ARMS TRADE

Masters of Business and War

  • Why it matters

    Why it matters

    German arms manufacturers lose one in three contracts to rivals from France, Britain or the United States, which receive more political support from their governments, say sources in the German defense industry.

  • Facts

    Facts

    • German arms exports rose during the first half of 2016 to a record figure of €4 billion, according to a government report, and more growth is predicted in coming years.
    • The German weapons industry as a whole has grown annually since 2010 by almost 8 percent, easily outpacing the rest of German industry.
    • German defense contractors set standards worldwide, from KMW’s Leopard 2 tank to the Heckler & Koch G36 assault rifle.
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Kampfpanzer Leopard
A Leopard 2 A6 tank, produced by KMW. Source: DPA

Even the Spanish morning sun couldn’t brighten the mood recently at an Airbus hangar just south of Madrid.

Dirk Hoke, the new chief of Airbus Defence and Space, a division of the Airbus group, had invited his 500 most important employees to the meeting, and many feared the European aeronautics firm was in for more cutbacks.

Instead, Mr. Hoke conveyed a radiant future. The mechanical engineer and former Siemens executive announced a five-year plan with more business in unmanned aircraft, increased digital services and cyber-defense. The division would explore more than 20 new products and expected double-digit growth, he said, particularly in the United States, the world’s largest arms market.

“The targets are ambitious,” Mr. Hoke said. “But we will reach them.”

The mood is similarly upbeat in the rest of the German armaments industry. Arms exports rose during the first half of 2016 to a record figure of €4 billion ($4.4 billion), according to a government report, and more growth is predicted in coming years.

The largest employers in the industry have more orders than ever. Armin Papperger, head of the Rheinmetall military technology and auto parts group, is also promising double-digit growth.

And the German weapons industry as a whole has grown annually since 2010 by almost 8 percent, easily outpacing the rest of German industry.

All this comes in an era of continuing conflicts in the Middle East and huge influxes of war refugees — which point to the shadowy side of the business and amplify the political debate over morality in the arms trade.

The industry — with some 220 companies producing goods worth €30 billion in Germany — is heavily dependent on shifting political outlooks.

“You can’t define key national technologies and then pull the economic rug out from under them.”

Ulrich Grillo,, president, Federation of German Industries

If, for example, Berlin reduces its military procurement budget because suddenly something else is more important, revenues drop at Rheinmetall, ThyssenKrupp and other armament makers.

Or if the government no longer considers Saudi Arabia a dependable partner, Airbus is immediately affected — because every foreign deal must be approved by the Federal Security Council, a committee consisting of the chancellor and selected ministers.

Since the current government never openly endorsed the arms industry, business had limped along for some time. Companies like Airbus scaled back their military business or, like Carl Zeiss, got out of it all together. The number of employees sank from 500,000 to 136,000.

Sigmar Gabriel, the economics minister and head of the center-left Social Democratic Party (SPD), summed up the attitude of government leaders who criticize making money with weapons of war: “It’s a disgrace that Germany numbers among the largest armaments exporters,” he said.

Ulrich Grillo, president of the Federation of German Industries, or BDI, complained about such treatment. “You can’t define key national technologies and then pull the economic rug out from under them,” he said.

Frank Haun, co-head of KNDS, the joint venture of Munich tank manufacturer Krauss-Maffei-Wegmann (KMW) and French weapons maker Nexter, also protested. “Berlin treats us like a mistress,” he said. “Everyone wants what we offer. But they would prefer us to be dead, if only no one saw them in the act of murder.”

Still, the industry has received a boost of late. Terrorism threats and aggression by countries like Russia have brought the issue of defense back to the front.

Defense Minister Ursula von der Leyen of the conservative Christian Democrats (CDU) had been keeping the industry on a short leash because of numerous cost overruns and delivery delays. But now she has promised the German Armed Forces €130 billion in investments until 2030.

And throughout the world, police forces and domestic security agencies are putting more money into protecting the public. Their global spending has risen from €40 billion to €280 billion since 2010.

weapons-for-the-world-01

The industry also has a reputation for secure jobs, because employers are technologically among the best in the world and do their balance-sheet homework. And there is no need to fear disruption by new players from Silicon Valley.

