S. content. For example, in the
                                   competition for the U.K. Replacement Maritime Patrol Aircraft, the two




                                   Page 15                                         GAO/NSIAD-98-6 Defense Trade
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U.S. competing products lost to a British Aerospace developed product,
the upgraded NIMROD aircraft. This British Aerospace product, however,
contained significant U.S. content with major components coming from
such companies as Boeing. In the Conventionally Armed Standoff Missile
competition, Matra British Aerospace Dynamics’ Stormshadow
(a U.K.-French developed option) won. In this case, the competing U.S.
products were competitively priced, met the technical requirements, and
would have provided significant opportunities for U.K. industrial
participation. Table 3 provides details on some U.K. major procurements
in which U.S. defense companies competed.




Page 16                                        GAO/NSIAD-98-6 Defense Trade
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Table 3: U.K. Defense Procurement Policy and Selected Procurements
                             Major Defense Competitions In Which U.S. Companies Participated
Defense item           Year awarded        Competitors                                         Outcomea
Attack helicopter      1995                (1) Apache (Westland, McDonnell Douglas)            Westland/McDonnell Douglas team won.
                                           (2) Cobra-Venom (GEC-Marconi, Bell                  Contributing factors were the technical
                                           Textron)                                            capability of the product, company
                                           (3) Tiger (British Aerospace, Eurocopter)           partnership, and the industrial participation
                                                                                               package offered.
Transport aircraft     1995                (1) C130J (Lockheed Martin)                         Lockheed was selected. It had the only
                                           (2) Future Large Aircraft (Airbus Military          existing product in the competition. The
                                           Company)                                            Future Large Aircraft has yet to be
                                                                                               developed.
Transport helicopter   1995                (1) Chinook CH-47 (Boeing)                          The United Kingdom bought 22 helicopters
                                           (2) EH-101 (Westland, Agusta)                       from the U.K.-Italian joint venture that
                                                                                               produces the EH-101 and 14 Chinook
                                                                                               helicopters from Boeing.
Air-launched           1996                (1) Brimstone (GEC Marconi)                         GEC Marconi won with a low cost,
anti-armor weapon                          (2) JSOW (Texas Instruments)                        technically competitive bid. The company
                                           (3) Typhoon (British Aerospace)                     spent several years developing a product to
                                           (4) SWARM (Hunting Aviation)                        meet the U.K. requirement. Rockwell is a
                                                                                               subcontractor to GEC Marconi.
Conventionally Armed 1996                  (1) Stormshadow (Matra British Aerospace            Matra British Aerospace Dynamics won.
Standoff Missile                           Dynamics)                                           This British/French joint venture company
                                           (2) Tomahawk (Hughes)                               had a competitive product that they will
                                           (3) SLAM (McDonnell Douglas)                        jointly produce.
                                           (4) JSOW (Texas Instruments)
                                           (5) Pegasus (GEC Marconi)
                                           (6) Taurus (DASA)
                                           (7) Popeye (Rafael Armaments)
Replacement            1996                (1) Nimrod 2000 (British Aerospace)                 British Aerospace won with its low-cost
Maritime Patrol                            (2) Atlantique III (Dassault Aviation)              domestically developed product. Boeing
Aircraft                                   (3) P3 Orion 2000 (Lockheed Martin)                 will provide the mission suite and perform
                                           (4) P3 Upgrade (Loral)                              the avionics integration work.
The U.K.’s Defense Procurement Policy: The policy is to aim for best value for money—which means taking a commercial approach to
procurement by using competition. Industrial participation packages are encouraged from non-WEU countries, and on a case-by-case
basis from WEU partners on all large purchases.
                                            a
                                             The factors that contributed to the outcome of these competitions were those identified by U.S.
                                            industry and government officials.



France                                      France has purchased major U.S. defense weapon systems when no
                                            French or European option is available. In contrast to the Netherlands and
                                            the United Kingdom, the French defense procurement policy has been to
                                            first buy equipment from French sources, then to pursue European
                                            cooperative solutions, and lastly to import a non-European item. Recently,
                                            French armament policy has put primary emphasis on European
                                            cooperative programs, recognizing that it will not be economical to



                                            Page 17                                                           GAO/NSIAD-98-6 Defense Trade
                                            B-276450




                                            develop major systems alone in the future. The procurement policy
                                            reflects France’s goal to retain a defense industrial base and maintain
                                            autonomy in national security matters. As illustrated in table 4, the French
                                            government made two significant purchases from the United States in 1995
                                            when it was not economical for French companies to produce comparable
                                            equipment or when it would have taken too long to develop.


