Lessons in Restructuring Defense Industry:

The French Experience

June 1992

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Recommended Citation:

U.S. Congress, Office of Technology Assessment, Lessons in Restructuring Defense Industry:

The French Experience-Background Paper, OTA-BP-ISC-96 (Washington, DC: U.S.

Government Printing Office, June 1992).

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Foreword

In conducting its assessment of strategies for the transition to a smaller but still robust

U.S. defense-industrial base, the Office of Technology Assessment (OTA) has considered how

other Western countries with sizable defense industries are responding to the new security and

fiscal environment. France is arguably the foreign case most relevant to U.S. policy.

Possessing the world’s third largest defense industry after the United States and the former

Soviet Union, France has global security interests and is the only European power capable of

developing the Ml range of major weapon systems, including fighter aircraft, main battle

tanks, nuclear-powered submarines, aircraft carriers, nuclear weapons, and a panoply of

missiles.

This background paper first describes the structure and management of the French

defense-industrial base and then reviews a variety of strategies the French Government and

industry are pursuing to rationalize the base, while preserving key technological assets and

strengthening the competitive position of French defense contractors in world markets. France

has faced the problem of overcapacity since the late 1980s and is already implementing some

of the policy options for the United States in the 1990s discussed in the OTA report

Redesigning Defense. These strategies include consolidation, diversification into the civil

sector, shifting emphasis from procurement to R&D, integrating civil and military production,

and international collaboration. While not all French efforts have been successful, and some

actions taken by the French Government would not be appropriate to the U.S. economic or

political context, the French experience provides interesting and useful lessons for the United

States in planning its own restructuring efforts.

The French Government engages in long-term planning and various forms Of

administrative guidance to ensure the financial and technological health of the defense

industry. In contrast, the U.S. Department of Defense relies primarily on market mechanisms

rather than government intervention. As the U.S. defense base shrinks, however, this

traditional laissez-faire approach runs the risk that firms that are the sole source for key

components or that possess critical design and manufacturing skills may go out of business

or leave the defense market. The French approach of devising coherent policies to preserve

the core competencies of the defense industry is therefore worthy of consideration by U.S.

policymakers.

In researching this background paper, OTA conducted interviews with several French

Government and industry officials, whose names are listed in the appendix and whose

contributions are gratefully acknowledged. As with all OTA studies, however, the content of

this background paper is the sole responsibility of the Office of Technology Assessment and

does not necessarily represent the views of our advisers and reviewers.

$/ e4L# M----- >

JOHN H. GIBBONS

Director

. . .

Ill
Lessons in Restructuring Defense Industry:

The French Experience

Advisory Panel

Walter B. Slocombe, Chair

Caplin & Drysdale Chartered

Richard Bohlen

Consultant

Robert Calaway

President

Resource Management International, Inc.

Gordon Corlew

Vice President, Engineering and Production

AIL Systems Inc.

Jacques S. Gansler

Senior Vice President

TASC

Julius Harwood

Consultant

William W. Kaufmann

Professor

John F. Kennedy School of Government

Harvard University

Gen. P.X. Kelley

USMC (Ret.)

James L. Koontz

President & CEO

Kingsbury Machine Tool Corp.

Thomas L. McNaugher

Senior Fellow

The Brookings Institution

William McNeill

Professor Emeritus

Department of History

University of Chicago

John Mearsheimer

chairman

Department of Political Science

University of Chicago

William J. Perry

Chairman & CEO

Technology, Strategies and Alliances

Donald W. Putnam

Corporate Director

Contracts and Technical Analysis

General Dynamics Corp.

Jack Ruina

Professor of Electrical Engineering

Center for International Studies

Massachusetts Institute of Technology

Howard D. Samuel

President

Industrial Union Department AFL-CIO

Wickham Skinner

Professor Emeritus

Business Admins “ “stration

Harvard University

Gen. William Y. Smith

USAF (Ret.)

James Solberg

Professor

Engineering Research Center

Purdue University

Leonard Sullivan

Consultant

System Planning Corp.

Adm. Harry Train

USN (Ret.)

Division Manager

Strategic Research and Management Services

Division

Science Application International Corp.

Gen. John W. Vessey, Jr.

USA (Ret.)

Albert Wheelon

Consultant

NOTE: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the advisory panel members.

The panel does not, however, necessarily approve, disapprove, or endorse this report. OTA assumes full responsibility for the

report and the accuracy of its contents.

iv
OTA Project Staff—Lessons in Restructuring Defense Industry:

The French Experience

Lionel S. Johns, Assistant Director, OTA

Energy, Materials, and International Security Division

 Alan Shaw, International Security and Commerce Program Manager

Jack H. Nunn, Project Director

Ivan Oelrich

Jonathan B. Tucker

Christopher Waychoff

Administrative Staff

Jacqueline Robinson-Boykin, Office Administrator

Louise Staley, Administrative Secretary

Contractor

Madeline Gross
Outside Reviewers

Philippe Caduc

Charge` de Mission

Secretariat Generale de la Defense Nationale

James Compton

Office of the Under Secretary of Defense for

Acquisition

Department of Defense

Henri Conze

President

Henri Conze International

Murielle Delaporte

President

Defi Consultants

Jean-Francois Delpech

Director

CREST/Ecole Polytechnique

Edward A. Kolodziej

Dept. of Political Science

University of Illinois

Col. Philippe Labernede

Defense Cooperation Attache

Embassy of France

Robbin F. Laird

Director, Soviet and European Affairs

Institute for Defense Analyses

Andrew Moravcsik

Dept. of Government

Harvard University

David S. Yost

Dept. of National Security Affairs

Naval Postgraduate School

Ellen L. Frost

Senior Fellow

Institute for International Economics

vi
Contents

Page

Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Lessons in Restructuring Defense Industry: The French Experience . . . . . . . . . . . . . . . . . . . . . . . .

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Challenges to the Gaullist Paradigm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

INDUSTRIAL STRUCTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Export Dependence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

MANAGEMENT OF THE BASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The General Delegation for Armaments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Pros and Cons of the French Procurement System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

STRATEGIES FOR INDUSTRIAL RESTRUCTURING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commercializing the Arsenals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Preserving Core Competencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Diversification Into Civil Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Shift From Production to R&D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . .

Dual-Use Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidation and Foreign Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Collaborative Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Integration of European Defense Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Export Dependence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Civil-Military Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Integrated Decisionmaking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Multiyear Budgeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

International Arms Collaboration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Incremental Development Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

‘1

3

3

3

6

8

10

11

16

17

18

20

21

22

25

26

27

30

31

32

32

32

32

32

32

35

Figures

Figure Page

1. French Defense Budget Trends . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

2. French Arms Exports, 1974-90 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

3. Dassault Aviation Annual Orders, 1986-91 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

4. Funding of Defense Research and Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

5. Organization of the DGA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

6. Geographical Distribution of Defense-Industry Employment, 1988 . . . . . . . . . . . . . . . . . . . . . . . 19

7. Thomson-CSF Revenue by Business Group, 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

8. Growth in Complexity of Software for Dassault Military Aircraft . . . . . . . . . . . . . . . . . . . . . . . 23

9. Changes in Dassault’s Employment Structure, 1980-90 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Table

Table Page

1. Major French Defense Contractors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Overview

Although the United States spends 10 times more

on defense than does France, the two nations’

defense industries share some basic similarities that

make recent French experience in defense-industrial

restructuring relevant for U.S. policymakers. In

considering the lessons that might be learned from

France, however, Americans should keep in mind

the differences between the two nations. First,

whereas the U.S. defense industry is mainly in

private hands and the U.S. Government emphasizes

market mechanisms, nearly four-fifths of the French

defense industry is controlled by the state and

broadly managed by the government. Second, the

French Parliament has much less power over defense

decisions than does the U.S. Congress.

France has sought to remain a leading military

power by acquiring a small-scale version of a

superpower arsenal with three distinct elements: an

independent nuclear deterrent, conventional forces

for air and land combat, and a Rapid Action Force

and blue-water Navy for intervening in overseas

crises of limited scope and duration. In building up

its forces, France has pursued three partially competing objectives:

. giving first priority to developing and maintaining its strategic nuclear capability;

. maintaining an autonomous defense-industrial

base capable of furnishing the full range of

materiel required by the French armed forces;

and

● procuring military systems at affordable cost.

The goal of national autonomy in defense procurement has resulted in the acquisition of nearly all

French weapons from domestic sources or joint

ventures involving French companies, even when

superior or less expensive alternatives were available from abroad. Because of the small size of the

French domestic arms market, concentration at the

prime-contractor level has led to a group of solesource ‘‘national champion” firms that are national

repositories of design and manufacturing know-how

for entire sectors of defense equipment. The French

defense industry also relies heavily on export sales

to amortize overhead costs and permit the economic

production of weapons for France’s own use.

Since 1989, however, France’s traditional approach to arms procurement has been shaken by cuts

in defense spending and three geopolitical changes

that have transformed the international security

environment: the dissolution of the Warsaw Pact and

the disappearance of the Soviet military threat; the

unification of Germany; and the emergence of

out-of-area threats to Western security, such as

Saddam Hussein’s Iraq. This convergence of economic, political, and military factors is forcing a

major restructuring of French military forces and the

defense industrial base that supports them.

Weapon acquisition programs and arms exports

are the responsibility of the General Delegation for

Armaments (DGA), a centralizedprocurement agency

within the Ministry of Defense. In addition to

supplying the armed forces and safeguarding the

autonomy of the national defense industry, the DGA

adapts the industry to France’s overall industrial

needs and negotiates collaborative weapon development and production programs with other countries.

DGA officials believe that in the state-dominated

defense field, administrative controls on quality and

cost are superior to relying on market mechanisms

such as competition. But a drawback of the French

procurement system is that decisions tend to be

made in a secretive, top-down manner, with limited

accountability to Parliament or the public.

Currently, the French defense industry is restructuring in response to budget cuts, shrinking export

sales, and rapid technological advances, many of

them driven by commercial applications. In an effort

to manage the transition and mitigate its adverse

effects on employment and regional economies, the

DGA is pursuing an active defense-industrial policy

focused around two axes. The first policy axis seeks

to preserve and promote the technological competencies of the defense industry. To this end, the DGA

is converting national arsenals into state-owned

companies, encouraging defense contractors to diversify into the civil sector, investing in defense

R&D at the expense of current production, urging

firms to concentrate on areas of excellence to

improve their competitive advantage, and promoting

greater reliance on dual-use technologies. The second policy axis aims to enable French defense firms

to play a leading role in the restructuring of defense

production on the European scale. This goal is being

pursued through collaborative research and development programs, strategic alliances, acquisitions of

foreign fins, and cross-border mergers.

– l –

323-947 0 - 92 – 2 QL:3
2 ● Lessons in Restructuring Defense Industry: The French Experience

Because France has been forced to confront the

problems of industrial overcapacity and budget

constraints since the late 1980s, it began to restructure its defense industry sooner than the United

States and thus may offer some useful lessons for

U.S. policymakers. Positive lessons include the

value of a professional acquisition corps-provided

there are adequate checks and balances between

government and industrial power, and accountability to the legislature and the public. France has also

had some success in diversifying its defense industry

into commercial markets, promoting the integration

of civil and military production (by eschewing

regulatory barriers and placing greater reliance on

dual-use technologies), and pursuing strategic alliances and other forms of international collaboration

in defense R&D and procurement.

The French experience offers some cautionary

lessons as well. Overreliance on profits from arms

exports to subsidize defense research and development has created pressures to sell arms that have

adversely affected French foreign policy. Shrinking

export markets in recent years have also reduced the

ability of French defense contractors to remain at the

technological leading edge. OveraIl, France has

managed defense R&D and procurement to preserve

abroad-based defense industry for the future, but at

some cost to its current military capabilities-as

evidenced by the shortcomings of French weapon

systems during the Gulf War. In contrast, the United

States has managed defense R&D and procurement

to maximize its current military capability, but at

some cost to the future health of the defenseindustrial base. As the U.S. defense industry restructures, policymakers will need to find an optimal

balance between these two strategies.
Lessons in Restructuring Defense Industry:

The French Experience

INTRODUCTION

Throughout the post-war era, France has sought to

remain a strong and independent military power.

Beyond the defense of the homeland and overseas

interests, French military forces serve a political

role: to confirm France’s international status as a

major power, to preserve its independence in foreign

and security policy, and to restore a sense of national

pride after the bitter military defeats in World War

II and Indochina and the loss of Algeria and the rest

of the colonial empire. To these ends, successive

French Governments have developed a small-scale

version of a superpower arsenal with three distinct

elements:

●

●

●

an independent nuclear deterrent based on a

“triad” of submarines, bombers, and ballistic

missiles; l

conventional land and air forces, manned largely

with conscripts, for the defense of the French

homeland and Central Europe; and

a largely professional Rapid Action Force

(established in 1983) and a blue-water Navy for

intervention in overseas crises of limited scope

and intensity, mainly in France’s former African colonies, the Middle East, and the Persian

Gulf.

The U.S. defense budget is about 10 times the size

of the French allotment, and the two defense

industries are structured very differently. Whereas

the French defense industrial base consists mainly of

sole-source contractors owned wholly or in part by

the state, the U.S. base is dominated by competing

firms in the private sector and enjoys a much larger

domestic market. Nevertheless, the two defense

industries share some basic characteristics that make

the French case relevant to U.S. policy. Like the

United States, France supports a large military

establishment with overseas responsibilities; produces the full spectrum of major weapon systems,

including fighter aircraft, main battle tanks, nuclearpowered submarines, aircraft carriers, and tactical

and ballistic missiles; and invests heavily in military

research and development, devoting more than a

third of all government R&D spending to defenserelated programs.

Over the past few years, France has also accumulated some useful experience in restructuring defense industry. The United States pursued a military

buildup during much of the 1980s and has only

recently begun to react to cuts in defense spending

resulting from the end of the cold war. France, in

contrast, has had to rationalize its defense industry

since the late 1980s in response to economic

constraints, including overcapacity in the broader

European industry and slumping export sales. For

this reason, France has implemented a number of

strategies for restructuring its defense-industrial

base while preserving core technological assets and

strengthening its competitive position in world

markets.

Although the French system of military procurement evolved in response to a different set of

economic and political conditions than those in the

United States, several aspects of France’s experience with restructuring its defense industry are

relevant to U.S. policymakers facing a similar

challenge in the coming years. This paper assesses

the pros and cons of the French procurement system

and draws some practical lessons from the success or

failure of various restructuring strategies.

