November 1997

Consolidation in the French defence industry – Turmoil in Asia

Consolidation in the French defence industry

The end of the Cold War, the peace dividend and the following economic problems which surfaced in Europe destroyed the market of most of Europe’s defence industries.

Where as most of western Europe’s defence industries are publicly owned in France the majority of the companies are state owned or they possess a controlling stake in the firm. While the others could adapt to the new situation the French companies could not. The structures and the staff of those companies stayed the same.

Several governments in France tried to change the situation but the difficulties with the law, a number of employees at the large defence contractors are civil servants, unions and also their own policy were the reason that none of the plans could be implemented to streamline the defence industry.

The Chirac government tried to merge the French defence industry, through privatisations, into several leading groupings which at their turn could be merged into an European group with a stong French influence.

The election brought however the socialists to power which limited the influence of president Chirac. The socialists were not favour of privatisation which is nearly a precondition for further cooperation with other European companies.

The socialist led government also wanted to revitalise the defence industry. To keep the election promiss, to stop the privatisations, they propose a part privatisation were the government still wil be the dominating power.

Essentially this means that there will be a very large French defence company with mergings and holdings in all important defence producers. The privatisation of Thomson-CSF is called off. Instead it will merge or exchange stocks with Aerospatiale, Dassault and Alcatel. Another Thomson-CSF joint-venture with DASA, TDM formerly Thomson Brandt, should on the other hand exchange stocks and merge with GIAT. Further alliances with smaller companies will be constructed as well with the objective to create a very large company with allround capabilities for land and air forces systems.

This new Thomson-CSF conglomerate would be the leading company in Europe in electronics and aerospace and a major player on nearly all other fields. This state-owned or at least state controlled giant will possess none what so ever attraction to cooperate with. The future of such large gouping will be bleak because they will not be an attractive partner in the next major armaments programmes. And cooperation with European partners will be absolutely necessary to finance those programmes.

The creation of an European defence industry to support the major programmes or to counter the large US companies will only be possible without the Thomson-CSF conglomerate. The French gigant would in every cooperation/merger automatically take over the leadership of the operation. The French government ownership/control increases the dominance of the grouping. And this will be unacceptable to the other partners in any future cooperation.

The consolidation of the French defence industry is a necessary long overdue affair. But the creation of one dominating French group will prove to be the wrong way. Any further European integration will be impossible. It would have been wiser to create two or three French companies which could integrate in the European scene on terms of equality.

Turmoil in Asia

The Thai currency crisis and the collapsing stock market of Bangkok was the initiation of a crisis in first South East Asia which later also hurted Hong Kong and even reached the Western stockmarkets.

The fast growing economies of Asia which seemed to be unstoppable were in fact mixed with fatalities like nepotism, failing currency management, lack of financial regulations in the banking system, an underdeveloped infra-structure and uncompetitive production and services in the commercial sector. The countries is Asia and especially South East Asia did actually possess more economic and also political problems than one might have thought.

The “tigercubs”, Thailand, Indonesia, Malaysia and to lesser extent the Philipines, experienced the largest declines in the value of their currencies and the stockmarkets. But the fatalities mentioned above are also the widest spread in the “tigercub” countries.

The advantage of South East Asia was their cheap labor, a relatively well educated population, an advantageous investment climate and a promising market for the future. The “tigercubs” where able to develop theirselves into prosperous economies. This prosperity was at the same time the major cause of the nepotism, a failing currency policy, the bad loans, the lagging development in the infra-structure and the failing business development.

These difficulties could have maybe overcome by a continuing economic growth and foreign investment but the rise of the US dollar made the local currencies an easy target to the international money traders. And it was this weakness which the start of the nightmare, the devaluation and the consecutive drop of the stock market. But the internal weaknesses of the “tigercubs” were to many and already to far penetrated in the society that a happy end was very unlikely.

Hong Kong was dragged into the crisis mainly because the Hong Kong government tried to keep money traders out by rising the intrest rate to keep the connection with the US dollar and because of problems which came forward at the development/building companies in the already overpriced real estate/property market.

The Hong Kong collapse was the start for a worldwide drop in stock prices. All markets are for a more or lesser extent influenced by the Asian economies/markets. The international finance system is interdependent to a larger extent than most had imagined. The Western world will however be able to recover itself from this correction within a month. The Asian region however will need much more time to restore the trust of the investors before they will comeback.

It is therefore of the utmost importance that the Asian “tigercubs” governments start with the reconstruction of their economic system. Those changes are necessary because without it they will never receive the support of the IMF and neighbouring countries, the trust of international investors and to get back on the fast track of growth.

The Asian stockmarket is now however cheaper than ever before, they have lost more than a third of their value in the last month. It might be early but a number of stocks look very interesting at the moment. This same is true for the Western world most stocks are becoming very attractive.

In Asia one should limit its purchases to Hong Kong, Taiwan, Japan and possibly Singapore. The companies which are active in the electronic-, trading, finance and transport sectors with a high export potential will show the best results in the last two months of this year.

The western stockmarkets will also see a lot of growth, before the end of the month it will have reached the same level as at the beginning of October 1997. We maintain our listing as given in our report of August II, 1997. They are as we call them quality stocks with a lot of potential even if we have reached the same high levels as we have seen before. You could add to that list Merck, Miravant Medical, J.P. Morgan, BankAmerica and Banc One, after the decline these stocks are bound to show some impressive growth in the next quarter. The energy and oil exploration companies will also see some extraordinary growth, the coming winter and especially the rise in tension in the Middle East are the main cause for it. You could think about Mobil, Occidental Petroleum and Atlantic Richfield.