Table 4: French Defense Procurement Policy and Selected Procurements
                                 Recent Major Procurements of U.S. Defense Equipment
Defense item                                 Year purchased           Company                  Reasons for purchasea
KC-135 tanker aircraft                       1995                     Boeing                   The European Airbus consortium offered
                                                                                               the only other option, but it lacked the
                                                                                               range, duration, and payload of the KC-135,
                                                                                               and would have taken 5 to 10 years to build.
E-2C Hawkeye Airborne Early Warning          1995                     Northrop Grumman         No other U.S. or European companies
Aircraft                                                                                       produced this type of specialized aircraft.
France’s Defense Procurement Policy: The policy is to buy technically sophisticated weapons from French companies or seek
European cooperative solutions. France will buy non-European commercially available defense equipment if a national or European
program cannot fill a requirement. Significant offsets are required on non-European purchases.
                                            a
                                             The factors that contributed to the outcome of these competitions were those identified by U.S.
                                            industry and government officials.



Germany and Italy                           Germany and Italy have made limited purchases of U.S. defense equipment
                                            in recent years because of significantly reduced defense procurement
                                            budgets and commitments to European cooperative projects. Both
                                            countries now have an open competition defense procurement policy and
                                            buy a mixture of U.S. and European products. The largest share of these
                                            countries’ defense imports is supplied by the United States. In recent
                                            major defense equipment purchases from the United States, both Germany
                                            and Italy reduced quantities to reserve a portion of their procurement
                                            funding for European cooperative solutions. For example, Italy purchased
                                            the U.S. C-130J transport aircraft but continued to provide funding for a
                                            cooperative European transport aircraft program. As in the other
                                            European countries, Germany and Italy encourage U.S. companies to
                                            provide opportunities for local industrial participation when selling
                                            defense equipment. Table 5 highlights German defense procurement policy
                                            and a selected major procurement.




                                            Page 18                                                           GAO/NSIAD-98-6 Defense Trade
                                            B-276450




Table 5: German Defense Procurement Policy and Selected Procurement
                                Recent Major Procurement of U.S. Defense Equipmenta
Defense item                                 Year purchased          Company                 Reasons for purchase
Advance Medium Range Air-to-Air Missile      1995                    Hughes                  No other option existed that met military
(AMRAAM)                                                                                     requirements, but quantity purchased was
                                                                                             reduced to have funds available for a future
                                                                                             European alternative.
Germany’s Defense Procurement Policy: The policy is to have open competition on most major defense equipment purchases, with a
commitment to European cooperative solutions. Recent significant reductions in the defense procurement budget allow limited funds
that are primarily spent on upgrades and maintenance of existing defense equipment.
                                            a
                                             According to German Ministry of Defense officials, the German government has not purchased
                                            many major defense end items in the last 5 years. Its defense equipment spending has primarily
                                            consisted of modernization of existing defense equipment or coproduction programs.




                                            As European nations work toward greater armament cooperation,
U.S. Industry Is                            competition for sales in Europe is likely to increase. To mitigate potential
Taking the Lead in                          protectionism and negative effects on U.S.-European defense trade, both
Forming Transatlantic                       the U.S. defense industry and government have taken steps to improve
                                            transatlantic cooperation. U.S. defense companies are taking the lead in
Ties                                        forming transatlantic ties to gain access to the European market. The U.S.
                                            government is also seeking opportunities to form transatlantic
                                            partnerships with its European allies on defense equipment development
                                            and production, but some observers point to practical and cultural
                                            impediments that affect the extent of such cooperation.


U.S. Companies Form                         U.S. defense companies are forming industrial partnerships with European
Industrial Partnerships                     companies to sell defense equipment to Europe because of the need to
With European Industry to                   increase international sales, satisfy offset obligations, and maintain market
                                            access. Most of these partnerships are formed to bid on a particular
Sell Defense Equipment                      weapon competition. Some, however, are emerging to sell products to
                                            worldwide markets.

                                            According to U.S. defense companies, partnering with European
                                            companies has become a necessary way of doing business in Europe. U.S.
                                            government and defense company officials have cited the importance of
                                            industrial partnerships with European companies in winning defense sales
                                            there. Many of these partnerships arose out of U.S. companies’ need to
                                            fulfill offset obligations on European defense sales by providing European




                                            Page 19                                                         GAO/NSIAD-98-6 Defense Trade
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companies with subcontract work.9 When U.S. companies had to find ways
to satisfy the customary 100-percent offset obligation on defense contracts
in Europe, they began to form industrial partnerships with European
companies.