Challenges to the Gaullist Paradigm

French autonomy in defense procurement dates

back to the 17th century. During the period immediately following World War II, the United States

supplied a large share of France’s military equipment, but France returned to its historical tradition of

defense-industrial autonomy after 1958, when Charles de Gaulle became President of the Fifth Repub1 me Frmch ~uclem ~~e fome (&ce defiappe) ~mistsof 5 Red~utabie.c@s nucl~-power~b~~tic-~ssileSUti~, which by 1993 ~

be equipped with a total of 80 M-4 missiles carrying up to 480 warheads; 18 Mirage IVP bombers carrying Air-Sol Moyenne Portt?e (ASMP)

air-to-surface missiles; and 18 S-3D intermediate-range brdlistic missiles equipped with single l-megaton warheads, deployed infkd silos onthe Albion

Plateau in southeastern France. France also possesses a sizable arsenal of tactical (“prestrategic”) nuclear weapons, including 45 Mirage 2000N and

about 20 SuperEtendurdaircraft armed with the ASMP missile. The current force of PMon short-range ballistic missiles, with a range of 120 @ will

berepkuxdwith40Hu dt?smissiles having a range of 480~ but the new missiles will be stockpiled rather tbandeployed. Source: DiegoA. Ruiz Palmer,

French Strategic Options in the 1990s, AdeZphi Papers No. 260 (Lmdon: International Institute for Strategic Studies, Summer 1991),

pp. 6-8.

–3–
4 ● Lessons in Restructuring Defense Industry: The French Experience

lie. De Gaulle’s 1966 decision to withdraw France

from the integrated military structure of the North

Atlantic Treaty Organization (NATO) symbolized

the national independence sought by fostering a

defense industry capable of producing the full range

of major weapon systems.2

Since then, two “Gaullist” principles have shaped

the French approach to weapons acquisition: reliance on nuclear deterrence as the basis of French

security, and the maintenance of a broad defenseindustrial base to preserve France’s freedom of

action in foreign and security policy. The priority

given to nuclear deterrence has resulted in the

investment of about 30 percent of the French defense

budget for the acquisition, operation, and maintenance of nuclear weapons and delivery systems. At

the same time, the pursuit of national autonomy has

led to procurement of the lion’s share of weapons

from French sources (sometimes in collaboration

with other countries), even when technically superior or less expensive alternatives were available

from abroad. In order to reduce the unit costs of

French weapon systems to acceptable levels, the

defense industry relies on export sales, which make

it possible to amortize the costs of research and

development (R&D) and industrial overhead

through longer production runs.

Since 1989, however, the traditional Gaullist

policies of nuclear deterrence and autonomy in

defense procurement have been called into question

by a nexus of economic and political factors,

including growing financial constraints, the process

of European economic integration, and three major

geopolitical changes that have transformed the

global security environment.

The first of these major changes was the dissolution of the Warsaw Pact and the disappearance of the

Soviet military threat to Western Europe. With the

end of the cold war, the French defense industry

faces significant cuts in defense spending and

s “ hrinking export markets. Over the next few years,

Photo credit: DGA/COMM

An Amethyste-class nuclear-powered attack submarine

is comissioned at Cherbourg Naval Shipyard.

spending levels will remain fairly steady because

several major weapon systems are still in the

acquisition pipeline, including the Leclerc main

battle tank, the Rafale fighter, the Charles de Gaulle

aircraft carrier, the Amethyste-class nuclearpowered attack submarine, the Triumphant-class

ballistic-missile submarine, and the France-German

Tiger antitank helicopter. Nevertheless, the French

armed forces will be reduced in size by about 20

percent by 1997, with a parallel drawdown in major

weapon systems.3 The French Air Force, for example, plans to cut its fleet of combat aircraft by more

than 10 percent over the next 5 years, from 450 to

about 390 aircraft.4

The 1992 French defense budget totals 195.5

billion francs ($37.7 billion) excluding pensions, a

nominal increase of 0.5 percent over the previous

year but a net decline of 2.3 percent after inflation.

Although 1992 procurement spending will remain

unchanged at the 1991 level of F103.1 billion ($19.9

billion), this figure represents a shortfall of F8.4

billion ($1.6 billion) from the last 5-year planning

target approved by the French Parliament in 1990.5

The downward trend in French defense spending

becomes more apparent when viewed as a percent-

 withdrawal the d, it has remained a member of NATO and continues to participate actively in

alliance political forums such as the North Atlantic Council and the Senior Political Committee. Although France is not a member of the Conference

of National Armaments Directors (CNAD), which coordinates NATO collaborative arms development and production programs, it does belong to the

Independent European Programme Group including all NATO allies except Iceland, and the United States. The was established

 1976 for the purpose of bringing France into European collaborativearmaments programs.

 t. Times, 

4 de “ “French Cutbacks Will Squeeze Tiger, NH-90 Copter Projects,” News, vol. 7, No. 8, Feb. 24, 1992, p. 54.

 de Opposition Rails Against Defense ” Defense News, vol. 6, No. 47, Nov. 25, 1991, p. 8. All 

conversions are based on an exchange rate of to the U.S. dollar, the rate in effect on Jan. 6, 1992.
Lessons in Restructuring Defense Industry: The French Experience ● 5

250

200

150

100

50

0

Millions of French francs

Figure l—French Defense Budget Trends

1986 1987 1988 1989 1990 1991 1992

Defense budget

SOURCE: French Ministry of Defense

age of the gross domestic product (GDP). (See figure

1.) Between 1981 and 1992, the French defense

budget declined from 4.2 percent to 3.26 percent of

GDP, and Defense Ministry sources suggest that the

budget will fall to 3.15 percent of GDP after 1993.6

To support the modernization of its nuclear deterrent

within a restricted budget, France will have to limit

its investment in conventional forces, causing many

weapons programs to be stretched out and delayed.

For example, the anticipated cuts in defense spending will cause initial production deliveries of the

France-German Tiger antitank helicopter to be

delayed by 2 years, until 1999.7

The second geopolitical change was the unification of Germany in October 1990. Although France

and Germany have been close allies since the 1960s,

France seeks to anchor an increasingly powerful and

assertive Germany within multilateral European

economic, political, and military structures so as to

preclude a resurgence of the rivalry that proved so

disastrous to French security in the past. The

ongoing process of France-German security cooperation is likely to include a deliberate effort to

integrate the two countries’ defense industries, with

Percent of gross domestic product (GDP)* 41

3 -

2 -

1-

0’

1986 1987 1988 1989 1990 1991 1992 1993

(est.)

*GDP corresponds to the gross added value (including

value-added taxes) of goods and market services

the political aim of strengthening bilateral military

ties at the core of an increasingly unified European

Community. This trend was reflected in the joint

proposal in October 1991 by French President

Francois Mitterand and German Chancellor Helmut

Kohl for the creation of a European army corps built

on the basis of an existing France-German brigade.8

The third geopolitical change was the Persian

Gulf War, which increased the salience of “out-ofarea’ threats to French security. After the loss of the

colonial empire, the clear priority of French defense

planning shifted to deterring aggression by the

Soviet bloc, and Paris never envisioned the largescale use of conventional forces outside Central

Europe. 9 Instead, French expeditionary forces were

designed for rapid, small-scale interventions in

Africa, the Middle East, and other trouble-spots. As

a result, France was not prepared for a contingency

like the Gulf War, which required the deployment of

heavy conventional forces over long distances

against a well-equipped adversary, and where nuclear deterrence was not politically credible. In the

coming years, France must decide if it can afford

both a sophisticated nuclear deterrent and large

 de “ “Top French Officials Debate Changes in Military,” News, vol. 6, No. 36, Sept. 9, 1991, p. 42. For purposes of

 the U.S. defense budget peaked at 6.5 percent of GDP in 1985, fell to 5.5 in 1992, and is expected to drop to about 3.4 percent by

1997.

7 op. cit., 

8 Jacques and Jean-Pierre “MM. Mitterrand et Kohl proposent de les en de

 Oct. 17, 1991, p. 1.

 of French forces demonstrate Political 

perform a test the intentions of the adversary, and conduct a national deterrent maneuver to the adversary to reassess

his objectives. See David S. France’s Deterrent Posture and Security in Europe: Part Z: Capabilities and Doctrine, Papers, No. 194

(London: International Institute for Strategic Studies, Winter 1984/5).
6 ● Lessons in Restructuring Defense Industry: The French Experience

conventional forces capable of carrying out major

interventions overseas.

France played a relatively minor supporting role

in Operation Desert Storm for a number of reasons,

both political and technical.10 Constraints included

France’s lack of investment in conventional military

readiness and its heavy reliance on conscripts, which

created political inhibitions on their deployment

outside Europe. 11 Earlier French arms sales to Iraq

further complicated the situation. During the air

campaign, for example, top-of-the-line French Mirage fighters deployed to Saudi Arabia were not used

in combat because of concern that they might be

confused with Iraqi Mirages and shot down by

coalition forces.

The Gulf War also revealed deficiencies in French

weapons and power-projection capabilities.

France’s small fleet of transport aircraft was not

sufficient to sustain an operation requiring heavy

logistical support, and the French Air Force’s

obsolescent Jaguar attack aircraft were not equipped

with night avionics or advanced radar systems and

thus could not fly sorties at night or in bad weather.

In addition, French forces suffered from a shortage

of stockpiled munitions, such as laser-guided bombs.

Although the French Army’s 6th armored (“Daguet”) division successfully carried out a flanking

and screening maneuver during the ground campaign to liberate Kuwait, its relatively light equipment made it incapable of conducting a frontal

assault against Iraqi armored units. Finally, the

decision to defer replacement of the French Navy’s

aging carrier-based aircraft until the next-generation

Rafale fighter becomes available meant that

France’s two aircraft carriers lacked an effective

self-protection capability. As a result, the carriers

were either kept in port or served as cargo ships for

delivering trucks and helicopters to the theater of

operations.

In sum, a nexus of economic, political, and

technological factors will necessitate a major restructuring of the French defense-industrial base if

France is to bridge the growing gap between the

prominent role it aspires to play in world affairs and

its limited economic resources.

INDUSTRIAL STRUCTURE

While competition exists at the level of subcontractors and suppliers, the French domestic market

for military airframes, aero-engines, and armored

vehicles is not large enough to support more than

one prime contractor in each of these sectors. As a

result, the French Government has promoted the

consolidation of those portions of the defense base

considered vital both to national security and the

country’s overall economic growth. Since military

aerospace and defense electronics are closely linked

to “strategic’ civil industries (aeronautics, space

satellites, telecommunications, computers, and electronics), many defense prime contractors and their

associated civil-sector industries have been combined into large conglomerates known as “national

champions.

The national champions dominate the domestic

defense business in their sectors, and each is the sole

depository of design and systems-integration knowhow for an entire category of defense equipment.12

Examples include Dassault Aviation for fighter

aircraft, Aerospatiale for helicopters and ballistic

missiles, GIAT Industries for main battle tanks and

artillery, Matra for air-to-air missiles, and the

National Company for the Design and Construction

of Aircraft Engines (SNECMA) for military aeroengines. (See table 1.) At the same time, the French

Government believes that vertical integration of

defense industries is not desirable and has sought to

maintain a diverse vendor base of competing subcontractors and suppliers, many of them small and

midsized fins.

Nearly four-fifths of the French defense industry

is owned directly or indirectly by the state, either in

the form of government-owned and operated arsenals, nationalized companies (e.g., Aerospatiale,

10 ~eufited K@jom ~i~ ~-y ~o-~d~ ~~ ~iz~ of Fr~~e’s, deploy~ to tie pers~ G~~eXpeditiO~ COrpS of 35,000 trOOpS, COIUpiUd

with the 11,000 troops in the French Daguet division. Moreover, French Defense Minister Jean-Pierre Chevimement did not want to put French forces

under U.S. operational control and thus deployed them at Al Asha-far from the U.S. and British forces stationed at Dhahran-s o that they could

undertake operations in an autonomous fashion. Chevi2mement resigned on Jan. 29, 1991, soon after the start of the coalition’s major air offensive. He

was replaced by Pierre Joxe, who agreed to put French forces under U.S. command during the ground campaign to liberate Kuwait.

11 ktie ~te~~ of tie Gulf War, Fr~ce has men steps to reorganize more of its conventional forces into d@rOfCMiOIUd UdS Suitable fOr USe

in military operations outside Europe.

12 U.S. conwe5S, offke of Technology Assessment Global Arms Trude, OTA-ISC4160 (Washington DC: U.S. Government Prinfig Office, June

1991), pp. 72-73.
Lessons in Restructuring Defense Industry: The French Experience ● 7

Table l—Major French Defense Contractors

Sector/company Types of production Examples of products

Aerospace

Aerospatiale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Dassault Aviation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SNECMA(National Company for the Design

and Construction of Aircraft Engines) . . . . . . . . . . . . . . . . . .

Matra . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SEP(European Propulsion Company) . . . . . . . . . . . . . . . . . . .

Turbomeca . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Naval construction

DGA/Directorate of Naval Construction . . . . . . . . . . . . . . . . . . .

Chantiers del’Atlantique (GEC-Alsthom) . . . . . . . . . . . . . . . . .

Constructions Mecaniques de Normandie . . . . . . . . . . . . . . . .

Societe Francaise reconstructions Navales . . . . . . . . . . . . .

Land armaments

GIAT lndustries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Renault Industrial Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Thomson-Brandt Armaments . . . . . . . . . . . . . . . . . . . . . . . . . . .

Creusot-Loire Industries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Panhard et Levassor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Defense electronics

Thomson-CSF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SFIM(Company for the Fabrication of

Measuring instruments) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Dassault Electronique . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SAGEM (Company for General Applications of

Electricity and Mechanics) . . . . . . . . . . . . . . . . . . . . . . . . . . .

Societe Anonyme deTelecommunications (SAT) . . . . . . . . . .

Sextant Avionique . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Alcatel Thomson-Faisceaux Herziens . . . . . . . . . . . . . . . . . . . .

Alcatel Espace . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Unilaser . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sogitec . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Other

SNPE(National Companyfor Powder and Explosives) . . . .

Constructions lndustrielles de la Mediterranee (Calm) . . . . .

Messier-Bugatti . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Hispano-Suiza . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Auxilec . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SAFT(Company for Fixed Accumulators and Traction) . . . .

