July 1997

German Forces for the next millennium – The future of Hong Kong stocks

German Forces for the next millennium

After the re-unification with Eastern Germany the Federal Republic of Germany got in deep financial troubles because of the unexpected high costs of the re-unification. This together with a very slow growing national economy makes the entry into the monetary union very difficult if all conditions set in the Maastricht treaty of 1992 have to be fullfilled.

But even without the monetary union, the German expenditures have to be brought in accordance with the revenues. This will mean more savings on all budgets. The allocation of the armed forces will also be up for an assesment. And if the armed forces are not able to re-engineer their whole organisation structure and the attached political worldview, a number of very important programs will be eliminated and the armed forces will end up as an ineffective dinosaur in a dynamic world.

The armed forces have to be re-structured to meet the challenges of the future. They will have to improve their capabilities and at the same time do their utmost to limit their part in the national budget. Further they will have to give the greatest possible support to the defence industry. The survival of the defence industry is a part of the defence of the country. It is responsible to deliver the best possible equipment to the armed forces and to maintain its high technological know how. It will be however difficult to perform this act on the rope but it is possible.

The army

The German army, the largest of the three services, is divided into the main defence forces and the reaction forces. The idea behind this plan is not bad, but it is to much aimed at the problems of the past. The army have become through the division in main- and reaction forces a divided force, the reaction forces will be the modern attractive force while the main defence forces wil be the outdated force which even have not enough means to train and maintain their, respectivily, personell and equipment decently. Already a large part of the rolling stock of the main defence forces are unable to do their job. And the difficulties will only increase in the future.

There are also three major problems within the army. First, the army is divided into two parts. Second, the divided forces will not be able to work together and in a lesser part will have difficulties in co-operating with allied forces. Third, there are not enough funds available to maintain and improve the reaction- and main defence forces.

The above mentioned problems have to be solved if the German army wants to be reckoned with and fullfill their tasks. Like to improve the operability of the forces, to maintain an effective modern force and support the national industry. These goals can be reached, and at the same time save some money, but the army has to be changed.

Since the dissolution of the Warsaw pact the security situation have been changed dramatically in the world. The clash between the massive forces of East and West is now a thing of the past. To meet the threat of the future the armed forces have to be mobile but also need the highest possible form of protection. Information technology will thereby play a vital role in intelligence, planning and execution of future military operations. There will be a digital revolution as is now happening in the US Army XXI program.

The German army has to conform to this revolution otherways it will be left behind in operational capabilities. The army with its main and reaction forces will be to large to change to a digitised army. It is also to large to modernise its equipment on a one for one basis.

The security environment makes it possible to limit the number of divisions necessary to fullfill the defence needs of Germany and at the same time be present at some multinational operations.

For example the number of divisions could be reduced to 3 armoured, 1 mountain/light infantry and 1 airborne division. To improve the sustainabiltiy and maintainability the square division should be re-introduced. This will mean that the total number of brigades will be 20 or maybe 21 brigades.

These brigades will be modernised to full digitised status with new or modernised equipment, instead of an army with outdated and partly updated equipment. The number of MBTs needed can all be modernised to A5 status, every division would get its own batallion of Tiger battlehelicopters and this equipment could be maintained and the military trained properly.

The armed forces should be reduced by around 60.000 men, this can be reached by eliminating a number of brigades and by streamlining all headquarters and support and maintenance forces.

The reductions in manpower generate savings of 1.8 B. to 2 B. DEM a year. Further results of the reduction is a large pool of equipment which has to be repaired and which can be sold or delivered at friendship prices to neighbours and allies. This will bring another onetime 1 B.+ DEM. Another advantage is that it will bring work and future customers to the German industry. The savings and extra profits can be used to reduce the defence budget and at the same time modernise the defence equipment.

All these measures improve the fighting power of the army, deliver the defence industry work and a secure long term equipment planning, savings in the defence budget and maybe most important trust in the future. The industry can prepare itself on a steady demand of the army with production runs which are acceptable. For example, the number of new MBTs needed would be aroung 1800 to 2000. Together with the export potential this would mean at least a production run of 3000 vehicles. The same is true for all other equipment producers.

The Air Force

The air force and the navy will be relativily untouched by the changes in the armed forces. The air force has to be modern and up to date. The security situation gives us the one time possibility to limit the number of air planes available in the coming years but it will give us a full capability within 5 years. This includes the absolute necessary introduction of a new air defence fighter, the Eurofighter.

But also the air force will experience some losses in staff. It has to change their organisation structure about divisions and wings. This will bring a number of savings and at the same time limit bureaucrazy in the air force and increase efficiency in the air force.

The air force has to rely in the future on a squadron system for its (strike)-fighters, a bit like the US Air Force. The number of planes in each squadron has to be increased to 24 planes a squadron. The air force will end up with 6 squadrons with the Eurofighter for air defence, 5 squadrons with Tornado in the strike role, 1 squadron Tornado ECR and 1 squadron Tornado in the recce role. This can be completed in the medium future by another 5 squadrons of CAS/BAI or multi-role planes. These multi-role planes are nice to have and are only than affordable if the economy allows it, but it will be a boost towards the German aerospace industry to participate in the development of a plane like the JAST.

Beside the forces listed above the German air force should also possess a dedicated rapid deployment force or UN support force. This wing should consists out of a squadron air defence planes, a squadron strike planes, a flight of Tornado ECR and a recce flight.

In the mean time before the introduction of the Eurofighter the organisation structure has already to be changed to the new one. The number of planes should be increased in the air defence squadrons to 18 F4F planes, later 24 Eurofighters, and the Tornado squadrons have to be transformed as soon as possible.