With the declining U.S. defense budget after the end of the Cold War, many
U.S. companies began to look for ways to increase their international
defense sales in Europe and elsewhere. According to some U.S. company
officials, they realized that many European government buyers did not
want to buy commercially available defense equipment but wanted their
own companies to participate in producing weapon systems to maintain
their defense industrial base. Forming industrial partnerships was the only
way that U.S. companies believed they could win sales in many European
countries that were trying to preserve their own defense industries. In
addition, several U.S. company officials have indicated that European
governments have been pressuring each other in the last several years to
purchase defense equipment from European companies before
considering U.S. options. These officials stated that even countries that do
not have large defense industries to support were being encouraged by
other European countries to purchase European defense equipment for
the economic good of the European Union. U.S. company officials believe
that by forming industrial partnerships with European companies, they
increase their ability to win defense contracts in Europe.

U.S. defense companies form a variety of industrial partnerships with
European companies, including subcontracting arrangements, joint
ventures, international consortia, and teaming agreements. The various
examples of each are discussed in table 6.




9
 For more information on offsets, see Military Exports: Offset Demands Continue to Grow
(GAO/NSIAD-96-65, Apr. 12, 1996).



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                                      B-276450




Table 6: Types of Industrial
Partnerships Formed by U.S. Defense   Type                      Definition             Comments                 Examples
Companies                             Subcontracting            Company agrees to      U.S. prime               Hughes Aircraft is a
                                      arrangement               provide parts or       contractors are          subcontractor for
                                                                services for another   often willing to be      British Aerospace’s
                                                                company’s weapon       subcontractors to        Advanced Short
                                                                system in a defense    European                 Range Air-to-Air
                                                                procurement.           companies to get         Missile program.
                                                                                       sales in Europe.
                                      Joint venture/            Two or more            Can be formed in         As one of two
                                      International consortia   companies agree to     response to              competing teams,
                                                                work on a particular   government-to-           Raytheon, Hughes,
                                                                project together.      government               Alenia, Siemens,
                                                                                       cooperative defense      and DASA formed a
                                                                                       programs.                company to jointly
                                                                                                                produce the
                                                                                                                Medium Extended
                                                                                                                Air Defense
                                                                                                                System—a
                                                                                                                cooperative
                                                                                                                program between
                                                                                                                Germany, Italy, and
                                                                                                                the United States.
                                      Teaming agreement         Agreement between      Can take many            Textron is teamed
                                                                companies to jointly   forms, including         with VSEL to
                                                                produce and bid for    those listed above.      produce the
                                                                a particular defense   Sometimes can            Howitzer for the
                                                                contract.              extend beyond a          United States.
                                                                                       specific competition     Companies will also
                                                                                       to future sales of the   work together to sell
                                                                                       item or other items.     the Howitzer to the
                                                                                                                United Kingdom.

                                      According to some U.S. defense company officials, most of U.S. industrial
                                      partnerships with European companies, whatever the form, are to produce
                                      or market a specific defense item. Some U.S. defense companies, however,
                                      are using the partnerships to create long-term alliances and
                                      interdependencies with European companies that extend beyond one sale.
                                      For example, Lockheed Martin has formed an industrial partnership with
                                      the Italian company Alenia to convert an Italian aircraft to satisfy an
                                      emerging market for small military transport aircraft. This arrangement
                                      arose out of a transaction involving the sale of C-130J transport aircraft to
                                      Italy. Some U.S. defense company officials see the establishment of
                                      long-term industrial partnerships as a way of improving transatlantic
                                      defense trade and countering efforts toward European protectionism.




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Changes to U.S. Policies        DOD has taken a number of steps over the last few years to improve
Support Defense Trade and       defense trade and transatlantic cooperation. For example, it has revised its
Transatlantic Cooperation       guidance on considering foreign suppliers in defense acquisitions and has
                                removed some of the restrictions on buying defense equipment from
                                overseas. In addition, senior DOD officials have shown renewed interest in
                                international cooperative defense programs with U.S. allies in Europe and
                                are actively seeking such opportunities. Despite some of these efforts,
                                some observers have cautioned that a number of factors may hinder shifts
                                in U.S.-European defense cooperative production programs on major
                                weapons.