Intertechnique. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Labinal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sochata-SNECMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sopelem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Sogerma-Socea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Souriau et Cie . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Ballistic missiles

Prestrategic missiles

Tactical missiles

Helicopters

Transport aircraft

Fighter aircraft

Trainers

Maritime patrol planes

Aero-engines

Airdelivered missiles

Tactical missiles

Military satellites

Solid-fuel propulsion

Aircraft and helicopter engines

Submarines, warships

Frigates, corvettes, support ships

Ships of less than 1,500 metric tons

Ships of less than 1,000 metric tons

Armored vehicles, tanks, artillery, munitions

Armored vehicles, tactical vehicles

Mortars, munitions, air-delivered bombs

Armored vehicles

Armored vehicles, tactical vehicles

S-3, S-4 ICBMs

M-4, M-45, M-5 SLBMs

Pluton, Hades, ASMP

Antitank (HOT, Milan)

Ground-air (Roland, Aster)

Air-ground (AS-1 5, AS-30, Exocet, ANS)

Gazelle, Dauphin, Lynx, Super Puma,

Tiger, NH-90

Transall, Epsilon

Mirage F1, Jaguar, Mirage 2000, Rafale

Alpha Jet

Atlantic 2

ATAR, M53, M88, Tyne

Air-air Magic, Super 530, MICA

Ground-air Crotale, Mistral

Syracuse, Helios

Solid fuel for ballistic and tactical missiles

Arriel, Makila, RTM 322, MTM 390

Ballistic missile submarines, attack submarines,

nuclear aircraft carriers, frigates

Test and measurement ships, patrol frigates

Rapid patrol boats

Various ships

AMX-10, AMX-30, Leclerc, 155mm AUF1

Armored reconnaissance vehicles

BAP-1OO bomb

AMX-13

Light Armored Vehicle (VBL), Light AutoMachinegun (AML), P4 tactical vehicle

Command-control systems, antiair weapon

systems, radars, sonars, optoelectronics,

simulation, telecommunications, electronic

warfare, components

Stabilized sighting systems

Radars, seekers, calculators, countermeasures

Navigation systems, fire-control systems,

optoelectronics

Radio communications, optoelectronics

Avionics, navigation systems, fire-control,

automatic testing

Microwave links, satellite communication earth

stations

Satellite communication systems

Lasers

Simulators

Solid fuel, powder and explosives

Combat engineering equipment, welded

assemblies

Landing gears

Aeronautical equipment

Motors and electric generators

Batteries, power supplies

Fuel systems, air conditioning, oxygen

Cable, connectors, motors

Engine repair

Optics, night-vision systems

Various aeronautic equipment, aircraft maintenance

Connectors

SOURCE: DGA/COMM, L’lndustrie Frerpise de D4fense, June 1990, pp. 20-21.
8 ● Lessons in Restructuring Defense Industry: The French Experience

GIAT Industries, and SNECMA13), or firms in

which the government owns a large share of the

stock (e.g., Dassault Aviation, Matra, and ThomsonBrandt Armaments) .14 The nationalized French defense firms do not face the same pressures as private

firms to provide a short-term return on investment

and can also obtain loans and government subsidies

that private firms would not receive. In recent years,

however, the downturn in defense spending has

caused the nationalized companies to have relatively

little capital compared to private firms.

Since 1981, when Francois Mitterrand became

President, the French Government has only partially

nationalized the private defense sector so as to give

these firms continued access to capital markets.

Thus, although the government holds 59 percent of

the stock of the defense-electronics firm ThomsonCSF and 49 percent of the stock of Dassault

Aviation, both companies are still listed on the Paris

stock exchange. At the same time, ownership of a

large share of the stock gives the government

considerable influence over the semiprivate defense

fins. In the case of Dassault, the state is a minority

stockholder but controls more than 50 percent of the

voting rights by virtue of some double-vote shares.

The government has yet to exercise its majority

voting power, but Dassault management must take

this possibility into account.

Export Dependence

The small size of the French domestic arms

market means that the defense industry relies

heavily on export sales to permit the economic

procurement of weapons for France’s own use by

amortizing research and development (R&D) and

overhead costs over longer production runs. Because

of the spiraling cost of defense R&D, the export

dependence of the French industry has grown

rapidly: exports accounted for 18 percent of defense

production in 1970, rose to 42 percent in 1985, and

stabilized at about 33 percent in 1988.15 Some

Figure 2—French Arms Exports, 1974-90

Billions of current French francs

70

60

50

40

30

20

10

0

74757677787980818283 84858687888990

Year

 Orders

SOURCE: DGA

defense-industrial sectors

 Deliveries

are heavily dependent on

exports: Aerospatiale sells 90 percent of its helicopters and Dassault 60 percent of its combat aircraft to

other countries. Because of this structural dependence on foreign sales, the French Government takes

export potential into consideration when launching

a new development program, and the timing of

French military procurements is often tailored to

meet the needs of overseas customers.l6

Despite such efforts, however, French arms exports have declined sharply in recent years, particularly since the end of the Iran-Iraq war in 1988. (See

figure 2.) From a highpoint of F61.8 billion ($11.9

billion) in 1984, orders fell to F25.3 billion ($4.8

billion) in 1986 and F20 billion ($3.9 billion) in

1989. Although the industry recovered some lost

ground in 1990 with orders of F33.4 billion ($6.4

billion), they declined again in 1991. For Dassault

Aviation, for example, 1991 sales dropped 16

percent and new orders by 25 percent from their

1990 levels.17 (See figure 3.) Aerospatiale’s new

orders in 1991 also plunged 50 percent from the year

before. 18 SNECMA is facing an all-time low in

 of French state 97.11 percent of shares, United Corp. 1.73 

 Annual Report 1990, p. 25.

 (Paris: Presses Universities de France, P. 30.

15 de 

 June 1990), p. 12.

 programs are completely independent of the export 

 de “ BAe Expect Contracts on Anglo-French Fighter,“ News, vol. 7, No. 8, Feb. 24, 1992, p. 20.

18“Aerospatiale the vol. 17, No. 14, Apr. 4, 1992, p. 555.
Lessons in Restructuring Defense Industry: The French Experience ● 9

Figure 3-Dassault Aviation Annual Orders, 1986-91

-- Billions of French francs

20

15

10

5

0

1986 1987 1988 1989 1990 1991

SOURCE: Aviation

orders of military aero-engines, and Matra’s sales of

tactical missiles have declined because missile

exports are linked to purchases of military aircraft.

Moreover, France will probably have to write off

more than F7 billion ($1.4 billion) in unpaid arms

sales to Iraq. According to one analysis, “With

inflation factored in, France’s arms industry has

been losing ground year after year.”19 A forecast of

aerospace sales by the Group of French Aerospace

Industries (GIFAS), an industry association, predicts

a decline in defense business until after 1995, when

some weak growth is expected because of the need

to replace current-generation equipment.20

French arms exports have been adversely affected

by a number of factors, including falling oil prices,

growing competition from traditional suppliers (the

United States and Britain), the emergence of new

competitors (Israel, Brazil, and China), and the

dumping of used East European weapons on the

world market. The effectiveness of U.S. armaments

combat-tested in the Gulf War may also reduce the

competitiveness of French products. Finally, the

leading Western supplier nations may agree to limit

arms transfers to the Mideast, historically France’s

largest export market. Indeed, the French role in

providing 20 percent of Iraq’s major weapon systems between 1980 and 1989 has provoked at least

a temporary reassessment of the wisdom of largescale arms transfers to areas of conflict.

The decline in French arms exports has affected

the defense-industrial base both directly, by reducing levels of production, and indirectly, by undermining the funding mechanism for defense R&D.

Although the government pays for most defenserelated research, industry must cover a significant

share of the costs of weapon-system development

out of profits from foreign sales. During the negotiation of an R&D contract, the government and the

company make an initial assessment of the system’s

export potential and determine on this basis a

formula for an equitable sharing of R&D costs.

Thus, the greater a system’s predicted export sales,

the larger the share of development costs that must

be borne by industry. This cost-sharing formula may

be renegotiated later if the export prospects of the

system improve or worsen significantly. On average,

government funding for weapon-development programs covers only about 40 to 60 percent of industry

needs--compared to about 80 percent in the United

States. The precise funding split can vary considerably, however, depending on the industrial sector,

the firm, and the system being developed. (Funding

splits for Thomson-CSF and SNECMA are shown in

figure 4.)

The requirement that defense contractors internally finance a significant share of their development costs has given rise to a number of problems.

First, joint funding has created strong pressures for

arms exports, leading to some questionable sales.

Second, company financing of R&D has enabled the

French Government to launch more weaponsdevelopment programs than it can afford to carry

through to completion, resulting in costly stretchouts and delays. (This problem has also been

common in the United States.) Third, the recent

decline in arms sales has reduced the pool of money

available for company-funded R&D.

As long as arms-export markets were strong, the

structural problems associated with corporate funding of development out of profits from foreign sales

were not apparent. Dassault’s export profits, for

example, enabled the company to finance 50 percent

of its R&D costs and gave it the flexibility to pursue

independent programs like the Mirage 2000-5,

which was developed strictly for export without

19+ ’ FBIS translation of article by L. Main Paris, Dec. 26, 1990, p. 5 

Jan. 18, 1991, pp. 33-34).

20 “French Down 1990, But Deliveries Aviation Week & Space Technology, vol. 135, No. 13, Sept.

30, 1991, p. 25.

323-947 0 – 92 – 3 QL:3
10 ● Lessons in Restructuring Defense Industry: The French Experience

10

9

8

7

6

5

4

3

2

1

0

Figure 4-Funding of Defense Research and Development

Thomson - CSF

Billions of French francs

1986

47% 39%

I I ,

1987 1988 1989 1990

 percent of costs, company-funded

3

2

1

0

SNECMA

Billions of French francs

1

55%

I 1

58%

1986 1987 1988 1989 1990

 Percent of costs, government-funded

SOURCE: Thomson-CSF, 1990 p. 4; Report 1990, p. 3.

state assistance. (Ironically, Dassault was unable to The French Government takes a broad view of

sell this aircraft because foreign customers were

reluctant to buy a system that the French Air Force

did not plan to procure.) As export sales decline and

firms are less able to finance their development work

internally, the French Government will either have

to assume a greater share of the burden or engage in

more collaborative development programs with

foreign partners.

MANAGEMENT OF THE BASE

The French Government, as favored customer and

owner of a large portion of the defense-industrial

base, has two partially competing objectives: maintaining a broad defense-industrial base capable of

furnishing the full range of equipment required by

the armed forces (even when superior or less

expensive weapons are available from foreign sources);

and procuring military systems at an affordable cost.

Because of the central importance of the arms

industry to the country’s independent defense posture and technology policy, France places considerable emphasis on identifying and preserving key

design and manufacturing skills in the major defense

fins. The results of this comprehensive planning,

programming, and budgeting effort are embodied in

the 5-year military programming law (which sets

financial targets for defense procurement) and the

annual defense budgets.

national defense as covering military forces, civil

defense, and their economic and industrial underpinnings, and integrates defense-industrial policy with

other industrial, economic, and social policies. Thus,

while the Ministry of Defense has the lead in

defense-industrial policymaking, several nondefense

agencies also play important roles. At the highest

level, there is a division of responsibility between

the French President and Prime Minister. The

President is supreme commander of the armed forces

and in charge of formulating national security

policy, whereas the Prime Minister coordinates the

more routine aspects of defense planning, including

industrial mobilization, wartime rationing, and civil

defense. Reporting to the Prime Minister is the

General Secretariat of National Defense (SGDN), an

advisory body analogous to the U.S. National

Security Council staff, whose activities include

geopolitical analysis, export controls on arms and

dual-use technologies, and nonproliferation policy.

The Ministry of Economics, Finance, and the

Budget exerts a significant influence over the extent

and content of French defense spending; the Ministry of Industry and Foreign Trade is responsible for

the supply and rationing of industrial raw materials

in wartime; and the Ministry of Transportation

controls the air and sea transport fleets. Oversight

functions are performed by the Cour des Comptes,

an investigative agency similar to the U.S. General
Lessons in Restructuring Defense Industry: The French Experience ● 11

Accounting Office, which audits the accounts of the

nationalized firms and ensures that defense funds are

spent within the guidelines of the law.

The French weapons-acquisition system reflects

France’s “statist” political system, with a strong

executive and a relatively weak legislative branch.

In contrast to the U.S. political system, which is

based on the principle of checks and balances among

competing power centers, the French parliamentary

system involves a greater fusion of the legislature

and the executive. Thus, while each chamber of the

French Parliament (National Assembly and Senate)

has a Committee on National Defense and Armed

Forces, these bodies exert much less oversight of

defense and procurement policy than the Armed

Services Committees of the U.S. Congress.21 The

French Parliament votes the annual defense budget

and a 5-year military programmingg law providing

financial targets for future procurement, but these

bills are largely spending envelopes and permit little

if any legislative control over individual weapons

programs.

The General Delegation for Armaments

De Gaulle’s political goal of achieving national

autonomy in the full range of armaments—

particularly nuclear weapons—in the face of tight

budgetary constraints required the careful husbanding and allocation of resources. To this end, in 1961

de Gaulle replaced the weapons directorates reporting to the individual armed services with a centralized procurement agency known as the General

Delegation for Armaments (Delegation Generale

pour l’Armement, or DGA).22 This organization

includes all of the services and organizations within

the Ministry of Defense responsible for the research,

development, and production of defense equipment.

The DGA is the linchpin of the French armsprocurement system, mediating among the political

authorities, the defense industry, and the military

operators. After the Parliament votes the defense

procurement budget, the DGA allocates funds among

specific weapons programs. Because of this power

of allocation, DGA can ensure multiyear funding of

high-priority systems even within a shrinking defense budget.

The director of the DGA reports directly to the

Minister of Defense and “has greater control over

research, engineering, and industrial matters than

any other European-or American-defense official. ’ ’23 He oversees a staff of about 54,000 people,

including career military or civil servants in scientific, technical, and management positions, and

several thousand workers in the government-run

arsenals, depots, and factories. Thanks to an elaborate system of recruitment and training, the senior

management positions in the DGA attract some of

the best and brightest French students of engineering

and administration, who become specialists in

developing sophisticated armaments and selling

them abroad. At the top of the hierarchy is an elite

corps of about 1,000 “armament engineers,’ 80

percent of them graduates of the prestigious Ecole

Polytechnique in Paris and 20 percent recruited

internally. Increasingly, armament engineers also

occupy the top executive positions in the nationalized and semiprivate sectors of the defense industry.

