MILITARY CONTRACTS

Difficult Maneuvering Around Warship Deal

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Angela Merkel’s coalition government wants to finalize a deal to purchase five warships before federal elections in September. Source: Stefan Sauer / DPA

Shipyard manager Friedrich Lürssen is a man with striking determination. Together with his cousin, he turned Bremen-based Lürssen Werft into Germany’s leading shipbuilder, primarily by acquisitions. If a takeover target was unwilling and resisted, like Hamburg-based Blohm + Voss, he waited patiently and then achieved his goal after all.

And he can use this perseverance right now. The German Ministry of Defense wants to order five new K130 corvettes. They are supposed to be built by a consortium composed of Lürssen and Thyssen-Krupp Marine Systems (TKMS), the shipyard subsidiary of Thyssen-Krupp. Since these firms had already delivered five K130 in recent years, they were given the contract without a call for bids.

However, competitor German Naval Yards lodged a complaint with the federal cartel office and was able to chalk up a win. Last week, the authorities in Bonn didn’t go along with the defense ministry’s argument, according to which the deal was urgent and only the old consortium would be able to build the ships. Now the deal with a volume of around €2 billion ($2.25 billion) is on ice.

But the ministry has until the middle of next week to appeal the decision of the antitrust authority. “We are thoroughly reviewing the decisions of the federal public procurement chamber and will then make a decision on what action to take,” a ministry spokesperson said.

Sources within the government say an appeal is likely. Representatives of the shipbuilding industry are counting on the case going before a court of appeals – if no alternative solution is found. “The ministry could once again award the contract to Lürssen und TKMS, citing national security,” said one source in Berlin. This may not be in accordance with German practice with defense contracts, but it is possible according to EU law.

The question is whether the government and industry are doing themselves a favor with another order for the K130.

One way of dealing with the complaint would be to include German Naval Yards, Europe’s biggest private shipbuilder, in the consortium, the source told Handelsblatt. The owner, Lebanese-French businessman and shipbuilding magnate Iskandar Safa, is hoping to export naval vessels from his German locations. “If German Naval Yards isn’t supplier of the home navy, then I have no chances to export,” he explains.

If that were to happen, the contract could yet be finalized before the parliamentary elections in September. Then the funds to finance it could be released during the last meeting of the budget committee at the end of June, a participant in the negotiations said.

But the question is whether the government and industry are doing themselves a favor with another order for the K130. According to information obtained by Handelsblatt, the corvettes don’t meet current safety and environmental standards. The planning for the ships dates back to the turn of the millennium. But in order to avoid having to put the contract out to tender, the outdated construction plans need to be binding.

The K130 corvette has not brought much joy to the German navy. In fact, the ship has been an unmitigated disaster. Five corvettes were previously delivered with delays of up to four and a half years and showed considerable design deficiencies. Gears broke, and the air in the ships was temporarily so toxic that the soldiers became sick.

It is already foreseeable that the new ships won’t be able to be delivered before 2022. Components such as on-board electronic systems, weapon systems and air conditioning need to be redesigned, said an individual involved in the planning and this could take years.

So the K130 is demanding quite a bit of patience – but that’s certainly nothing new for Friedrich Lürssen.

 

Martin Murphy covers the steel, car and defense industries for Handelsblatt. Donata Riedel covers economic policy for Handelsblatt. To contact the authors: murphy@handelsblatt.com and riedel@handelsblatt.com.

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