                                The following U.S. policy changes have been made that may help to
                                improve defense trade:

                            •   A DOD directive10 issued in March 1996 sets out a hierarchy of acquiring
                                defense equipment that places commercially available equipment from
                                allies and cooperative development programs with allies, ahead of a new
                                U.S. equipment development program. According to some U.S.
                                government and defense industry officials, many military program
                                managers traditionally would have favored a new domestic development
                                program when deciding how to satisfy a military requirement.
                            •   In April 1997, the Office of the Secretary of Defense announced that DOD
                                would favorably consider requests for transfers of software
                                documentation to allies. In the past, such requests were often denied,
                                which was cited by U.S. government officials as a barrier to improve
                                defense trade and cooperation with the United States.
                            •   In April 1997, the Under Secretary of Defense (Acquisition and
                                Technology) waived certain buy national restrictions for countries with
                                whom the United States had reciprocal trade agreements.11 This waiver
                                allows DOD to procure from foreign suppliers certain defense equipment
                                that were previously restricted to domestic sources. European government
                                officials have cited U.S. buy-national restrictions as an obstacle in the
                                improvement of the reciprocal defense trade balance between the United
                                States and Europe.

                                DOD is also seeking ways to improve international cooperative programs
                                with European countries through ongoing working groups and a special
                                task force under the quadrennial review. Senior DOD officials have stated
                                that the United States should take advantage of international armaments

                                10
                                  DOD Directive 5000.1.
                                11
                                 Fiscal Year 1997 Defense Authorization Act (P.L. 104-201, sec. 810, amending 10 U.S.C. sec. 2534 (d))
                                provided the Secretary of Defense with the authority for this waiver.



                                Page 22                                                            GAO/NSIAD-98-6 Defense Trade
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cooperation to leverage U.S. resources through cost-sharing and to
improve standardization and interoperability of defense equipment with
potential coalition partners.

The U.S. government has participated in numerous international defense
equipment cooperation activities with European countries, including
research and development programs, data exchange agreements, and
engineer and scientist exchanges, but these activities only occasionally
resulted in cooperative production programs. More recently, senior DOD
officials have provided increased attention to armaments cooperation with
U.S. allies. In 1993, DOD established the Armaments Cooperation Steering
Committee to improve cooperative programs. In its ongoing efforts, the
Steering Committee established several International Cooperative
Opportunities Groups in 1995 to address specific issues in armaments
cooperation. In addition, the 1997 Quadrennial Defense Review to identify
military modernization needs included an international cooperation task
force to determine which defense technology areas the United States
could collaborate on with France, Germany, and the United Kingdom. In
March 1997, the Secretary of Defense signed a memorandum stating that
“it is DOD policy that we utilize international armaments cooperation to the
maximum extent feasible.”

The U.S. government has a few ongoing cooperative development
programs for major weapon systems, but most cooperative programs are
at the technology level.12 Some observers indicated to us that there may be
some impediments to pursuing U.S.-European defense cooperative
programs on major weapon systems because (1) European procurement
budgets are limited compared to the U.S. budget; (2) the potential that U.S.
support for a program may change with each annual budget review may
cause some European governments concerns; (3) despite changes in DOD
guidance, many military service program managers may be reluctant to
engage in international cooperative programs due to the significant
additional work that may be required and potential barriers that may arise,
such as licensing and technology sharing restrictions; (4) many U.S.
program managers may not consider purchasing from a foreign source due
to the perceived technological superiority of U.S. weapons; and
(5) European and U.S. governments have shown a desire to maintain an
independent ability to provide for their national defense.



12
  As of July 1996, DOD had several hundred ongoing cooperative programs at the technology level,
including cooperative research and development programs, data exchange agreements, and engineer
and scientist exchanges.



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                  Efforts have been made to develop a more unified European armament
Conclusions       policy and defense industrial base. As regional unification efforts evolve,
                  individual European nations still independently make procurement
                  decisions, and these nations vary in their willingness to buy major U.S.
                  weapon systems when European options exist. To maintain market access
                  in Europe, U.S. defense companies have established transatlantic
                  industrial partnerships. These industrial partnerships appear to be
                  evolving more readily than transatlantic cooperative programs led by
                  governments. Although the U.S. government has recently taken steps to
                  improve defense trade and cooperation, some observers have indicated
                  that practical and cultural impediments can affect transatlantic
                  cooperation on major weapon programs.