According to political scientist Edward A. Kolodziej, the DGA’s primary mission is “the preservation and promotion of an ever-modernizing arms

industry within an internationally competitive

French industrial system."24 The major tasks of the

DGA are

●

●

●

●

to manage the definition, development, and

production of military equipment for the

French armed forces and for export;

to certify that technical performance and costs

are acceptable;

to supervise the government-run arsenals and

guide the nationalized and semiprivate defense

firms;

to ensure the long-term health of the French

defense industry; and

21 See David S. Yost “French Defense Budgeting: Executive DO minance and Resource Constraints,” Orbis, vol. 23, fall 1979, pp. 579-608.

z ~o~er fipo~t motive for de Ga~e’s d~ision to shift authority over arms procurement from the individual armed services @ a cen@*d

agency reporting directly to the French President was to help gain control over the rebellious oflicer corps, which had brought down the Fourth Republic

in protest over the loss of Algeria and threatened to destabilize the Fifth Republic as well. See Edward A. Kolo&iej, Making and Mar&eting Arms: The

French Experience andZts Implications for the International System (Princeto~ NJ: Princeton University Press, 1987), p. 243.

23 U.S. ConWess, office of ~~olog Assessment, Holding the Edge: ~ainraining ~~e ~e~ense T’&~nozogyBase, OTA-lSC-420 ~dlk@O~ ~:

U.S. Government Printing Office, Apr. 1989), p. 101.

24 Kolo&iej, op. cit., fOoblOte 22, P. 258.
12 ● Lessons in Restructuring Defense Industry: The French Experience

● to adapt the defense industry to France overall

industrial needs.25

Since France relies primarily on single-source

national champions for most of its major weapon

systems, the DGA must impose administrative

controls on price and quality, while simultaneously

cooperating with industry to maintain profits, employment, and investment in new technologies so

that France will remain internationally competitive.

In order to preserve the competencies of the defense

industry, DGA officials often balance long-term

industrial considerations, such as the need to preserve design teams or to keep production lines open,

against the operational requirements of the French

military. The DGA’s industrial-policy goals must, of

course, be harmonized with the interests of the

Ministries of Defense, Foreign Affairs, and Economics and Finance. When interagency conflicts

arise, they are decided at the political level.

The DGA is divided into functional and technical

units. (See figure 5.) Reporting to the director are

two policymaking bureaus. The Delegation for

Armament Programs (DPA) draws up plans for

weapons development and procurement over the

annual and 5-year budget cycles, while the Delegation for International Relations (DRI) negotiates

foreign arms sales and collaborative agreements

with other countries for the joint development and

production of military equipment. In order to facilitate arms sales, the DRI arranges attactive credit and

finance terms for foreign arms buyers, guarantees

loans, and provides insurance for companies and

banks against the special risks of the arms trade.

The DGA’s program-management functions are

the responsibility of five functional directorates and

services (for defense research, personnel, industrial

affairs, cost accounting, and quality control) and five

technical directorates (for ground armaments, naval

construction, aeronautics, missiles and space, and

electronics and computing). The technical directorates function in different ways depending on the

defense-industrial sector. Whereas the Directorate of

Naval Construction directs a complex of governmentowned shipyards that produce, maintain, and overhaul most of the French Navy’s warships and

submarines, the Directorate of Aeronautics negotiates contracts with private and nationalized companies.

The technical directorates also coordinate with

the French armed services to define R&D and

production programs and priorities. Committees

made up of service representatives and DGA officials identify operational military requirements and

transform them into technical specifications. Although both sides strive to reach consensus, the

DGA has the final say in the launching of a

development program. As a result, DGA officials

may choose to balance short-term military needs

against technical feasibility, export potential, and

industrial-base considerations.

Defense Research

France spends about F30 billion ($5.8 billion) on

defense research and development, or more than a

third of the government’s entire R&D budget.

Although civil and defense R&D are budgeted and

administered separately, defense R&D is expected

to benefit the overall economy. Some F8 billion

($1.54 billion) of the defense R&D budget is

allocated to “research,’ of which 20 percent goes to

nuclear-weapons work under the auspices of the

French Atomic Energy Commission and the rest is

divided up among other areas. In addition to

contracted R&D, the French Government draws on

independent research conducted by defense companies. A portion of these R&D expenses are reimbursed as overhead costs on defense contracts, in a

manner similar to the U.S. Independent Research

and Development (IR&D) program. The reimbursement rate varies from 2 to 6 percent of contract cost,

depending on the industrial sector and other criteria.

In May 1977, DGA reorganized its organization

for defense research by creating a new Directorate

for Research, Studies, and Techniques (DRET). This

organization is analogous to the U.S. Defense

Advanced Research Projects Agency (DARPA),

although it lacks the latter’s flexibility and responsiveness. With a staff of about 2,000, DRET

coordinates all defense-related research in the public

and private sectors, including work on “dual-use”

technologies with both military and civil applications. Each year DRET directly funds about 200

medium- and long-term research programs at two

government-supervised laboratories: the Institut de

~ U.S. Cowess, Office of lbchnoloW Assessment, Holding the Edge: Volume 2: Appendices (Wdingtonj DC: U.S. Gov-ent fi@Office,

1989), p. 139.
Lessons in Restructuring Defense Industry: The French Experience ● 13

Figure 5-Organization of the DGA

General

Delegate

for Armaments

Assistant Director

m

Programs

m

Relations

I

I I I

Central

Service

for

Industrial

Affairs

Service

for the

Investigation

of

Armament

costs

1

Service

for

Industrial

Surveillance

of

Armament

I

Directorate

for

Research,

Studies,

and

Techniques

Directorate

for

Personnel

and

General

Affairs

(DPAG)

Armament

Schools

I

I

Center

for

Advanced

Armament

Studies

 Technical Directorates 

SOURCE: DGA/COMM
14 ● Lessons in Restructuring Defense Industry: The French Experience

Saint Louis (ISL), a France-German center for

ballistics and explosives research, and the National

Office for Aerospace Studies and Research (ONERA).

DRET also awards contracts to industrial labs and to

universities, which conduct 10 to 15 percent of

French defense research. Since university personnel

are paid by the Ministry of Education, DRET can

leverage its assets by financing only those additional

facilities required for defense research.

In addition to its funding role, DRET is responsible for monitoring defense-related developments in

science and technology both within and outside

France, and bringing them to the attention of the

technical directorates. DRET also defines the nation’s defense research priorities on an annual basis.

This task is carried out by 30 internal working

groups staffed by armed-service representatives and

DGA engineers. The working groups are organized

according to scientific field (e.g., materials, electronic components, aeronautical systems) and operational area (e.g., air defense, artillery). Eight “synthetic” working groups then assess research priorities for each armed service and allocate finding

shares. (DRET attempted to develop a “Critical

Technologies List” but abandoned the effort as

inconclusive.)

French defense-research priorities are shifting in

response to the emerging international security

environment. The Gulf War demonstrated the fundamental importance of command, control, and communication technologies; of surveillance from space

and on the battlefield; of stealthy weapon systems;

and of long-range, precision-guided weapons like

the U.S. Tomahawk cruise missile. In response to

these lessons, DRET is intensifying its research

effort in electronics, sensors, space systems, and

advanced munitions, while reducing its emphasis on

the fining platforms themselves. Funding for military

space programs rose by more than 17 percent in the

1992 defense budget. Current plans call for developing a series of military reconnaissance satellites that

will be equipped with optical cameras, equipment

for intercepting signals and communications, and

synthetic-aperture radar for 24-hour, all-weather

imaging. 26

Controls on Price and Quality

Two functional services within DGA are responsible for oversight and control of the defense

industry. The Service for Industrial Surveillance of

Armament (SIAR) certifies the technical quality of

tested French weapons and foreign equipment purchased for the French forces, while the Service for

the Investigation of Armament Costs (SECAR)

performs cost audits of all major procurement

programs. DGA officials contend that because the

state is the single dominant customer for defense

products, administrative controls on quality and

costs are more effective than relying on market

mechanisms such as competition. According to this

view, competing prime contractors tend to make

unrealistically low bids, resulting in cost overruns

that must be absorbed by the government. In

contrast, if single-source firms are assured of a

regular flow of business, they can engage in

longer-term planning that reduces overhead costs.

The DGA has used fixed-price contracts successfully by working closely with industry to ensure an

equitable sharing of costs based on a system’s

technical specifications and export potential. Contracts are renegotiated if export prospects change or

performance specifications become more demanding. DGA officials also contend that the international competition for export markets creates incentives for quality and price discipline, although they

admit that arms sales are greatly influenced by

political and strategic considerations. In recent

years, however, the costs of some major weapons

programs (such as the Leclerc tank and the Charles

de Gaulle aircraft carrier) have spiraled-in some

cases 40 percent over initial estimates-raising

questions about the effectiveness of administrative

controls and the lack of domestic competition at the

prime-contractor level.

Control of Arms Exports

French arms-export policy has been formulated

since 1955 by an interdepartmental coordinating

body called the Interministerial Commission for the

Study and Export of War Materials (CIEEMG),

chaired by the General Secretariat for National

Defense. Made up of representatives from the

Ministries of Defense, Foreign Affairs, Economics

and Finance, and Industry and Foreign Trade, this

group is responsible for advising the Prime Minister

on proposed arms sales and for recommending

changes in overall arms-export policy. In evaluating

proposed sales, the CIEEMG considers both defenseX Giov@ de Briganr.i and Peter B. de Selding, “France TO Widen Spwe Efforts,” Defense News, vol. 7, No. 5, Feb. 3, 1992, pp. 4,37.
Lessons in Restructuring Defense Industry: The French Experience ● 15

industrial needs and the political and strategic status

of the requesting country. For example, the transfer

of French arms to Iraq during the Iran-Iraq War was

authorized by the highest political levels for strategic reasons, with industrial considerations playing a

secondary role. Even so, the CIEEMG is strongly

influenced by the DGA’s Directorate of International Relations, which prepares all of the files for

commission review and tends to be a proponent

rather than an arbiter of arms sales within the French

Government.27

Defense Industrial Policy

The functional directorate of the DGA responsible

for defense industrial policy and planning is the

Central Service for Industrial Affairs (SCAI). It

monitors the activities and financial health of

defense fins, maintains a centralized database

containing this information, and prepares analyses

of actions aimed at improving the competitiveness

and profitability of the French defense industry.

SCAI also sets out guidelines for defense contracts

and industrial practices and suggests ways to enhance the contribution of the defense industry to

France’s economic development and the competitiveness of its civil industries.28

In contrast to the technical directorates, SCAI has

a broad vision of France’s defense-industrial needs

that focuses on industrial development and the

expansion of defense trade over the immediate

requirements of the armed services. This emphasis

on the long-term health of the French defense

industry sometimes conflicts with the DGA’s other

roles as producer, controller, and customer of

military equipment. For example, in order to preserve sufficient industrial capacity to meet national

procurement objectives, SCAI might advise the

Directorate for Aeronautics to award a development

contract on a competitive basis but give the losing

bidder a share of the production work to keep both

firms in business, even if this approach increases

overall procurement costs. Similarly, SCAI might

recommend keeping an assembly line open by

stretching out the procurement of a current item until

the next system enters production.29

Administrative Guidance

State directives assign the DGA responsibility for

administrative guidance (tutelle) of the defense

industry. DGA officials seek a balance between

giving the industry the freedom to compete in

international markets and preserving a national

defense-industrial base that responds to French

military and social needs. One type of administrative

guidance involves the direct management of government-owned and operated arsenals, such as the

naval shipyards run by the Directorate for Naval

Construction. A second type of guidance derives

from the power of the French state as the primary

customer of the defense industry and a major

shareholder of the nationalized and semiprivate

defense companies. The chairmen of the nationalized defense firms are named by the President on the

recommendation of the Prime Minister and the

Ministers of Defense, Finance, and Industry, and

government representatives sit on the companies’

boards of directors. While DGA officials do not

intervene in day-to-day company operations, they

must concur in major strategic decisions such as

large investments, new ventures, or international

collaborative programs.

When conflicts of interest between government

and industry arise, they are worked out in secret, far

from the public spotlight. The DGA’s influence over

the defense industry is offset to some extent by the

fact that the national-champion firms enjoy a functional monopoly in their respective industrial sectors. For example, since Dassault Aviation possesses

the only design team in France capable of developing combat aircraft, the government must keep it

supplied with contracts to preserve its unique skills.

In recent years, however, DGA officials have

promoted international collaborative programs as a

strategy for countering the monopolistic practices of

national-champion fins.

Industrial Mobilization

France no longer plans to complement peacetime

defense production with reserve industrial capacity

that could mobilize in crisis and war. Since the

French defense base is increasingly integrated into

the broader civil economy, competitive pressures to

27 Kolodziej, op. cit., footnote 22, p. 266.

2 Ibid, p. 259.

~Fer-d MeMe, “Un Compl~e Mili@ro-~dustrielFmn@is?” Jean-Christophe Victor (cd.), ARM-ES: France 3t%ze Grand: NOS SticZtegieS,

Chercheurs, Fabricants et Vendeurs (Paris: Autrement Revue, No. 73, Oct. 1985), p. 92.
16 ● Lessons in Restructuring Defense Industry: The French Experience

reduce overhead costs militate against maintaining

surplus capacity for wartime mobilization. As a

result, surge production of defense equipment in

crisis or war would be limited to battlefield consumables such as conventional munitions, food, uniforms, and selected spare parts. France also plans to

rely on its European allies to supplement domestic

production.

In the belief that the conventional phase of any

war in Europe would be short, France has stockpiled

relatively small quantities of munitions. Moreover,

the armed services typically protect high-priority

weapons programs from budget cuts by paring back

spending on military readiness. The 1991 munitions

budget, for example, was down 28 percent from the

year before and contained no money to purchase

antirunway bombs, cluster bombs, or laser-guided

bombs. As a result, France had to purchase laserguided bombs and antitank missiles from Germany

during the Gulf War; without this external source,

there would have been only enough stockpiled

munitions for a week of combat.30 Of course, greater

reliance on allies assumes the compatibility of

foreign munitions with French weapons, creating a

strong incentive for collaborative development.

Pros and Cons of the French

Procurement System

France’s centralized, professional procurement

system offers four main advantages. First, senior

DGA officials enjoy high prestige and morale and

manifest a strong sense of responsibility to the state.

Moreover, whereas military officers move frequently from one position to another, DGA officials

remain with major weapons programs for several

years, providing managerial expertise and institutional memory. Second, there is a more cooperative

relationship between the French Government and

the defense industry, in contrast to the largely

adversarial relationship in the United States. One

reason for the greater apparent harmony in the

French case is that in an industry consisting largely

of monopoly suppliers and a single buyer, there is

little incentive for either party to criticize the system

openly.

A third advantage of the French system is that

centralization has enabled the French state to engage

in multiservice procurements and to consolidate

R&D programs to avoid redundancy. In some cases,

it has been possible to develop a single weapon

system for all three armed services, such as the

Mistral air-defense system, or a basic airframe that

is then modified for Air Force and Navy missions,

such as the Rafale fighter. More frequently, the DGA

funds joint programs to develop technologies of use

to all three services, including missile guidance,

command-and-control systems, and logistics management; these technologies are then incorporated

into service-specific weapon systems.

