Thyssenkrupp Submarines

Bidding for Australia's Billions

thyssen krupp submarines_dpa
Part of the "U36" submarine in 2013 during a ThyssenKrupp Marine Systems ceremony in the German city of Kiel.
  • Why it matters

    Why it matters

    Thyssenkrupp could substantially expand operations of its submarine unit if it wins an order worth $35 billion to build submarines for Australia.

  • Facts

    Facts

    • Australia wants to buy submarines and frigates and spend about €60 billion, or $63.5 billion, over the next 20 years.
    • Thyssenkrupp is one of the firms bidding for the contract, pitting it against Japan and France’s DCNS.
    • The German shipyard division Thyssekrupp Marine Systems will bid for the construction of both submarine and surface vessels.
  • Audio

    Audio

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Thyssenkrupp Marine Systems (TKMS), a division of German steel maker Thyssenkrupp, could see its sales increasing soon. The company has officially entered the race to win what is one of the biggest contracts ever to be awarded by a country’s navy.

Australia aims to modernize its naval forces from the ground up and to do so will spend the equivalent of about €60 billion, or $63.5 billion, in the next 20 years. In addition to patrol boats and frigates, the country plans to acquire up to 12 new submarines.

The German shipyard division Thyssenkrupp Marine Systems will bid for the construction of both submarine and surface vessels.

Insiders anticipate a tough competitive battle, one that Thyssenkrupp, based in Essen in Germany’s industrial Ruhr region, stands a good chance of winning. In March, the Australian government invited companies from Japan and France to submit bids for the submarine deal. The invitation to bid for building the surface ships is expected to take place in the next round.

Thyssenkrupp wants to complete a large share of production in Australia, which would satisfy an important demand coming from Australian lawmakers and the public.

Thyssenkrupp is entering a newly developed submarine, code-named “Endeavour,” into the race. Although the vessel is still in the design stages, it is already considered one of the world’s best conventional submarines today. The ship is about 90 meters, or 295 feet, long and will reportedly be capable of diving for up to a month at a time.

The Germans want to complete a large share of production in Australia, which would satisfy an important demand coming from Australian lawmakers and the public. The country cannot upgrade its navy on its own, primarily because of the relatively modest technical expertise of domestic shipyards. Thyssenkrupp is offering a technology transfer that the competition is unwilling to provide.

The German company, which also produces elevators, car parts and wind turbine bearings and was almost bankrupt five years ago, can count on broad political support. Uwe Beckmeyers, state secretary in the German Ministry for Economic Affairs and Energy, visited both the Australian capital Canberra and the port city of Adelaide, thereby demonstrating the level of political support the project has in Berlin.

This hasn’t always been the case. Although Thyssenkrupp Marine Systems is very well connected in German defense circles, “it lacked the federal government’s support until the end of last year,” an insider said critically.

The situation changed a year ago when German Chancellor Angela Merkel attended the G20 summit in Brisbane, Australia. She reportedly campaigned for a German bid with Australian Prime Minister Tony Abbott. She argued that Germany could behave neutrally, whereas Japan is hampered by tensions with China. Mr. Abbott reportedly agreed.

With her remark, the chancellor addressed one of the two key problems that have stood in the way of upgrading the submarine fleet for years: the geopolitical consequences of purchasing Japanese submarines, and the practically uncompromising demand by Australian politicians that a new submarine had to be built in Australia, at least in part.

There is hardly any other defense project that Australian politicians have kicked down the road as much as the acquisition of new submarines.

There is hardly any other defense project that Australian politicians have kicked down the road as much as the acquisition of new submarines. Prime Minister Abbott had initially all but given his Japanese counterpart and friend, Shinzo Abe, the assurance that Japan could provide Australia with submarines in the 4,000-ton Soryu class.

In February, however, responding to pressure from the parliament, Mr. Abbott changed his position and called upon Germany, Japan and France to submit their bids. On the French side, state-controlled DCNS wants to offer a conventionally powered 4,000-ton ship similar to the nuclear-powered “Barracuda.”

Japanese companies Mitsubishi Heavy Industries and Kawasaki Heavy Industries, builders of the Soryu submarine, initially entered the race. Now Mr. Abe’s administration has taken over and the Japanese government is acting as the sole supplier.

Thyssenkrupp is very likely to present a concept that will include building at least a portion of the fleet in Australia.

“It’s possible that a prototype will be built in Kiel, while the remainder of the ships will be assembled in Adelaide by employees trained in Germany,” an person familiar with the matter told Handelsblatt. A local shipyard would probably also handle maintenance of the vessels over the next few decades, a substantial contract in itself.

Observers in Canberra see this approach as the only acceptable solution from the standpoint of domestic policy.

Nevertheless, purchasing a Japanese submarine off the rack remains an option. It’s an open secret in Canberra that Washington, as Australia’s most important ally, has a strong interest in promoting greater Japanese involvement in the region.

American officials stress that they have no intention of compelling Australia to purchase the Japanese submarine. However, “the goal is to strengthen the United States-Australia-Japan axis – in opposition to China, as it becomes more and more dominant and aggressive in the Pacific,” an observer, who declined to be named, told Handelsblatt.

Thyssenkrupp aims to put up a tough fight for the contract, as it struggles for the future of its own shipyards. Chief executive Heinrich Hiesinger would prefer to withdraw from the defense business, with its recurring corruption problems. The marine division’s books are being carefully audited, once again, to investigate insider allegations over bribes paid in connection with a contract in Turkey.

Corruption is not a concern in Australia, however. The bidding process is transparent, and the country is considered irreproachable from a compliance standpoint.

If Thyssenkrupp wins the bid for the submarines or the surface ships, the chances that it will get out of the shipbuilding business will actually increase. The company had discussed a sale of the division more than a year ago, but talks with a potential buyer fell apart because Thyssenkrupp felt that the offer price was too low. A contract with Australia worth billions would change this.

If Thyssenkrupp Marine Systems were sold, it would fulfill the wish of one of Thyssenkrupp’s former executives, the late Berthold Beitz, who died in 2013 at the age of 99. Mr. Beitz, chief executive and chairman between 1953 and 1989, had expressed the wish that his company would no longer earn money with the sale of weapons.

But when the head of the precursor company, Krupp, and later honorary chairman of the merged corporation, died two years ago, his wish remained unfulfilled. The company is still deeply involved in the defense industry, with its navy yard in the northern port city of Kiel.

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Urs Wälterlin covers Australia, New Zealand, Oceana and Southeast Asia for Handelsblatt. Mr. Wälterlin lives near Australia’s capital, Canberra. Martin Murphy specializes in the automotive, defence and steel industries. To contact the authors: waelterlin@handelsblatt.com and murphy@handelsblatt.com

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