                  In commenting on a draft of this report, DOD concurred with the report and
Agency Comments   the Department of Commerce stated that it found the report to be accurate
                  and had no specific comments or recommended changes. The comments
                  from DOD and the Department of Commerce are reprinted in appendixes II
                  and III, respectively. DOD also separately provided some technical
                  suggestions, which we have incorporated in the text where appropriate.


                  To identify European government defense integration plans and activities,
Scope and         we examined European Union, WEU, OCCAR, and NATO documents and
Methodology       publications. We developed a chronology of key events associated with the
                  development of an integrated European defense market. We interviewed
                  European Union, Western European Armaments Group, OCCAR, and NATO
                  officials about European initiatives affecting trade and cooperation and
                  their progress in meeting their goals. We also discussed these issues with
                  officials at the U.S. mission to NATO, the U.S. mission to the European
                  Union, and U.S. embassies in France, Germany, and the United Kingdom.
                  We interviewed or obtained written responses from officials from six
                  major defense companies in France, Germany, and the United Kingdom
                  about European industry consolidation. We identified relevant information
                  and studies about European government and industry initiatives and
                  discussed these issues with consulting firms and European think tanks.

                  To assess how procurement polices of European nations affect U.S.
                  defense companies’ market access, we focused our analysis on five
                  countries. We selected France, Germany, and the United Kingdom because
                  they have the largest defense budgets in Europe and their defense
                  industries comprise 85 percent of European defense production. Italy and



                  Page 24                                          GAO/NSIAD-98-6 Defense Trade
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the Netherlands were selected because they are significant producers and
buyers of defense equipment. These five countries are also current
members or seeking membership in OCCAR. We interviewed officials from
13 U.S. defense companies on the basis of their roles as prime contractors
and subcontractors and range of defense products sold in Europe. Most of
these companies represented prime contractors. Eight of these were
among the top 10 U.S. defense companies, based on fiscal year 1995 DOD
prime contract awards. We also discussed the major defense competitions
that U.S. companies participated in over the last 5 years and the factors
that contributed to the competitions’ outcome with officials from these
companies and with U.S. government officials.

We discussed procurement policies with European and U.S. government
officials. We met with Ministry of Defense officials in France, Germany,
and the United Kingdom, as well as U.S. embassy officials in those
countries. We did not conduct fieldwork in Italy or the Netherlands, but
we did discuss these countries’ procurement policies with officials from
their embassies in Washington, D.C. We also reviewed documents
describing the procurement policies and procedures of the selected
countries and U.S. government assessments and cables about major
defense contract awards that occurred in these countries and discussed
factors affecting these procurement awards with U.S. government and
industry officials. We did not review documentation on the bids or
contract awards.

We collected and analyzed data on defense budgets and defense trade,
including foreign military and direct commercial sales to identify buying
patterns in Western Europe over the past 5 years. We only used the foreign
military sales data to analyze sales by weapons category for the five
countries and Western Europe. Direct commercial sales data, which are
tracked by the State Department through export licenses, were not
organized by weapon categories for the last 5 years. However, we
reviewed congressional notification records for direct commercial sales
over $14 million for the last 5 years to supplement our analysis of foreign
military sales data.

To determine actions the U.S. industry and government have taken in
response to changes in the European defense environment, we
interviewed defense company and U.S. government officials within DOD
and the Departments of Commerce and State. With U.S. defense
companies, we discussed their business strategies and the nature of the
partnerships formed with European defense companies. We obtained and



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analyzed recently issued DOD directives and policy memorandums on
defense trade and international cooperation and discussed the
effectiveness of these policies with U.S. and foreign government officials
and U.S. and European defense companies.

We performed our review from January to September 1997 in accordance
with generally accepted government auditing standards.


We are sending copies of this report to interested congressional
committees and the Secretaries of State and Commerce. We will also make
copies available to others upon request.

Please contact me at (202) 512-4181 if you have any questions concerning
this report. Major contributors to this report were Karen Zuckerstein,
Anne-Marie Lasowski, and John Neumann.