A final advantage of the French system is that the

DGA has pursued a coherent strategy for managing

the defense industry. DGA officials seek to balance

a variety of objectives, including force requirements,

the health of both the defense base and the larger

civilian industrial base, and political goals such as

France-German cooperation. Because of the need

for tradeoffs among these objectives, the French

procurement system is not designed to optimize

individual weapon systems but rather to further the

nation’s military, industrial, and political interests.

The frost two benefits of the French system—the

high prestige of government service and cooperative

government-industry relations—are characteristic

of most European countries and Japan, whereas the

second two benefits—multiservice procurement programs and a coherent defense-industrial strategy—

are unique to France. Despite these advantages,

however, the French procurement system suffers

from a number of problems. The DGA’s mission of

preserving an autonomous defense-industrial base

has sometimes been achieved by procuring national

systems that cost more, perform less well, or take

longer to procure than foreign-sourced weapons.

France’s heavy reliance on exports also tends to

overshadow domestic procurement needs; in some

cases, foreign contracts for French weapons have

received higher priority than national orders.

Thus, while French procurement policy is generally coherent and well-managed, some critics question its overall effectiveness. In particular, the critics

argue that the political insulation of the French

procurement system has resulted in a defenseindustrial base that is too broad to be competitive,

either economically or militarily. This overextension is suggested by the undercapitalization of the

nationalized defense companies. Furthermore,

~~erre ~~ouche, “L’Ecole de Guerre,” Le Point, MaK. 4, 1991, pp. 35-37.
Lessons in Restructuring Defense Industry: The French Experience ● 17

France’s extensive reliance on national champions

promotes efficiency but lacks the benefits of competition in promoting innovation and reducing costs.

The existence of only one prime contractor in several

key sectors also makes the system as a whole prone

to a certain brittleness. If a monopoly producer like

Dassault Aviation or SNECMA were to go out of

business, France would lose a vital piece of its

defense-industrial base.

Over the past decade, the French armed services

have become increasingly vocal in questioning

DGA’s continued emphasis on domestic production

of the full range of weapon systems, which has led

in some cases to serious delays and cost overruns. A

well-publicized example was the decision to protect

the national program to develop the Rafale fighter

aircraft despite soaring development costs31, diplomatic pressures on France to participate in the

five-country European Fighter Aircraft program,

and the French Navy’s preference for purchasing the

U.S. F/A-18 Hornet to replace its obsolescent

Crusader carrier-based fighter aircraft. A key motivation behind the decision to forge ahead with the

Rafale program was to maintain the design teams at

Dassault and SNECMA. French journalist Jean

Guisnel has described the “collusion” among industry executives seeking to preserve their exclusive

know-how, Air Force officers reluctant to compromise their performance specifications, and DGA

officials determined to exercise their power and

authority .32 Because of the decision to proceed with

the Rafale program, the French Navy will have to

keep its aging Crusader fighters in service until

around the year 2000, when the naval version of the

Rafale is scheduled to replace them. The negative

consequences of this decision for the military

effectiveness of the French Navy during the Gulf

War have already been mentioned.

A final drawback of the French procurement

system is its lack of accountability to the Parliament

and the public. Hidden behind a veil of secrecy,

DGA technocrats make procurement decisions in a

top-down manner, and the lack of effective legislative oversight mechanisms enables the DGA and the

defense industry to shield themselves from objective

criticism. The absence of oversight in this closed,

inbred system introduces a higher potential for abuse

Photo credit: DGA/COMM

A test pilot flies a prototype of the designed

and built by Aviation.

or error. In addition, a dense network of informalities

between the DGA and the defense industry results in

a lack of bureaucratic checks and balances. Although France has conflict-of-interest statutes forbidding ‘‘revolving-door’ moves between government and industry (known as pantouflage in

French), these laws have never been enforced. As a

result, senior DGA officials have moved to highlevel jobs with the major defense firms. (Mobility in

the reverse direction also occurs to a lesser extent.)

Since many top procurement and industry officials

went to the same schools and know one another

socially, this old-boys’ network gives the arms

complex powerful political influence within the

French Government and helps insulate it from

parliamentary and public scrutiny. According to

Kolodziej, the lack of external controls on the

French military-industrial complex “hinders attempts to evaluate independently the economic and

military performance of the arms industry or to

propose feasible and practical alternatives to the

heavy reliance on foreign arms exports in maintaining economic productivity and in supporting French

technological development and competitiveness. ”33

STRATEGIES FOR INDUSTRIAL

RESTRUCTURING

Over the near-term, the major armaments programs launched during the 1980s will slow the rate

 and development of the through the demonstration and cost billion ($6.75 billion).

 en France (Paris: La 1990), PP. 

 op. cit., footnote 22, p. 298.
18 ● Lessons in Restructuring Defense Industry: The French Experience

of decline in French defense budgets. Even so, the

defense-industrial base has already begun to shrink

in response to the combined effects of reduced

spending, increased competition for export markets,

and the growing number of collaborative programs,

which require the sharing of development and

production work with other countries. Diminished

procurement will force a major restructuring of the

French defense-industrial base, with far-reaching

consequences for employment and regional planning.

In 1989, the French defense industry directly

employed about 261,000 people (including about

75,000 engineers), or about 5.4 percent of the

country’s industrial workforce. Taking account of

all the raw materials and components required for

arms production, more than 400,000 French workers

were employed directly or indirectly by the defense

industry .34 As a result of lower export sales and

planned cuts in defense spending, many of these jobs

may be at risk. A wave of aerospace layoffs in

December 1991 was just the beginning; according to

unofficial government estimates, defense-industrial

restructuring could ultimately result in the elimination of between 10,000 and 100,000 jobs. The

French Government and the defense industry therefore face a major challenge in managing the economic and social consequences of cuts in defense

spending.

Because of the strength of French labor unions,

industrial restructuring is more difficult in France

than in the United States. Not only is it costly for

French firms to fire workers, but large-scale layoffs

can trigger strikes. Thus, while U.S. firms can adjust

employment levels on a short-term basis, French

defense firms must engage in long-term social

planning. Another problem is that, for historical

reasons, French defense industries and arsenals are

concentrated far from the border with Germany in

less developed regions of central and southwestern

France, which are heavily dependent on defense

production. (See figure 6.) As a result, closing down

defense plants may result in severe unemployment

in areas that are already economically depressed. In

order to develop an economic conversion plan to

mitigate the social consequences of downsizing the

defense industry, French Defense Minister Pierre

Joxe established a “Restructuring Committee”

within the Defense Ministry on August 30, 1991.35

At the same time, the DGA is pursuing a

restructuring strategy that aims to consolidate the

defense industry but retain its strengths. The goal is

to reduce overcapacity while maintaining sufficient

activity in key defense-industrial sectors to exceed

the threshold of economic production. According to

a parliamentary report, the government’s strategy is

focused along two axes. The first axis seeks to

preserve a broad range of technological competencies in individual firms, while the second axis aims

to give the French defense industry a leading role in

the restructuring of defense production on a European scale.36 Although the DGA provides overall

guidelines for industrial restructuring and intervenes

to ensure the overall coherence of the transition

process, it is up to the companies themselves to take

initiatives for adapting to the new environment

(except in the special case of state-run arsenals). The

major restructuring strategies are summarized in the

following sections.

Commercializing the Arsenals

While the aerospace and defense-electronics sectors in France consist of a mixture of private,

semiprivate, and nationalized firms, the French

Government has traditionally owned and operated

arsenals for land armaments and naval vessels. In

recent years, however, the government has moved to

commercialize these operations, freeing them from

legal constraints and burdensome regulations that

have prevented the most economic use of equipment

and labor. Under French law, government-owned

and operated arsenals are not allowed to work for

commercial advantage and lack flexibility in accounting practices, inventory control, and investment. They cannot produce goods in anticipation of

foreign sales, use export-derived “profits” to finance the development of new products, or keep

production lines open between government orders in

anticipation of foreign sales. Moreover, each production facility must be managed independently,

~D&6gation Wn6r~e pour l’hnernent, L’Indusm”e Fran~aise de ZXfense (Paris: DGA/COMM, June 1990), P. 12.

35 De J3rigmti, op. cit., footnote 6.

36 J~.~~hel Bouchemm Rapport fait au nom de la Commission de la D~ense Nationale et des Forces Armbes (1) sur 1e projet de loi de

programmation (no. 733) relatifd l’kquipment nu”litairepour les anm?es 1990-1993, Assembk$e Nationale, Premkre session ordinaire de 1989-1990,

No. 879, Oct. 2, 1989, p. 683.
Lessons in Restructuring Defense Industry: The French Experience ● 19

Figure 6-Geographical Distribution of Defense-Industry Employment, 1988

Percentage employment in

defense industry

less than 10/0

u 1 to 

❑

 .

%1% 2.5 to 50/0

5 to 7.5%0

❑ greater than 7.5°/0

SOURCE: DGA/COMM

without an overall corporate strategy. Because of

these bureaucratic and commercial inefficiencies,

the arsenals have been unable to compete effectively

in export markets.

In July 1990, the Army arsenal, or Industrial

Group of Land Armaments (GIAT), was converted

through legislation into a nationalized company

called GIAT Industries.37 Although the French

Government still owns nearly all the firm’s capital

and retains considerable influence, GIAT has gained

financial autonomy, access to capital markets, and

decision-making authority. The new company has

set up a personnel department and sales office,

negotiated collaborative agreements with a network

of international partners (including the British firm

v

Vickers and the German firm Rheinmetall), and

diversified its industrial activities into new fields,

such as aircraft cannon pods and subcontracts for the

production of aircraft parts. Nevertheless, the fact

that the more than 11,000 GIAT workers retain their

privileged job status within the civil-service system

still limits the fro’s flexibility.

GIAT Industries’ largest weapons program is the

new Leclerc main battle tank, whose prospects are

uncertain. When the program was launched in 1978,

the French Army planned to purchase 1,400 Leclerc

tanks to replace its existing fleet of obsolescent

AMX-30s on a one-for-one basis. Because of cost

overruns and troop cuts, however, the Army now

plans to procure only 800 Leclerc tanks, and budget

 No. 38, Sept. p. 
20 ● Lessons in Restructuring Defense Industry: The French Experience

Photo credit: GIAT Industries

The new Leclerc main battle tank is produced by GIAT

Industries, formerly a government-operated arsenal and

now a nationalized company.

cuts are likely to reduce the production rate from 100

per year to less than 40.38 As a result, the unit cost

of the Leclerc is expected to reach about F37 million,

or more than $7 million-compared to about $3

million for the U.S. M-1 Abrams tank. Despite this

high price, GIAT Industries still hopes to obtain

major orders for the Leclerc from Saudi Arabia, the

United Arab Emirates, Sweden, and Qatar.39

The last remaining French arsenals are the flighttest centers and aeronautical depots operated by the

Directorate for Aeronautics, which test, repair, and

maintain military aircraft and aero-engines and

manufacture spare parts; and the shipyards run by

the Directorate of Naval Construction (DCN), which

produce all of France’s major warships and submarines. In October 1990, DCN established a private

subsidiary called DCN International to manage its

international marketing and collaborative activities.

Even so, full commercialization and rationalization

of the naval shipyards will take several years

because the DCN’s 26,800 employees enjoy lifetime

job security under a special statute. Although many

of these workers could be paid a bonus to take early

retirement or accept a new job status, the cost of the

transition would be high.

In addition to commercializing the arsenals, there

has been some talk of privatizing the nationalized

defense firms. In September 1991, French President

Mitterrand approved a partial privatization (up to 49

percent) of the entire nationalized sector, including

banks and insurance companies as well as defense

contractors. Nevertheless, even partial privatization

of the nationalized defense firms faces a number of

obstacles. First, it will be necessary to find buyers

who are prepared to pay a good price for the shares,

despite uncertainties over future government contracts and export sales. Second, since the French

Government is bound to remain heavily involved in

defense-industrial policy, people may be cautious

about buying shares in a state-controlled firm whose

priorities and goals may differ from those of the

private investor. Because of these difficulties, privatization of the nationalized defense companies

remains unlikely.

Preserving Core Competencies

Given the changes in the international security

environment and the downward trends in defense

spending and export sales, France is gradually

moving away from its traditional Gaullist emphasis

on national autonomy in arms production. The DGA

has concluded that France no longer has the financial

means to maintain an independent capability across

the full spectrum of weapon systems and must

increasingly rationalize defense production on a

European scale, while concentrating on its competitive strengths. In an effort to reduce overcapacity

and eliminate redundancies, the French Government

has urged defense companies to pare back their

product lines, collaborate with other European firms

that have complementary technological assets, and

focus on “poles of excellence’ where France enjoys

a technical or market advantage, such as fighters,

helicopters, defense electronics, and tactical missiles. 40 Other priority areas include those high

technologies having both military and civil applications (e.g., optoelectronics, satellites, telecommunications) and sectors considered vital for preserving

the independence of the French nuclear deterrent

(e.g., nuclear weapons and strategic delivery systems).

Although the DGA is determined to maintain the

technological potential of the defense industry to

develop the next generation of advanced weapons, it

is up to the individual firms to identify their “core

 F. Future Crucial to Weekly, vol. 16, No. 12, Sept. 12, 1991, p. 499.

39 Jane’ Weekly, vol. 16, No. 24, Dec. 14, 1991, p. 1141.

 op. cit., footnote p. 
Lessons in Restructuring Defense Industry: The French Experience ● 21

competencies." DGA officials will then help preserve them by selectively awarding procurement and

R&D contracts. Dassault Aviation, for example, has

established an internal working group to identify the

technologies it must keep in-house for the design

and assembly of high-performance combat aircraft,

while subcontracting out less critical subsystems

and manufacturing activities. Dassault’s identified

core competencies include new materials, stealth,

computer-aided design and manufacturing, advanced

fabrication technologies (such as superplastic forming and diffusion bonding), and robotics. For Chantiers de l’Atlantique, a shipyard that does both civil

and naval work, the firm’s core competencies lie in

the design of architectural interfaces between a ship

and its communications and weapon systems, while

taking account of such factors as electromagnetic

interference, shock, and noise. Thus, while subcontracting the development of command-control systems, data links, and armaments, Chantiers will

focus on integrating these systems with the vessel’s

superstructure.