The truth is that the arms industry may be socially despised, politically straight-jacketed or morally condemned, but it’s a flourishing business for a sizeable group of German large and mid-sized businesses. They have evolved from court purveyors and military suppliers into companies with an awareness of civilian concerns. And their products are so much in demand that they have survived political restrictions, so far at least.

The new German arms miracle is happening across the country: In Oberndorf in southwestern Germany, for example, where Heckler & Koch builds pistols and assault rifles. Or in the tank factories of KMW and Rheinmetall at Kassel. Or in the Bavarian town of Manching, in the outskirts of Ingolstadt, where Airbus builds the Eurofighter combat jet.

But nowhere is the recipe for success more evident than in an unassuming commercial district in Rellingen, just outside Hamburg in northern Germany. It is the home base of Autoflug, a successful mid-sized company that specializes in aerospace and defense technologies.

Chief Executive Andreas Sedlmayr is the third generation to head the company, which has €40 million in revenues and 250 employees. He is intimately familiar with all aspects of the business – from the smallest product component to details of German export law. For almost 100 years, Autoflug has specialized in rescue and safety in the field of aviation. Its products include parachutes and harnesses, as well as safety seats for helicopters and armored vehicles.

In spite of their olive-green color, the seats don’t seem particularly military at a first glance. But they are elaborately high-tech and give a tank crew a significantly higher chance of survival if they run over a mine.

“We save lives: The tiniest details are crucial,” said Mr. Sedlmayr. “And that makes us an engine of innovation.”

Bundeswehr sendet Kampfhubschrauber nach Afghanistan
A "Tiger" military helicopter in a Bundeswehr training exercise. Source: DPA

In contrast to almost all other countries except the United States, there are no state-owned companies in the German armaments industry – only private-sector firms with an attention to detail, quality and innovation that in many cases borders on the obsessive.

“The industry has massive engineering knowledge far beyond mere precision mechanics,” said Frank Witte, an armaments specialist at Deloitte consulting. For example, until it sold its armaments-electronics division, the Airbus Group had more computer specialists than German software giant SAP.

So German defense contractors set standards worldwide, from KMW’s Leopard 2 tank to the Heckler & Koch G36 assault rifle.

Their products extend also to the periphery of the industry — for example, containers for transporting and storing battle tanks by WEW Container Systems.

WEW is based in Weitefeld in western Germany and is a subsidiary of Teka, which manufactures commercial kitchen and bath products. It has some €40 million in revenues and dominates the premium segment of the military water and fuel tank business, with about €400 million in annual sales.

“Thanks to special paint coatings, our water and gasoline tanks are almost invisible to enemy radar,” said WEW chief executive Ulrich Bernhardt.

Another strength of German armament makers is highly specialized individual components, such as Autoflug’s seats. Others include parts for tanks, such as Rheinmetall’s smooth-bore barrel that remains stable even in the heat of continuous fire. Or indestructible automatic transmissions from Renk, a MAN trucks subsidiary. Or diesel motors that run on almost any type of fuel and are made by the Rolls Royce subsidiary MTU Friedrichshafen. Or chains from Diehl.

“Here German companies often enjoy undisputed supremacy, so that their products are purchased even by the United States, which otherwise is restrained regarding imports but wants to give its soldiers the best protection,” said Daniel Darling of the U.S. market research firm Forecast International.

This sort of inventiveness means many suppliers are in high demand from foreign armaments producers, which don’t widely publicize high-class German workmanship in their weapons.

Many countries don’t buy complete German weapon systems because they feel obliged to other countries such as France. For example, the United Arab Emirates orders French Leclerc tanks but equips them with many parts made in Germany.

No company embodies this final element of the economic miracle of the German weapons industry as much as does the Diehl family in Nuremberg. Its headquarters in the medieval inner city resembles a fortress — the path to the conference room in the rear building includes intricate stairways and a scuffed-up freight elevator.

But the vision of the head of the family, Thomas Diehl, is extremely clear: “Strength lies in diversity,” he said.

Under the 65-year-old’s leadership, the company has significantly expanded its armaments business. Popular military products include the Iris-T guided missile and Simone surveillance sensors for ships. But armaments account for only 13 percent of the company’s more than €3 billion in revenues. The grandson of the founder, for instance, also invested in auto parts and an internet-capable heating regulator.