Sincerely yours,




Katherine V. Schinasi
Associate Director
Defense Acquisitions Issues




Page 26                                           GAO/NSIAD-98-6 Defense Trade
Page 27   GAO/NSIAD-98-6 Defense Trade
Contents



Letter                                                                                        1


Appendix I                                                                                   30

Chronology of
European Defense
Initiatives
Appendix II                                                                                  32

Comments From the
Department of
Defense
Appendix III                                                                                 33

Comments From the
Department of
Commerce
Tables              Table 1: Selected Characteristics of OCCAR and WEAO                       7
                    Table 2: Examples of European Defense Company Transnational              11
                      Cooperative Activities
                    Table 3: U.K. Defense Procurement Policy and Selected                    17
                      Procurements
                    Table 4: French Defense Procurement Policy and Selected                  18
                      Procurements
                    Table 5: German Defense Procurement Policy and Selected                  19
                      Procurement
                    Table 6: Types of Industrial Partnerships Formed by U.S. Defense         21
                      Companies

Figures             Figure 1: Organizations Addressing European Armament Policy               5
                      Issues
                    Figure 2: Examples of European Defense Company Cross-Border              13
                      Consolidation
                    Figure 3: U.S. Defense Equipment Sales to Western Europe by              15
                      Major Weapon Categories




                    Page 28                                         GAO/NSIAD-98-6 Defense Trade
Contents




Abbreviations

DOD        Department of Defense
OCCAR      Organisme Conjoint de Coopération en Matière d’Armement
NATO       North Atlantic Treaty Organization
WEAO       Western European Armaments Organization
WEU        Western European Union


Page 29                                      GAO/NSIAD-98-6 Defense Trade
Appendix I

Chronology of European Defense Initiatives



Date                Event

                    Western European Union (WEU) was established as a result of the agreements signed in
May 1955            Paris in October 1954 modifying the 1948 Brussels Treaty.



                     Treaty of Rome wae signed creating the European community.
 Mar. 25, 1957



                    The Independent European Programme Group was established to promote European
                    cooperation in research, development, and production of defense equipment; improve
 Feb. 2, 1976       transatlantic armament cooperation; and maintain a healthy European defense industrial
                    base.



                    The Treaty on European Union was signed in Maastricht but was subject to ratification. The
 Dec. 9-10, 1991    WEU member states also met in Maastricht and invited members of the European Union to
                    accede to WEU or become observers, and other European members of the North Atlantic
                    Treaty Organization (NATO) to become associate members of WEU.


                    The Council of the WEU held its first formal meeting with NATO.
 May 21, 1992



                    The European Defense Ministers decided to transfer the Independent European
 Dec. 1992          Programme Group's functions to WEU.



                    The Maastricht Treaty was ratified and the European Community became the European
 Nov. 1, 1993       Union.



                    French and German Ministers of Defense decided to simplify the management for joint
 Dec. 1993          armament research and development programs. The proposal for a Franco-German
                    procurement agency emerged.

                    A NATO summit was held, which supported developing of a European Security and
 Jan. 10-11, 1994   Defense Identity and strengthening the European pillar of the Alliance.



                    WEU Ministers issued the Noordwijk Declaration, endorsing a policy document containing
 Nov. 14, 1994      preliminary conclusions of the formation of the Common European Defense policy.




                             Page 30                                                             GAO/NSIAD-98-6 Defense Trade
                         Appendix I
                         Chronology of European Defense Initiatives




Date            Event

                The European Union Intergovernmental Conference, or constitutional convention,
March 1996      convened.



                The Defense Ministers of France, Germany, Italy, and the United Kingdom signed the political
Nov. 12, 1996                                                                                  '
                foundation document for the joint armaments agency Organisme Conjoint de Cooperation en
                    '
                Matiere d'Armament (OCCAR).


                The Western European Armaments Organization was established, creating a subsidiary
Nov. 19, 1996   body within WEU to administer research and development contracts.



                The four National Armaments Directors of France, Germany, Italy, and the United Kingdom
Feb. 4, 1997    met during the first meeting of the Board of Supervisors of OCCAR. The board reached
                decisions about OCCAR's organizational structure and programs to manage.

                The European Union Intergovernmental Conference concluded. A new treaty was drafted, but
June 19, 1997   little advancement was made to developing a common foreign and security policy. The treaty
                called for the European Union to cooperate more closely with WEU, which might be
                integrated in the European Union if all member nations agree.



                The Board of Supervisors of OCCAR held a second meeting.
July 3, 1997




                         Page 31                                                            GAO/NSIAD-98-6 Defense Trade
Appendix II

Comments From the Department of Defense




              Page 32          GAO/NSIAD-98-6 Defense Trade
Appendix III

Comments From the Department of
Commerce




(707230)       Page 33            GAO/NSIAD-98-6 Defense Trade
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