Thomson-CSF has chosen several fields in which

to focus its efforts, including electronic warfare,

flight simulators, sonars, radars, and naval combat

systems. For each of these areas, the company has

identified technologies, techniques, and manufacturing know-how that give it a competitive edge in

current and future markets, so that these core

competencies can be preserved and further strengthened. Like Dassault, Thomson-CSF plans to spinoff

nonessential activities to subcontractors with whom

it will establish long-term partnerships. The company has also streamlined its R&D capabilities by

merging design teams in different divisions that do

similar work. For example, two divisions at ThomsonCSF were engaged in developing X-band radars:

low-power radars for combat aircraft and highpower radars for air-traffic control. Since these

systems involve similar technologies and approaches,

the merger of the two design teams has enabled the

company to reduce the total number of engineers

working in this area and to bring some formerly

subcontracted work in-house.

Diversification Into Civil Sector

The DGA has encouraged French prime contractors-and their less visible network of thousands

of subcontractors and suppliers-to limit their

dependence on defense work and expand their

market share in commerical areas. In the current

Figure 7—Thomson-CSF Revenue

by Business Group, 1990

21%

ommunication

nd command

16%

c

23%

SOURCE: Thomson-CSF

environment, those contractors whose economic

survival depends on a narrow range of military

products will be exposed to sharp fluctuations in

procurement, putting them at risk of going out of

business. The more a firm is diversified into the civil

sector, the better it can survive slowdowns in

military or commercial sales-assuming, of course,

that both markets do not decline simultaneously.

Another factor is that many young French engineers

are reluctant to work in the defense industry, either

because the commercial sector appears more dynamic or because involvement with specialized

defense technologies and military secrecy might

prevent them from moving to civil industry later in

their careers. Given these concerns, greater diversification of defense firms into the civil sector should

make it easier to attract qualified engineers.

French defense companies differ in their extent of

diversification. Thomson-CSF obtains 79 percent of

its revenue from defense activities and 21 percent

from civilian ones. (See figure 7.) In the 1960s,

Matra’s business was 100 percent defense, with a

strong concentration on tactical missiles. Over the

next decade, the firm expanded into watchmaking,

automobiles and transport, telecommunications, and

space. Although watchmaking proved a failure,

Matra was more successful in the space and transport

markets, including the production of subway cars

and a small family van called the Renault Espace. By

1979 Matra had a 50:50 civil-military split, and by

1990 the proportions had shifted to 76 percent civil

and 24 percent defense. Today, Matra’s business

activities are led by automobiles and transport (34
22 ● Lessons in Restructuring Defense Industry: The French Experience

percent of sales), followed by missiles (24 percent),

telecommunications and software (24 percent), and

space (18 percent). The company’s long-term goal is

to divide its business equally among the three sectors

of defense/aerospace, transport, and telecommunications. Since Matra’s corporate identity is closely

linked to missiles, however, the firm plans to remain

active in the defense sector.

Constructions Industrielles de la Mediterranee

(CNIM), a midsize company with about 1,000

employees, is currently divided equally between

military and civil work. Its defense products include

bridging equipment and floating bridges for the

French Army, and submarine missile tubes and

launching equipment for the Navy; its commercial

products are cogeneration boilers and other environmental systems. Although CNIM’s military sales

have not yet begun to drop, company executives see

defense cutbacks on the horizon and are gradually

reorienting the firm toward the civil sector.

The French aerospace industry is already fairly

well diversified, falling well below the 60 to 80

percent reliance on defense work characteristic of

U.S. prime contractors. In 1991, commercial business accounted for 52 percent of total industry sales,

exceeding military business for the first time.41

Aerospatiale’s aircraft division is 100 percent civil,

the helicopter division is evenly split between civil

and military, the space and ballistics division is 80

percent military, and the tactical missile division is

100 percent military. SNECMA did 75 percent of its

business in civil aero-engines in 1991 and is

considering a new diversification into industrial

turbines. While the volume of military-engine sales

has remained roughly constant since 1986, it has

fallen sharply as a percentage of total sales. In fact,

SNECMA president Louis Gallois wants to increase

the company’s work on military engines from the

current 25 percent of sales to between 30 and 35

percent to attract more government R&D funding

and help the company ride out fluctuations in the

civil aero-engine market.42

Dassault Aviation is also reducing its dependence

on defense work from the current level of 72 percent

of sales to a target of about 55 percent, while

increasing its involvement in civil aeronautics. The

military side of the house continues to develop the

Rafale fighter, which is not scheduled to enter full

production for the French Air Force and Navy until

the end of the decade. Meanwhile, business aviation

has become a major pillar of Dassault’s corporate

strategy. The company’s Falcon business jets now

account for 25 percent of total sales, and the new

twin-jet Falcon 2000 (developed in collaboration

with Alenia of Italy) is expected to increase the

firm’s civil-aviation activities to 35 percent of sales.

In the civil space field, Dassault is participating

(together with Aerospatiale) in the European

Hermes space-shuttle program. Over the next several years, the company plans to increase its space

activities from the current 5 percent to 10 percent of

sales. Dassault’s Systems Division has also developed an extremely successful computer-aided design system called CATIA, which has been widely

sold to aerospace firm including Boeing. Finally,

although the company has reduced its manufacturing capacity from 16 to 14 plants, it plans to keep the

remaining factories busy with production subcontracts such as the manufacture of composite structures for passenger aircraft.

Several French defense contractors are attempting

to diversify by developing civil spinoffs of military

technologies. Thomson-CSF plans to diversify into

commercial niche markets such as videotelephones,

while Matra has proposed using its Brevel battlefieldsurveillance drone for monitoring borders, forest

frees, and the environment. CNIM originally developed an electron-beam welding system to manufacture missile launch tubes for submarines, but the

company has since used the system to weld sections

of the Ariane 5 commercial rocket and is now

pursuing other commercial markets such as welding

tracks for high-speed trains.

Shift From Production to R&D

With the decline in volume of defense production

and simultaneous increase in complexity of individual weapon systems, the major French defense

contractors-with support from the DGA-are streamlining their production operations and reorienting

the workforce toward R&D and limited amounts of

high-value-added manufacturing. Although fewer

weapon systems are under development than in the

41 Giovanni de Brig~ti, “ Martre Says French Budget Cuts Could Cripple Aerospace Industry,” Defense News, vol. 7, No. 11, Mar. 16,1992, p. 41.

42 pierre Kerloueganand~udRodier, “kPDG de la Snecrna: 11 faut des programrnes militaires ambitieux, ‘‘ L.eFigaroEconomique, Oct. 1,1991,

pp. 1,2.
Lessons in Restructuring Defense Industry: The French Experience ● 23

past, each one is more complex and highly integrated, requiring a greater investment of financial

and human resources. Worldwide, the portion of the

cost of a combat aircraft devoted to electronics has

tripled over the past 20 years, from 10 percent to

nearly 30 percent, and is expected to reach more than

40 percent in next-generation systems. Software

engineering has also become central to weaponsystem development. Advanced combat aircraft, in

particular, require highly sophisticated digital flightcontrol systems that entail a massive software

development effort. (See figure 8.)

As a result of these technological changes, the

development of military systems has undergone a

major shift in emphasis from hardware to software

and from structural and materials engineering to

systems integration. The DGA has accordingly

sought to maintain the competitiveness of the French

defense industry by investing in R&D at the expense

of current production. This investment strategy

should help French firms preserve their technological strengths, putting them in a position to play a

leadership role in future collaborative development

programs with other countries. Dassault Aviation,

for example, plans to retain “a big brain and a small

body” by concentrating on aircraft design, software

development, aerodynamic analysis, project management, and final assembly, while engaging in less

manufacturing. Similarly, Thomson-CSF is reinvesting 8 percent of its profits in R&D, with an

emphasis on design studies, prototypes, software

development, and assembly work. At the same time,

the company has eliminated a number of machining

facilities and subcontracted more of its manufacturing activities.

The overall shift in prime-contractor emphasis

from production to R&D is reflected in humanresource policies: French defense firms are hiring an

increasing number of graduate engineers and a

declining number of production workers. Between

1980 and 1990, Dassault Aviation cut its total

workforce from 15,843 to 12,390 employees. At the

same time, the firm increased the proportion of

graduate engineers and executives from 26 to 38

percent and reduced the share of production workers

from 29 to 11 percent. (See figure 9.) Thomson-CSF

has also changed the composition of its workforce.

In 1986, the company employed 10,000 production

workers and 2,000 software developers. By 1991,

only 5 years later, the proportions had shifted to

5,000 production workers and 7,000 software develFigure 8--Growth in Complexity of Software

for Dassault Military Aircraft

1,000-

Mirage 2000 EAD

900-

 800-

c

 700- Mirage 2000 H

 600-

 500– Mirage 2000 N

 400-

 - Mirage 2000 DA

200 –

Super Mirage

100-

Alpha Jet F1 EQ2 1

I I I I I I I I I 1

1975 1980 1985 1990

SOURCE: Dassault Aviation

opers. The firm also subcontracted 2.5 million hours

of software development in 1991, up from zero hours

in 1986.

With the diminished military threat to Europe and

cutbacks in defense procurement, the length of time

between generations of French military equipment

will increase, resulting in a greater emphasis on

exploratory development and prototyping. This

approach is not entirely new: Dassault has traditionally taken an evolutionary approach to fighteraircraft development in an attempt to minimize

technological risk. Since 1945, the firm has developed more than 150 prototype fighters, most of them

incremental improvements on previous designs.

Prototypes are built around available and proven

engines and incorporate no more than two major new

design features, which are subjected to exhaustive

flight testing before the plane enters production. By

adding only a few novel technologies to each new

fighter generation, Dassault has achieved significant

improvements in performance at relatively low cost

and risk, and has been able to adopt innovations

developed by competitors into its own designs.

Despite the apparent slowness of evolutionary
24 ● Lessons in Restructuring Defense Industry: The French Experience

Figure 9—Changes in Dassault’s Employment Structure, 1980-90

Percent Executives/

40

35

30

25

20

15

10

5

‘ —

— — —

-o- 0- e- * .

---- ------ ----- -------- - -- ---- ---- ---- ------ -— __ - - .- - — --- -- ---- -- --- - --

1980 1981 1982 1983 1984 1985

SOURCE: Dassault Aviation

development, the progression from the Mirage III

fighter of the 1960s to the vastly more capable

Mirage F-1 of the 1970s and Mirage 2000 of the

1980s indicates that substantial improvements in

performance can be achieved without moving to

entirely new designs.43

Jacques Batistella, vice president for industrial

strategy and business development at Aerospatiale,

has urged the French Government to finance the

development of technology demonstrators that would

integrate new design concepts but would not be

industrialized or produced in quantity. Each demonstrator would be built by engineers rather than

production workers, and would explore technologies

and materials for future production aircraft. Thus,

while the military customer would procure a new

aircraft only about every 15 years, the company’s

design bureau would develop prototypes twice as

often. By permitting two small technological leaps

rather than a single giant one, prototyping would

reduce the costs and risks of development. Along

similar lines, SNECMA president Louis Gallois has

called on the European Community to finance the

development of technology demonstrators in the

field of hypersonic airframes and engines.44

38.060/o

11 .34 ”/0

3.47 ”/0

1986 1987 1988 1989 1990

graduate

engineers

Technicians/

draftsmen

Clerical

employees

Product ion

workers

Supervisors

Another trend is that as military systems become

more complex, defense contractors are increasingly

developing upgrades or variants of existing products, such as families of fighter aircraft or engines

based on the same design concept. Dassault, for

example, has been able to convert a basic fighter

configuration-the tailless delta wing—into a large

family of variants tailored to specialized missions

and export markets. The same applies to the

aero-engine sector, where companies frequently

engage in modifications and upgrades of existing

systems. Indeed, as much as 40 years can transpire

between the start of an engine development and the

last sale of spare parts. After SNECMA completes

development of the M88 engine for the Rafale, for

example, the company plans to use the engine core

as the basis for a family of engines designed for

various military and civil aircraft. The engine

variants will incorporate new subsystems that improve thrust or fuel-efficiency.

There is also an expanding market for retrofitting

existing platforms with improved electronic subsystems and armaments. According to Thomson-CSF,

the profit margin from upgrades is equal to that of the

first-sale market, although the volume is much

43 CA:

RAND Corp., report No. September 1973).

 Rodier, op. cit., footnote 42, 
Lessons in Restructuring Defense Industry: The French Experience ● 25

lower. While Dassault naturally prefers to sell new

aircraft, modernization of the electronics and weapon

systems on Mirage and Super Etendard fighters

owned by foreign countries earned the company F3

billion ($579 million) in 1990. Nevertheless, the

retrofit market will primarily benefit defenseelectronics firms and other subcontractors that

produce components and subsystems rather than the

prime contractors that integrate and assemble the

final products.

Dual-Use Technologies

French industry officials contend that outside the

nuclear-weapons field, relatively few technologies

are uniquely military. The commercial market has

become the primary driver in a growing number of

defense-related areas, including satellites, electronic

components, computers, flat-panel displays, and

telecommunications. It is therefore increasingly

possible to integrate civil technology into military

systems. A prominent French example is the Helios

military surveillance satellite, which relies on technology developed by Matra for its SPOT commercial remote-sensing satellites.45

Thomson-CSF executives contend that in the

future, the defense-electronics industry will be based

on dual-use technologies, which will be maintained

primarily in the civil sector. As a result, the French

Government will need to fund only a limited number

of uniquely military technologies to preserve the

nation’s defense-industrial competencies. Dual-use

technologies could also provide a nucleus from

which the defense base could be expanded rapidly in

case of war. The main constraint on dual-use

technologies is the different tradeoff between cost

and performance in the civil and defense sectors, as

reflected in the more demanding performance requirements of military specifications. Nevertheless,

many civil technologies are said to provide 80

percent of the performance of military systems for a

fraction of the cost. Efforts at civil-military integration may therefore compel procurement officials to

decide which performance requirements are truly

critical and to revise the existing military specifications to permit greater use of commercial technologies.

Given these trends, the DGA supports the development of dual-use technologies with promising

Photo credit: 

The military satellite,

shown here in an artist’s conception, is scheduled for

launch in 1994.

military applications. Unlike Germany, where research on dual-use technologies is funded by civil

ministries, dual-use research in France is the primary

responsibility of DRET. The directorate coordinates

its funding efforts with the civil ministries to ensure

an efficient division of labor and to leverage its

investment. For example, while the Ministry of

Industry supports research on civil electronics,

DRET provides targeted funds for work on products

with specific military applications, such as electronic warfare systems and infrared seekers.