In other countries only a few firms combine civilian and military business, like U.S.-based Boeing or Thales in France. But in Germany most arms makers think like Mr. Diehl. Even KMW, long focused solely on tank production, also earns money with truck training systems.

There’s little sense in combining the two areas, said Peter Fey, an arms expert from Dr. Wieselhuber & Partner, a Munich-based consulting firm focused on mid-sized companies. The reason, he said, is “because of the divergent requirements, for example in research or marketing.”

But the two commercial fields can support each other. Rheinmetall’s chief executive Mr. Papperger said the combination promotes more of a free-enterprise culture and attention to costs in its armaments division.

Also, he explained, “technical progress in the civilian sector often supports technology in the armaments business – and vice versa.”

The military specialists also profit from the foreign experience of their colleagues in the civilian sector. Since the latter have customers in almost all countries even at mid-sized companies, sales staff in the armaments division have an easier time than their counterparts at rival firms that mostly have less foreign experience.

“This allows us to compensate for at least some of the disadvantages imposed by strict German export policies,” said a Rheinmetall manager.

But German armament companies still face hurdles and competition. ThyssenKrupp, for example, was beaten by the French firm DCNS in Australia’s call for bids to build submarines worth €35 billion.

“We no longer have a secure monopoly even with the best equipment,” noted Mr. Witte.

So the competition isn’t sleeping, and other countries deliberately promote their weapons industry. One-third of contracts are lost to rivals from France, Great Britain or United States, which receive better political support from their governments, said sources in the German arms industry.

Above all, the industry must improve its public image and build a more stable relationship with the government that is more resilient to changes in the political climate. That’s difficult because two opposing tendencies now characterize the debate.

On one hand, Europe is groaning under a record number of refugees from Africa and the Middle East. Migrants are the flip side side of the arms business boom. Weapons exported by Germany can pass from dependable recipient countries into crisis areas. From this point of view, exporting arms means importing crisis. Up to now, the industry hasn’t found a way to counter the argument.

At the same time, however, current wars and conflicts have sharpened political and public awareness of being dependent on military forces, including an armaments industry that must be equally strong. That has loosened public purse strings for military investments.

“We save lives: The tiniest details are crucial. That makes us an engine of innovation.”

Andreas Sedlmayr, Chief Executive, Autoflug

The German arms industry dreams above all of a reliable business outlook. If it can no longer expect orders from the country’s armed forces, then it hopes at least for development contracts – and for limited but calculable export opportunities.

Those were last offered by the center-left coalition government of Social Democrats and Greens under Chancellor Gerhard Schröder from 1998 to 2005, said Heinz Schulte, a political expert and head of Griephan information services.

Mr. Schröder of the SPD and his vice chancellor, Joschka Fischer of the Greens party, monitored things strictly, but they made decisions in weeks instead of years, said Mr. Schulte.

And there were clear criteria oriented toward the interests of German policy – unlike current Vice Chancellor Gabriel’s interest in courting arms opponents in his SPD, as well as the opposition Green and Left parties that are possible coalition partners after the 2017 general election.

A clear political line would also be helpful in defending the interests of the German arms industry, in the face of a consolidation that is imminent in Europe.

Last February German Defense Minister Ms. Von der Leyen and her Dutch counterpart Jeanine Hennis-Plasschaert took a big step toward European military unity. Starting in 2018, the German naval anti-terror unit will be absorbed into the Dutch navy, while the Dutch battle-tank unit will join Germany’s First Tank Division.

“Our goals are far more extensive,” agreed the two ministers.

In the opinion of Florian Hahn, a defense expert from the conservative Christian Social Union, the goals should include European export guidelines and joint purchases of military combat equipment.

“The higher number of units leads to lower costs and prices,” explained Mr. Papperger, the head of Rheinmetall. And it eases cooperation between European nations when countries concentrate on their individual strengths instead of wasting money by buying all types of weapons.

At first glance, the model would seem to harm the domestic armaments industry, since Germany would no longer decide on its own about its military budget. But armaments managers remain optimistic.

“It may be that our industry, and especially myself, are viewed by many as fossils or dinosaurs,” said Mr. Diehl. “But we are extremely adaptable.”

This article first appeared in business weekly WirtschaftsWoche. To contact the author: ruediger.kiani-kress@wiwo.de 

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