World of War

All Guns Blazing at Rheinmetall

Source: Rheinmetall press image
Rheinmetall is hunting growth.
  • Why it matters

    Why it matters

    Rheinmetall makes car parts and defense equipment but has far-reaching plans to expand and enjoys the support of the German government, which backs consolidation in the industry.

  • Facts

    Facts

    • Germany’s Rheinmetall makes car parts and military technology; its plans to buy submarine manufacturers and marine equipment makers would bring its defense revenues to €5 billion.
    • Rheinmetall also wants to buy Krauss-Maffei Wegmann, a defense company which makes tanks and generated €1 billion in sales of defense technology in 2012.
    • KMW is pursuing an alliance with France’s Nexter, a defense company of a similar size, but this is opposed by German politicians.
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Germany’s Rheinmetall, the tenth largest weapons manufacturer in Europe, has ambitious plans to dominate the Continent’s arms market.

The company currently earns slightly more revenue from its auto parts business than its military arm but chief executive, Armin Papperger, wants to take advantage of political support for consolidation in the sector to boost its defense arm.

Economics Minister Sigmar Gabriel has said he believes that German defense firms should consolidate to cope with the falling number of contracts being awarded in Germany and many western countries.

Mr. Papperger is keen to play a major role in these plans.

He is considering taking over Thyssen-Krupp’s marine systems business, which recently said it is aiming for annual sales of €1.3 billion ($1.7 billion). Handelsblatt sources say initial talks have already taken place although both firms have refused to comment.

Mr. Papperger is particularly interested in the submarine systems business, where Krupp is an industry leader.

But he has a bigger vision, to make Rheinmetall a leading European manufacturer, dominating land and water weaponry, the way Airbus dominates the aviation industry, with the government’s full support.

“I am behind all of Rheinmetall’s plans to expand its base,” Rainer Arnold, the SPD’s defense spokesperson, told Handelsblatt.

Mr. Papperger could go even further by taking over one of Airbus’ subsidiaries such as Atlas Elektronik or Optronics. Industry sources suggest that Tom Enders, Airbus’ chief executive, is considering selling these this year.

Atlas is one of the key suppliers to Thyssen-Krupp’s marine systems technology. Optronics makes precision measuring instruments, surveillance cameras and laser systems.

Mr. Papperger is also making intense efforts to take over Krauss-Maffei Wegmann, or KMW, a tank maker based in Munich.

Both firms currently produce the Leopard 2 battle tank, the Puma infantry fighting vehicle and the Boxer armored personnel carrier.

Frank Haun, the chief executive of KMW, is working towards a merger with Nexter, the firm’s French competitor. But German politicians in both the ruling center-right Christian Democrats and the center-left Social Democrats oppose this plan.

If all Mr. Papperger’s plans come to fruition, Rheinmetall, which is currently listed on the M-DAX, would double its defense sales to nearly €5 billion. This would create a national champion of proportions not seen since the Second World War.

After the United States and Russia, Germany is the third-largest weapons exporter of weapons but its firms are comparatively small; on a list of the world’s largest producers of weapons, Rheinmetall ranks 30.

Now Mr. Pappenger wants Rheinmetall to join the big league of manufacturers but the route will not be straightforward.

KMW’s attempt to establish a deal with France’s Nexter are opposed by politicians who fear the deal could be disadvantageous for Germany.

“I am behind all of Rheinmetall’s plans to expand its base.”

Rainer Arnold, SPD’s defense spokesperson

KMW’s Mr. Haun hopes a merger with the French firm will help with the sales of tanks in the Middle East. But the economics minister, Mr. Gabriel, recently underlined that “restrictions on German defense exports also apply in cooperation projects.”

If the talks fail or Mr. Gabriel vetoes a deal with the French firm, this would re-open the doors for Rheinmetall.

Rheinmettal is also pondering a possible deal with Thyssen-Krupp which is considering selling its shipyards in the medium term.

Both these deals will require patience, and political goodwill. Rheinmettal is prepared to wait. It may even be willing to throw in its auto business, with its annual sales of €2.5 billion, as part of a possible deal.

There could also be more coming up for sale very soon.  At Airbus, a strategic review of its defense business could result in the sale of some divisions.  Mr. Enders is frustrated at Mr. Gabriel’s refusal to allow armament sales to states outside the North Atlantic Treaty Organization.

rheinmetall_2
Rheinmetall plans on buying the naval operations of Thyssen-Krupp. Sources: Colourbox

 

But behind the scenes, there is movement as politicians from the two ruling parties and in two government departments seek to mold the industry.

It is the Social Democrat Mr. Gabriel who has undertaken talks with firms in the sector about his export policy rather than Defense Minister Ursula von der Leyen, a Christian Democrat.

Observers have said he is the driving force in these talks, and as the vice chancellor, he is discussing these with Chancellor Angela Merkel rather than Ms. von der Leyen, his cabinet colleague.

Mr. Gabriel has tightened policy for weapons exports but has sought solutions with firms and another round of talks is planned for November; he is also expected to give a talk about the principles of his weapons policy in the coming weeks.

The economics minister is taking more of an interest in the defense industry than Ms. von der Leyen, who tends to avoid meeting with representatives from defense firms.

By contrast, Mr. Gabriel has played a subtle game, winning  approval from his party colleagues for stopping weapons exports to the Middle East, while appeasing his trade union support by helping re-organize and grow the industry.

This article was translated by Allison Williams. To contact the authors: hoppe@handelsblatt.com, fasse@handelsblatt.com, murphy@handelsblatt.com

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