Another important factor is that the French

Government imposes no legal, regulatory, or accounting barriers to combining civil and military

activities in the same facilities (other than security

restrictions and military specifications). SNECMA,

for example, plans to use the core of the M88

aero-engine being developed for the Rafale fighter

as the basis for a new civil aero-engine, the M123,

45 is Satellite Pour de la or Satellite for Observation of the Earth. It is 

Earth-resources satellite but has spatial resolution.
26 ● lessons in Restructuring Defense Industry: The French Experience

Photo credit: Chantiers de I’Atlantique

The Floreal, the first of six ocean-capable patrol vessels for

the French Navy, was procured for one-third the cost of a

standard frigate by using merchant-marine rather than

military specifications.

that will power a 100-seat” passenger aircraft. Some

French defense contractors are also consolidating

their military and civil design teams to maximize

flexibility and reduce the need to hire and fire. At

Matra, there is considerable mobility of development personnel among the company’s Defense,

Transport, and Space divisions. Similarly, all of

Dassault’s military, civil, and space systems are

designed with the same CATIA software, enabling

engineers to move easily from one project to

another. French civil-military integration is in sharp

contrast to the situation in the United States, where

specialized auditing and accounting rules and process specifications create high barriers between civil

and military production, forcing diversified defense

contractors to establish separate commercial and

military divisions.

An example of the French military’s adaptation to

the defense industry’s move toward civil-military

integration is the development of a new class of

naval frigates for routine peacetime missions, such

as showing the flag, patrolling coastal fishing areas

and oil platforms, drug interdiction, and policing

French overseas territories. In the face of significant

budget cuts, the French Navy determined that it did

not need highly capable and expensive warships to

perform these routine missions. Instead it could

make do with ocean-going patrol frigates capable of

defending themselves against one or two simple

threats-such as an aircraft or a few hostile ships—

rather than several at once.

As prime contractor for the program, the French

Navy hired a commercial shipyard, Chantiers de

l’Atlantique (owned by the Alcatel-Alsthom GEC

Group), which specializes in the design and construction of passenger liners and had not built a naval

vessel in 15 years. In lieu of military specifications,

the Navy permitted Chantiers de l’Atlantique to use

somewhat less rigorous ‘safety of life at sea’ norms

conceived for merchant-marine and passenger ships.

Moreover, while the patrol frigates are equipped

with the same cannons and missile systems as

standard frigates, they lack a computerized battlemanagement system integrating them into a naval

task force. Because of these economies, the patrol

frigates were developed and built at one-third the

cost of frigates built to military specifications. (Of

course, the limited defensive capabilities of the

patrol frigates could prove problematic if they

confront missile threats.) Chantiers de l’Atlantique

is currently developing a logistical transport ship for

the French Navy that will rely on a mixture of civil

and military norms.

Consolidation and Foreign Acquisitions

An important question facing the DGA is whether

to consolidate the French defense industry further in

sectors where there are still two or more prime

contractors, such as aeronautics (Dassault, Aerospatiale), defense electronics (Thomson-CSF, Electronique Serge Dassault), and missile systems (Matra,

Thomson-CSF, Aerospatiale). While Dassault has

so far fought successfully to retain its independence,

the company’s financial position is precarious, and

a merger with Thomson-CSF or Aerospatiale might

well strengthen the international competitiveness of

the French defense industry. In any event, a decision

of this magnitude would be made not by the DGA

but by the Prime Minister.

In the meantime, the DGA has used its power of

tutelle to encourage competing French prime contractors to establish joint ventures for mutual benefit.

The purpose of this policy is to reduce the duplication and overcapacity resulting from the parallel

development of similar weapon systems, and to

enable national firms with very different corporate

cultures to learn how to work together. For example,

after years of intense rivalry between Thomson-CSF

and Aerospatiale in the field of antiaircraft systems,

Thomson agreed in September 1991 to transfer

production of its new VT1 missile to the Euromissile

consortium, made up of Aerospatiale and its German
Lessons in Restructuring Defense Industry: The French Experience ● 27

Photo credit: Thomson-CSF

The VT1 antiaircraft missile, developed by Thomson-CSF,

will be manufactured by the competing Euromissile

consortium, an arrangement benefiting

both companies.

partner Deutsche Aerospace. The VTl missile will

then be integrated into Thomson’s Crotal antiaircraft system and Euromissile’s competing Roland

system. This arrangement will benefit both sides:

Euromissile will avoid the high cost of developing

a new missile for the Roland, and the market for

Thomson’s VTl missile will expand by a factor of

5, enabling the firm to amortize its development

costs.% Such a rationalization of the national industry should enhance France’s ability to compete and

cooperate in the broader European defense market.

Leading French defense contractors have also

sought to reinforce their technological strengths and

penetrate new markets by acquiring foreign firms

and creating overseas subsidiaries.47 GIAT Industries, for example, has been able to expand its market

share and offer a full range of defense products by

buying out France’s two other ammunition manufacturers (Matra-Manurhin Defense and Luchaire) and

two Belgian companies (PRB, a manufacturer of

large-caliber ammunition, and Fabrique Nationale, a

producer of small arms and ammunition) .48 Similarly, Thomson-CSF has sought to achieve a‘ ‘critical mass” in its defense activities by pursuing an

aggressive international expansion strategy. The

firm has sold off some of its nondefense activities

and acquired several foreign defense fins, including two subsidiaries of the Dutch electronics giant

Philips, ensuring a sufficient cash flow to continue

developing new technologies. In April 1992, Thomson moved to expand its presence in the large U.S.

defense market by bidding $255 million for the

missile division of LTV Aerospace and Defense Co.,

an American defense contractor.49

Collaborative Programs

Although France has collaborated with allies

since the- late 1950s on the development and

production of numerous items of military equipment, it has recently changed its overall approach.

From the 1960s through the 1980s, France emphasized bilateral collaboration with its European neighbors because such projects offered greater control

and lower transaction costs. Joint development

programs with Britain included the Puma, Gazelle,

and Lynx helicopters, the Jaguar attack aircraft, and

the Martel missile, while those with West Germany

included the Transall military transport, the Alpha

Jet trainer, the Milan and Hot antitank missiles, and

the Roland antiaircraft missile system. France also

negotiated coproduction arrangements with countries that purchased French weapons to help “offset’ procurement costs and thereby promote sales.5o

But Gaullist imperatives caused France to collaborate mainly on systems of secondary military importance, such as helicopters, trainers, and transport

aircraft, while preserving national autonomy in

“strategic’ areas such as nuclear weapons, nuclearM “Thomson Aligns System With Aviation Week & Space Technology, vol. 135, No. 10, Sept. 9, 1991, p. 27.

476$EWope parts,” Jane’ Weekly, 16, No. 4, 

 de “TheFrenchDefenseI ndustry: International Expansion is the Future Survival, vol. 5, No.49, Dee.

3, 1990, p. 10.

49 Government 

asked the Bush to block the sale on grounds of national security. See “Thomson Wins vol. 7, No. 15, Apr.

13-19, 1992, p. 2; Anthony L. Jr., “Thomson Global Plans Call for Infusion at Aviation Week & Space

Technology, vol. 136, No. 16, Apr. 20, 1992, pp. 64-65; Lewis, “Pentagon Examines Thomson’s Offer,” Jane’ Weekly, vol. 17,

No. 17, Apr. 25, 1992, p. 686.

50 of to transfer of economic or

industrial benefits. Such deals may include giving the purchasing country a share of the development and/or production of the weapon system, providing

subcontracts to local suppliers, making supplementary transfers of technology, or buying back unrelated goods and services. As arms-export markets

have grown more competitive, offset arrangements have become ubiquitous, but they remain controversial.
28 ● Lessons in Restructuring Defense Industry: The French Experience

capable delivery systems, and high-performance

combat aircraft.

The legacy of this go-it-alone strategy lingers in

several strictly national programs launched during

the 1980s, including the Leclerc tank, the Rafale

fighter, the SNECMA M88 turbojet engine, and the

RBE-2 airborne radar for the Rafale, jointly developed by Thomson-CSF and Electronique Serge

Dassault. Nevertheless, these systems appear to be

the last of a vanishing breed. In the future, it is

unlikely that France will be able to bear the cost of

purely national aircraft programs or to support the

industrial infrastructure of subcontractors and suppliers built up to support such programs. Indeed,

during the ceremony marking the rollout of the first

naval prototype of the Rafale on December 9, 1991,

DGA director Yves Sillard told reporters that all

future French combat aircraft will be developed with

European partners.51 Similarly, SNECMA has announced that the M88 aero-engine will be its last

independent program. In 1990, the company offered

an olive branch to its traditional archrival RollsRoyce by agreeing to cooperate in basic research on

engines for next-generation fighter aircraft.52

Despite France’s new emphasis on arms collaboration with European partners, however, the DGA

remains wedded to a policy of collaboration a la

carte so that France can retain a foothold in all major

defense-industrial sectors, particularly at the system

level. DGA officials seek industrial alliances in

which both partners benefit synergistically from

complementary technologies and know-how. In this

way, the French industry can gain access to European defense markets while preserving its competitive strengths in defense electronics, aeronautics,

and missiles.53

The DGA has also become more amenable in

recent years to selective off-the-shelf purchases of

foreign systems. During the 1980s, for example,

France purchased AWACS early-warning aircraft

and C-130 long-range transports from the United

States. In addition, the French and British defense

ministers signed a reciprocal-procurement agreement in December 1987 under which each country

pledged to consider purchases of defense products

from the other. While this agreement has failed to

produce a major expansion of bilateral defense trade,

the stated desire of both governments to cooperate

has given French and British firms an incentive to

establish joint ventures and other collaborative

arrangements. According to Gerard Chauvallon,

head of the DGA’s Directorate of International

Relations, “France and Great Britain are natural

partners for defense cooperation because both countries are determined to maintain a technological base

and because their industries are of similar size. ”54

France-British joint ventures are under way in the

fields of airborne radar, sonar systems, surface-to-air

missiles, and air-to-air missiles, and the two countries have begun preliminary talks on the joint

development of a next-generation fighter, a maritime patrol aircraft, and a new class of anti-air

frigate. 55 In another major departure from past

French defense policy, which postulated a strictly

national nuclear deterrent, Paris and London have

discussed the possible codevelopment of a longrange, air-delivered nuclear cruise missile known as

the Air-Sol Longue Portee (ASLP).

The DGA is also placing a strong emphasis on

collaborative R&D with other European countries in

order to stretch the French defense budget. Ever

since the creation in 1976 of the Independent

European Program Group (IEPG) as a forum for

planning joint armaments programs among the

European members of NATO (except Iceland),

France has been a leading proponent of greater

European cooperation in defense research. Because

the IEPG excludes the United States, France views

this forum as a means to strengthen European

defense technology and offset American predominance. In November 1990, at France’s request, the

IEPG nations established a cooperative defense

R&D program called EUCLID (European Cooperation for the Long-term in Defense), which is jointly

funded by the participating governments and firms.

According to a DRET official, France invested F150

million in cooperative defense research in 1990,

51 Giov~ de Brig~h,“ “U.K., France Discuss Fighter,” De$ense News, vol. 7, No. 6, Feb. 10, 1992, p. 37.

52 Alex~&a Schw@brod, ccsNECMAFlirting withRolls-Royce, “ LesEchos, Apr. 6,1990, p. 10. (Translated in FBIS-WEU-90-095, May 16,1990,

p. 24.) See also, J. A. C. I.Ewis, “UK, France Plan EFA Successor,” Jane’ sDefence WeekZy, vol. 17, No. 9, Feb. 29, 1992, p. 337.

53 Boucheroq op. cit., footnote 36, P. 587.

~ Citd h Giovauni de Bfigi@ “Frigate Study Heightens U.K.-Franco Cooperatio~” Defense News, vol. 7, No. 7, Feb. 17, 1992, pp. 11, 16.

55 De Brig~ti, Op. Ck, fOO(llOk? 51> P. 3“
Lessons in Restructuring Defense Industry: The French Experience ● 29

F300 million in 1991, and plans to spend F500

million by 1994. By then, 20 percent of French

defense R&D will be carried out jointly with allies.

For French defense companies, international collaboration offers both benefits and costs. On the plus

side, joint projects enable firms to share the costs and

risks of R&D, lengthen production runs to achieve

economies of scale, gain access to foreign markets,

and embed procurement programs in a political

framework that makes them less likely to be

canceled. On the minus side, collaboration is often

difficult and time-consuming because of the need to

harmonize national military requirements and procurement calendars, negotiate worksharing arrangements, and reconcile different corporate procedures

and management styles. Since collaboration inevitably entails economic inefficiencies (e.g., redundant

final assembly lines in the participating countries),

joint programs tend to be more expensive than

strictly national ones, yet because the total costs are

shared, each partner usually pays less.56 In the words

of a French aerospace executive, ‘‘international

collaboration did not develop because it corresponded to a spontaneous desire on the part of firms,

but rather because they could not devise any less

unsatisfactory solutions. ’ ’57

Despite such reservations, the French defense

industry is responding to economic realities by

teaming with other European firms on tactical

collaborations involving single projects or longterm strategic alliances over a series of projects. In

general, firms must gain some experience in tactical

collaboration with a particular partner before they

are willing to enter a strategic alliance. Aerospatiale

currently collaborates with foreign firms on twothirds of its products, including 97 percent of its

aircraft, 62 percent of its tactical missiles, and 100

percent of its space products, with the sole exception

of ballistic missiles. Matra’s 5-year business plan

downplays export sales to developing nations and

seeks instead to carve out a large share of the

European market for air-to-air missiles by forming

alliances and cross-ownership arrangements with

GEC-Marconi (UK), Ericsson (Sweden), Deutsche

Aerospace (Germany), and Alenia (Italy). ThomsonCSF has also reached across France’s borders to

establish joint ventures with several European partners. In May 1991, for example, Thomson and

Britain’s GEC-Marconi, Europe’s two largest manufacturers of airborne radars, announced the formation of a jointly owned company, GEC-Thomson

Airborne Radars (GTAR) to develop active-array

radars for the next generation of fighter aircraft.

Many analysts believe that such a collaboration

offers Europe’s only hope of maintaining a competitive airborne-radar industry into the next century .58

An important step in facilitating European arms

collaboration would be to reform the traditional

system of juste retour (’ ‘fair return’ ‘), in which work

in a joint program is allocated among the participating national firms in exact proportion to the size of

each government’s financial investment or anticipated purchase. The rigidity of this formula results

in inefficiencies because work is assigned according

to each fro’s nationality rather than its qualifications. Moreover, the design and production of a

complex weapon system is often divided arbitrarily

among the participating firms on the basis of

financial rather than functional criteria. For these

reasons, the DGA seeks greater flexibility in the

application of juste retour. Instead of dividing up

work in exact proportion to national investment on

each project, France would prefer a proportional

allocation of work averaged over several collaborative projects carried out during a period of 5 to 10

years.

In contrast to the expansion of French arms

collaboration with its European allies, FrancoAmerican programs have remained largely elusive.

