Friday, February 23, 2007

What's happening to Airbus?
by Simon Tilford

Top of the agenda when Jacques Chirac meets Angela Merkel today in Berlin will be the crisis at Airbus. The European aircraft manufacturer has been forced to suspend a restructuring programme following inferference from both the French and German governments. However frustrating it is for the Germans to accept, the futurer success of the company would be best served by it becoming more French.

The increasingly bitter political spat threatens to render decision-making impossible at EADS, the Franco-German-Spanish parent company of Airbus. What does the debacle say about Europe? How can the future competitiveness of one of the region's most striking corporate success stories be put at risk by disagreements over where the company's aeroplanes should be assembled?

The catalyst for the latest bust-up was German fears that Germany would bear the brunt of Airbus's planned corporate rationalisation. The company needs to reduce the number of production facilities and to outsource more production in order to speed up product development, and prevent a repeat of the problems that have forced it to postpone the launch of its new super-jumbo.

The events of the last week have been very dispiriting for those who see Airbus as an example of successful European industrial collaboration. The French prime minister, Dominique de Villepin, announced that Airbus would make 10,000 job cuts before Tom Enders, the German joint-chief of Airbus, knew anything about it. This, in turn, prompted unprecedented criticism of the French prime minister and Francois Gallois - Airbus's French co-chief - by the German Chancellor. Even the German press, usually so reticent about criticising France, has become stridently critical of alleged French mercantalism.

Airbus is a huge European success story. The company, established thirty years ago as a joint-venture between the British, French and Germans stood neck and neck with Boeing by 2000. This was no mean achievement. And contrary to Boeing's claims, Airbus's success has not been down to susidies alone. If anything, Boeing is more heavily subsidised than its European rival, even enjoying huge US government support when it was the unchallenged market leader.

However, Airbus's history as a joint-venture in a heavily politicised industrial sector means it has a less than optimal production network. Production is spread across Europe, with work shared out roughly according to how much subsidy each country comes up with. Final assembly takes place in Toulouse and Hamburg. The development of new models is always accompanied by wrangling over which country should be responsible for which bits of the plane and where it should be put together. This was one reason for last year's decision by British Aerospace to sell its 20 per cent share in Airbus to EADS.

The unfamiliar confrontational tone being adopted by the Germans has caught the French off guard. Angela Merkel has shown herself to be much less willing to compromise Germany's interests in the name of Franco-German harmony. In many ways, a more self-interested Germany would be good for Europe. For example, it could open the door to meaningful reform of the EU budget. It could strengthen the Commission against the protectionist impulses of the French. A more critical German approach to the country's relations with France would also enable Germany to foster stronger relations with other EU member-states.

But Airbus is the wrong issue to take a stand on. The problem for Germany is that the French are right - it would now make commercial sense to concentrate assembly in France, in order to maximise economies of scale and minimise the duplication of unnecessary costs. Indeed, one reason Airbus opted to construct a second assembly line in Hamburg was because it was difficult to source aerospace components in Germany. The German aerospace sector is relatively undeveloped compared to France and the UK and the German government wanted something to show for its subsidy. There was never a strong commercial logic for a second assembly line.

A more French Airbus would not mean the sourcing of all components in France - if decisions are taken commercially the wings of Airbus aircraft, for example, will continue to be manufactured in the UK, which has the most experience in this area. Similarly, most of engines will continue to be supplied mainly by GE of the US or Rolls-Royce of the UK. German companies would be free to tender for contracts. But it is hard to see how it makes sense to assemble planes in Hamburg.

Of course, a declining German role in Airbus would inevitably mean France having to finance a higher proportion of state financial support for Airbus, such as launch aid to develop new models. It may make sense for Airbus to become more French, but this will not be a free lunch for France.

Simon Tilford is head of the business unit at the Centre for European Reform.

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