Handelsblatt Exclusive

Defence Ministry Clashes With Warship Makers Over Cost

Taufe der Korvette Braunschweig
The old Corvette ships were inaugurated in 2006. Picture source: DPA

A German government order for five navy corvettes from shipbuilders Lürssen and Thyssen-Krupp Marine Systems is at risk of being shelved or cancelled since the companies are demanding €2.9 billion for the order: almost double the planned budget, Handelsblatt has learned.

Defense Minister Ursula von der Leyen had planned to place the order before the parliamentary break this summer. The navy urgently needs additional ships for missions in the Mediterranean as part of international efforts to pick up shipwrecked refugees, stop weapons smuggling and protect NATO’s southern flank.

The price cited has met with fury and astonishment in the German defense ministry because the corvettes aren’t newly developed vessels. They are based on an existing – and ageing – design.

If the dispute drags on it will be the latest in a long line of delays and cost overshoots in the procurement of tanks, ships and aircraft that Ms. von der Leyen had promised to sort out when she took office in 2013.

The K130 corvettes were to be ordered as a stop-gap because an original order for larger multi-purpose war ships had been delayed until after the September general election by a dispute between the ministry and manufacturers.

In ordering the corvettes, the defense ministry had based the likely cost on the money it spent on a previous order of five K130 vessels, and had budgeted for an outlay of €1.5 billion.

Project leader Lürssen and Thyssen-Krupp Marine Systems want €2.9 billion because the ministry has asked for expensive upgrades, such as the ships’ electronics systems, and the order has been expanded to include the construction of two training camps to train soldiers how to use the corvettes, one person involved in the matter told Handelsblatt.

But the price tag of close to €3 billion could trigger public criticism. “This was extremely inept coming just a few months ahead of a general election,” said another source. The premium being demanded was difficult to fathom and was likely aimed at boosting income from a contract that had been deemed safe, the source added.

The case is a potential fiasco for the companies and embarrassing for the ministry, which is failing to get large procurement projects completed in a timely, cost-efficient manner

Deputy Defense Minister Katrin Suder, a former McKinsey consultant recruited by Ms. von der Leyen to solve the chronic procurement problems, telephoned  Lürssen as soon as she received the estimate. Staff in her ministry said the conversation that followed was heated.

The firms are now looking for ways to lower the price, either by cutting the costs of components or reducing the performance of the vessels, said industry sources. If they don’t come up with a cheaper offer, the deal could be delayed until next year or even outright cancelled.

The government will also have to pay for refits of the existing corvettes which are based on an 18-year-old design and need to be upgraded — that in itself will cost hundreds of millions of euros.

Lürssen, Thyssen-Krupp and the ministry all declined to comment.

The case is a potential fiasco for the companies and embarrassing for the ministry, which is failing to get large procurement projects completed in a timely, cost-efficient manner.

It comes amid growing pressure from US President Donald Trump on Germany and other NATO members to boost military outlays in line with the alliance’s agreement that members should spend 2 percent of GDP on defense annually by 2024.

Germany is planning to spend €37 billion on defence in 2017, which amounts to around 1.2 percent of the country’s GDP.

Family-owned Lürssen needs the order to keep its yards fully utilized. TKMS would find the loss of the contract easier to weather because it’s about to get an order for 2 new submarines that insiders said will be worth €1.85 billion.

Germany’s military, the Bundeswehr, urgently needs all kinds of new equipment after two decades of budget cuts in the wake of the end of the Cold War. Everything from tank transport vehicles to uniforms, night vision equipment to aircraft, air defense systems and modern warships are considered short in supply.

Hans-Peter Bartels, the parliamentary commissioner for the armed forces, estimates that the defense budget would need to be €10-€12 billion higher than the current €37 billion just to plug the current gaps in equipment and personnel.

That makes it all the more frustrating that even projects that have long since been agreed and budgeted for regularly get bogged down in years of wrangling between the government and industry.

The new Airbus A400M military transport plane is beset with technical problems and still isn’t flying reliably even though it was ordered in 2003 by seven NATO nations – Belgium, France, Germany, Luxembourg, Spain, Britain and Turkey – to give Europe an independent military transport capability.

The Puma infantry fighting vehicle and the F-125 class of frigates fell short of what their manufacturers promised.

The ministry told lawmakers last month that it would not complete a contract with European weapons maker MBDA for a multi-billion euro missile defense system, MEADS, by the end of the current legislative period as planned. Defense officials are skeptical whether the company can really deliver the system.

Meanwhile defense companies are complaining that the government is insisting on firm commitments at a premature stage, and is too quick to impose penalties.

That’s because Ms. von der Leyen is determined to tighten up the process of defense tenders and establish the same standards that govern civilian tenders.

But the Federal Association of the German Security and Defense Industry argues that defense contracts aren’t comparable to civilian ones because the only customers are the Bundeswehr and other European armies.

All sides plan to get it right with the new MKS 180 multi-role warship. The agreement was for the navy to deliver a clear set of requirements and companies to provide a detailed and realistic offer.

But even that has been delayed until after the election. “Thoroughness before speed,” said Ms. von der Leyen’s spokesman, adding that the time spent getting the contract right would be saved later in avoiding alterations.

The government is confident the MKS 180 will be delivered. Germany’s soldiers serving on ageing vessels in the Mediterranean will believe that when they see it.

 

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

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