The change to the force structure as listed above will bring savings in money and equipment. Until the introduction of the Eurofighter the number air defence planes, F4Fs, can be reduced to about 110 to 120, including the training planes in the U.S.A., and excluding 18 MIG 29.

The changes proposed here will result in a more efficient and cheaper air force, which will be able to fullfill all operations which are demanded but which is also up to date in equipment, including the Eurofighter, a new transport plane (FLA) and possibly a new CAS/BAI or multi-role plane.

The Navy

The navy, Marine, the smallest of the three forces will experience no cuttings in the number of staff. They are like the air force better structured to meet the challenges of the future, they are the least bound by cold war structures.

But the navy has to accept a short time cut in their capabilities. This cut is necessary to cut the costs of running the fleet and    to prepare itsef for the next century.

The navy should lay off the three destroyes of the Lütjens class, the operating costs of these ships are relativily expensive and they are experiencing some other problems with the ships. Reduce the number of type 206A submarines to eight, if the first four type 212 submarines are introduced, the two oldest frigates of the Bremen, F 122, class should be eliminated simultanous if two extra F 123 are introduced and finally the missile FACs should be withdrawn quicker than planned.

This would give the defence budget some extra breathing space and would make a some funds available to make some lead-in investments to a new capability of the navy.

The navy should have the funds to acquire over next 5 to 8 years another two Brandenburg, F 123, class frigates, six type 124 air defence frigates, another four type 212 submarines, introduction of the first of the 15 type 130 corvettes by 2002 and finally four type 702 replenishment vessels should be introduced between 2000 and 2004.

This program seems to be very large but it would create a credible naval force which is up to the high demands of the future. The savings which could be made now, a balanced budget and the re-organisations in the armed forces would make this plan possible.

Another advantage of this plan is the boost to the naval industry which would get an balanced delivery schedule on development and production for the future.

Accepting a capability loss now will mean a stronger and better balanced navy in the next millennium. And the strategic situation allows us to redesign the armed forces and at the same time balance the national budget without endangering the security and political ambitions of Germany.

Conclusion

There is at the moment a need in Germany to cut the expenditures of all departments. The armed forces will also have to pay their part.

The role of the armed forces should be evaluated. The changed security situation places a new demand on the armed forces. It is the duty of the armed forces to conform to that situation and meet the challenge.

The aims of the armed forces can be compressed into:

– save money;

– improve or maintain military capabilities and still be able to fullfill all demanded orders;

– and stimulate the defence industry.

All these aims can be met by a reduction in manpower and by a shift in organisation structures and doctrines.

The army has to reduce its manpower by 60 to 65000 men and the air force by 5 to 10000 men. These cuts will save over 2 B. DEM a year. These cuts are possible through a reduction in fighting units and major change in the command, support and maintenance structure. The number of second line, support, forces can be limited through the use of new technologies and a more efficient organisation.

Further savings are possible through the reduction/elimination of equipment. The savings on maintenance of these old systems are already respectable. The equipment can thereby be sold and will deliver another extra saving to the armed forces. We should not forget the defence industry who will gain double, first by repair orders for the redundant equipment and second by getting new clients to whom the goods are sold.

The benefits from the sale of redundant equipment of the army, air force and navy will be around 2 to 2.5 B. DEM. The savings realized through the decrease in maintenance can be estimated at 800 M. DEM a year.

The profits from the sale of equipment are enough to finance the lead-in costs for the production of the Eurofighter and Tiger and for the procurement of two frigates. All other modernisaton plans can be fullfilled through the yearly savings on maintenance and personell. The plan we envision will also give a reduction in the defence budget of 1998 and 1999 of 1 B. DEM each year. The budget for the year 2000 will however have to be raised again to at least the 1997 level, not accounting inflation, to meet all our modernisation plans.

The German armed forces can meet the high demands of the next millennium. The strategic situation gives us the opportunity to change the armed forces without endangering Germany. And, maybe the most important asset, it will bring hope, or a chance for the German defence industry to play an important role in the European defence industry. And this is for the best of the German economy.

The future of Hong Kong stocks

This month will see a change in the position of Hong Kong. It will return to the motherland. It can be an opportunity to even more growth than ever before. If the Chinese government can hold its promise not to become directly involved in the Hong Kong economy and if Hong Kong can improve its infra-structure with the Chinese backlands it will have a very promising future.

Hong Kong has the capital and know how to become the centre of development of a very large part of China. If it can live up to those expectations a number of Hong Kong stocks possess the potential to grow over 25 % this year. The Hang Seng index could be easily over the 17.000 mark at the end of the year.

This is however an optimistic picture. If the Chinese take to much influence in the Hong Kong politics the economic dynamic could be stopped. Hong Kong could turn into a liberalized version of Shang-Hai with the same problems with growth and development.

The Hang Seng could become very volatile and in the end loose ever more of its important position in Asia. The best way to handle this situation is to keep your investments in Hong Kong but hedge them against fluctations in the stock market. Normally we do not like to hedge our investments, we do like to build on the strength of a market and its best stocks. But in this special situation you can protect investments with options running for three and six months.

At the end of the year the situation has to be evaluated and then we will know more about the intentions of the Chinese government. It will however be very unlikely that the Chinese government will destroy the economy of Hong Kong. It is to valuable and they themselve have invested to much capital into Hong Kong to destroy it. They have to protect their holdings from unwished developments. It seems also more likely that they will support the economy of Hong Kong more than ever before.

So for now we still believe in Hong Kong as a promising market with a prosperous future. Our advice is to stay involved in Hong Kong and even enlarge your holdings of stocks in the Hang Seng, especially the blue chips. The blue chips will be on the long term the more stabile and profitable. They offer the best between investments in China and international connections and investments.