For many years, Paris’s pursuit of national autonomy in defense production and its political rivalry

with Washington created major obstacles to collaboration between French and U.S. defense fins, but

the French industry has evinced a growing interest in

transatlantic ventures. The most successful example

has been the codevelopment of the CFM56 aircraft

engine by SNECMA and GE. Launched by the U.S.

and French Presidents in the early 1970s, this

program has been a remarkable commercial success

in both the civil and military transport markets, with

fiFor m in-depth analysis of collaborative armament programs, see U.S. Congress, Office of lkehnology Assessrnen4 Artnz”ng Our Allies:

Cooperation and Competition in D@ense Technology, OTA-ISC-449 (Washington, DC: U.S. Govemrnent Printing OffIce, May 1990).

57 J~-C~ude -u,D~torof~t-tio~Business at s~c~, cited ~Y+ Cwhennec, “Colla~mtion~te~tio~ehl’A6rospatiale,”

Air et Cosmos, No. 1148, June 20, 1987, p. 12.

58 @ov~ de Brig~h,“ “Thomsorq GEC ‘Ram on Airborne Radars,” Defense News, vol. 6, No. 43, Oct. 28, 1991, p. 16.
30 ● Lessons in Restructuring Defense Industry: The French Experience

sales of some 10,000 engines worth approximately

$38 billion. 59 The SNECMA-GE collaboration has

functioned well because of the quality of the

product, the complementary technical strengths of

the two partners, and the lack of direct competition

between them in other areas.60 Recently, SNECMA

and GE launched the development of the GE90, a

new civil engine with potential military applications; the worksharing arrangement is 25 percent for

SNECMA and 75 percent for GE.

To date, however, the successful SNECMA-GE

alliance remains the exception rather than the rule.

Other transatlantic programs have been hindered by

the structural mismatch between the French and U.S.

defense-procurement systems, nontariff barriers such

as ‘buy American” regulations and security restrictions, and the reluctance of U.S. defense contractors

to transfer advanced technology to potential competitors. When the United States has entered into large

collaborative arrangements with its European allies,

it has usually done so under NATO auspices or

because Congress has fenced off money for this

purpose (e.g., the Nunn Amendment programs).

Even in such cases, transatlantic programs have

generally involved low-priority weapon systems and

have often failed to reach fruition. A recent example

is the NATO program to develop a terminally guided

warhead for the Multiple Launch Rocket System,

from which the Pentagon withdrew in favor of a

strictly national development effort. Because of such

experiences, the French have come to view the

United States as an unreliable partner in collaborative arms programs.

Integration of European Defense Industries

Despite the rapid growth of European arms

collaboration, true cross-border mergers between

defense firms are rare. In 1990, the helicopter

divisions of Aerospatiale and the German firm

Deutsche Aerospace merged to form a joint-venture

company called Eurocopter, which is developing the

Tiger antitank helicopter. (Eurocopter is also collaborating with the Italian firm Augusta and the Dutch

firm Fokker on the NH-90 utility helicopter, scheduled to enter service in the late 1990s.) A joint

venture, however, is not a truly independent entity

with its own stockholders and full power of decision.

Since the two parent companies own all of EurocopPhoto credit: DGA/COMM

The helicopter is being developed by

 a joint venture of and the German

firm Aerospace.

ter’s shares, the firm must take account of their

respective interests. Obstacles to true cross-border

mergers are the lack of European business law

governing translational companies and the difficulty of integrating state-owned French defense

firms like SNECMA and Aerospatiale with their

British and German counterparts, which are primarily in the private sector.

Another barrier to the rationalization of the

European defense industry is lingering nationalism.

Instead of buying the best or cheapest defense

equipment available on the market, European governments protect inefficient national suppliers for

economic and political reasons, such as a reluctance

to eliminate jobs in national defense industies or to

spend taxpayers’ money on foreign weapons. These

policies have resulted in massive overcapacity, high

procurement costs, and incompatible military specifications. In the coming years, the growing financial

demands of military R&D programs and the need for

extended production runs will create pressures for an

integrated European defense market. But although

the European Community (EC) plans to remove all

remaining trade barriers by the end of 1992 and to

strengthen joint security organizations like the

Western European Union, major political barriers

59“SNEW Dynamic Relationship,” at Headquarters, 

 Publishers, 1986), p. 136.
Lessons in Restructuring Defense Industry: The French Experience ● 31

stand in the way of a European free market in

defense products.61

The apparent obstacle is Article 223 of the EC’s

founding Treaty of Rome (signed in 1957), which

permits member-states to exempt defense production and trade from common EC regulations on

grounds of national security. In fact, since Article

223 does not require the exclusion of national

defense industries from the common market, the real

problem is a lack of political will. At the EC Summit

at Maastricht, Netherlands, in December 1991, the

12 heads of state rejected a proposal by European

Commission President Jacques Delors to repeal

Article 223. The reason for this hesitation is that

European leaders face a chicken-and-egg problem:

defense-industrial integration assumes a level of

political and military interdependence for which

many of them are not yet ready.

France, in particular, has opposed any European

Commission involvement in regulating defense

trade on the grounds that defense is a special case.

French political leaders support the creation of a

European defense “identity” founded on a strong

defense technology and industrial base. They also

believe that European economic and political integration is the key to France’s future prosperity

and-paradoxically-the only way France can regain sufficient economic and political weight to play

the leadership role to which it aspires. But since

some countries enjoy a technological edge in key

defense-industrial sectors (e.g., Germany in tanks),

opening up the European defense market to free

competition would result in the failure of less

competitive producers and a gradual drift toward an

international division of labor at the primecontractor level. DGA officials contend that because

each European country has particular security requirements to which its national defense industry is

geared specifically to respond, free trade in defense

goods must await a common European defense

policy that takes different national needs into

account. In the words of SCAI official Jean Fournet,

moving too quickly toward a free market ‘‘would

risk disrupting major ongoing programs and bring

further turmoil to a European industry already facing

upheaval in the wind-down from the Cold War.” 62

Thus, despite the economic logic of rationalizing

the European defense industry on a continental

scale, the actual evolution of a common armaments

market will depend on the rate of progress toward

European political union. With the blurring of the

line between civil and military technologies, however, the European Commission in Brussels will

become increasingly involved in the defenseindustrial sector through its responsibilities for

mergers, trade, R&D, state subsidies, and regional

policies.63 In December 1990, the EC member-states

agreed to consider the gradual expansion of the

Community’s jurisdiction in the security area, including ‘‘economic and technological cooperation

in the armaments field, coordination of arms-export

policy, and nonproliferation."64 It is also likely that

the growing number of cross-national alliances and

mergers between European defense companies will

promote consolidation of the industry, particularly if

the EC member-states pool their technical and

financial resources to develop the costly next

generation of fighter aircraft, space vehicles, and

missile-defense systems.

Given these trends, European defense-industrial

integration is likely to move forward at a slow but

deliberate pace. Because of the small size of the

European defense market, it seems inevitable that

some industrial sectors will eventually be dominated

by a single multinational prime contractor with no

competitors. At the subcontractor and supplier level,

however, large numbers of small and medium-sized

firms will continue to bid for work in a competitive

framework.65

CONCLUSIONS

In response to the sweeping changes in the

security and fiscal environments, the French Government is seeking to preserve the technological

competencies of its defense-industrial base while

enabling French firms to play a leading role in

61 Under tie 1992 in~~-marketplan scheduled to come into force onDec. 31, 1992, the EC mtions have pledged to abolish ~~t~ duties ~d

tariffs, hiumonize national health and safety standards, and otherwise eliminate barriers to the iiee movement of goods, services, and persons within the

borders of the EC. The resulting unifkd market of 340 million Europeans will become the world’s largest single trading bloc.

62 ~~Fmce Swds Firm on Defence, “ Jane’ sDefence Weekly, vol. 17, No. 1, Jan. 4, 1992, p. 26.

63 Marc Rogers, “Ailing Industries May Get EC C@” Jane’ sDefence Weekly, vol. 17, No. 7, Feb. 15, 1992, p. 227.

~ European Council, “Presidency Conclusions, Part I,” Rome, 14-15 December 1990, document No. 424/1/90 (OR.f) REV I, p. 6.

6s ~~Fmce sbds Firm on Defence,” op. cit., fOOtnOte 62.
32 ● Lessons in Restructuring Defense Industry: The French Experience

restructuring defense production on a European

scale. One of the primary roles of the General

Delegation for Armaments (DGA) is to ensure the

long-term health and competitiveness of the industrial base, even when this goal involves tradeoffs

against short-term military capabilities. These priorities are reflected in the move to convert the

government-owned arsenals into nationalized companies and to continue funding defense R&D at a

high level despite the drop in procurement. Budgetary constraints are also forcing the French Government and the defense industry to concentrate resources on a limited number of fields in which they

enjoy a competitive advantage, to diversify further

into civil markets and emphasize dual-use technologies, and to enter into a growing number of strategic

alliances with other European firms.

Despite the obvious differences between the

political and organizational structures of the French

and American procurement systems, the French

experience with defense-industrial restructuring offers some useful lessons for U.S. policymakers.

Export Dependence

The French case suggests the economic and

political drawbacks of overreliance on export sales

to support the defense-industrial base-in particular,

to help finance defense R&D. Not only has the

export imperative harmed French foreign-policy

interests in some cases (e.g., arms sales to Syria,

Libya, and Iraq), but the recent downturn in export

sales has limited the ability of French defense firms

to remain at the technological leading edge.

Civil-Military Integration

In the United States, the obstacles to the greater

use of commercial products and processes in the

defense sector are primarily legal and regulatory

rather than technological. Hundreds of U.S. laws and

regulations control the way defense business is done

and differentiate it from the civil sector, so that

diversified firms are compelled to set up separate

defense divisions. In contrast, France has no legislative, regulatory, or accounting barriers between civil

and military procurement, enabling firms to use

commercial practices in the defense sector. This

flexibility has enabled French firms to produce

military and civil products in the same factories and

to rely extensively on dual-use technologies and

processes, improving efficiency and reducing overhead costs.

Integrated Decisionmaking

The French Government integrates defenseindustrial policy with other industrial, economic,

and social policies in a systematic way to develop a

broader strategic-industrial perspective. In addition

to the DGA and the Ministry of Defense, the

Ministries of Economics and Finance, Industry and

Foreign Trade, and Transportation participate in

various aspects of defense-industrial planning. In

contrast, the United States segregates economic and

security decisionmaking in different bureaucracies

and has few mechanisms for resolving conflicts

between economic and national-security interests.

Multiyear Budgeting

Although the French Parliament must approve the

annual defense budget, it votes only on an overall

spending envelope rather than individual line items

and weapon systems. As a result, the DGA is able to

ensure stable, multiyear funding for high-priority

weapon systems, a task that is virtually impossible

in the United States. While the U.S. political system

mandates greater congressional oversight of the

defense budget, multiyear defense budgets are

theoretically possible.

International Arms Collaboration

France’s growing commitment to collaborative

armaments programs after along period of hesitation

may presage a similar increase in American international involvement. As U.S. defense procurement

shrinks and defense technology becomes increasingly globalized, there will be growing incentives

for transatlantic collaboration in defense R&D and

production. While the integration and final assembly

of weapon systems will likely remain under national

control, a growing number of components and

subsystems containing the best available technology

will be developed overseas. Thus, the United States

may increasingly procure the innards of its weapon

systems from foreign suppliers, including France.

Incremental Development Strategy

During the Gulf War, the United States demonstrated its clear leadership in defense technology—

the result of a massive, 40-year investment in

defense R&D. Although the French defense industry

lags about a half-generation behind the United States

inmost categories of military equipment, France has

often chosen to compromise on performance in order
Lessons in Restructuring Defense Industry: The French Experience ● 33

to limit program costs and technological risk or to

develop systems suitable for export to developing

nations. In the post-cold-war era, France’s evolution-

, low-risk approach to weapons development

may be more appropriate to the emerging fiscal and

security conditions than the traditional U.S. approach of seeking quantum leaps in military performance at enormous cost.

In conclusion, since the late 1980s, France has

faced the difficult challenge of restructuring and

shrinkin“ g its defense-industrial base in response to

declining defense budgets and export sales, while

retaining its core design and manufacturing capabilities. Today, the United States confronts a similar

difficult transition. Although some of the actions

taken by the French Government are not appropriate

to the American economic and political context,

U.S. policymakers can still draw some useful

lessons from the successes and failures of French

restructuring strategies. Overall, France has managed defense R&D and procurement to preserve a

broad-based national defense industry for the future, but at some cost to its current military

capability. In contrast, the United States has managed defense R&D and procurement to obtain the

best current military capability, but at some cost to

the long-term health of its defense-industrial base.

As the defense industry restructures, U.S. policymakers will need to find an optimal balance

between these two strategies.
Appendix

Interviews With French Government and Industry

Officials (Paris, October 1991)

General Delegation for Armaments, Ministry of

Defense

Jean-Paul Gillyboeuf, Director, Central Service for Industrial Affairs (SCM)

Jean Fournet, Director, 0ffice of International Industrial

Affairs

Isabelle L’Ebrellec, Office of European Affairs

Paul-Ivan de Saint Germain, Director, Directorate of

Research, Studies, and Techniques (DRET)

Ministry of Industry and Foreign Trade

Jean-Paul Devilliers, Senior Defense Official

Aerospatiale

Jacques Batistella, Corporate Vice President for Industrial

Strategy and Business Development

Chantiers de l’Atlantique

Jean-Mattieu de l’Epinois, Naval Sales Manager

Constructions Industrielles de la Mediterrande (CNIM)

Michel Tauzin, Marketing Director for Military Materiel

Gen. Georges Etchanchu, Military Adviser

Roland Marcillat, Chief of Commercial Service, Defense

System Division

Dassault Aviation

Gilles Marcoin, Vice President for Business Development

GIAT Industries

Norbert Charbit, Director General

Bernard Bourge, Managing Director for Europe

Michel Barrier, Director of Research and Development

Matra

Philippe Cothier, Director, Department of Strategy and

Development

SNECMA

Michel Coquelet, Director, International Business Development

Thomson-Brandt Armaments

JOSe A. Massol, Chief Executive Officer

Thomson-CSF

Jean Boulange, Area Manager, International Division

Pierre Lepetit, Director of Technological Cooperation,

R&D Division

Jean-Pierre Pujes, General Management Division

Bertrand de Fouchier, Vice President for North America,

International Division

Pierre Gosselin, Vice President for Manufacturing and

Quality Assurance

U.S. GOVERNMENT PRINTING OFFICE’ : 1992 0 - 323-947 QL:3

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