Weak dollar remains French bane

 - June 11, 2007, 12:00 PM

The competitiveness of the French aerospace industry continues to be battered by the historic weakness of the U.S. dollar against the euro. The country’s labor laws aren’t helping matters and the industrialists are looking to France’s new government to instill a new approach to employment.

This is the diagnosis and prescription offered by Dassault Aviation chief executive Charles Edelstenne in his capacity as chairman of French aerospace industry group GIFAS on the eve of the Paris Air Show. But despite talking openly about the tough challenges facing the group’s members, he insisted that, overall, 2006 was an “outstanding year” for the country’s aerospace firms.

“Revenues are up, exports reached an all-time peak and orders remain strong,” Edelstenne told Aviation International News. “But the euro/dollar exchange rate continues to have a devastating impact on the industry’s capacity to fund research and development from cash flow.” In his view, the French government needs to actively promote exports, especially for small and medium-sized companies and in the defense sector, as well as make employment laws more flexible.

Need for Leadership
Edelstenne and his fellow French business leaders are clearly looking to President Sarkozy for new leadership. The GIFAS boss said he had been particularly attentive to Sarkozy’s declared employment policies. “He has said he would legislate on this subject because even companies that need more people to increase production–and there is a market–don’t hire readily and are not able to easily lay off people when necessary,” Edelstenne explained. “We will see what the new government says in the coming months.”

But the omens aren’t necessarily good for the captains of the French aerospace sector. Last year, when EADS tried to close its loss-making Sogerma subsidiary, senior government ministers intervened to prevent this move–a step that many political observers interpreted as a naked sacrifice of business efficiency for political expediency.

Sarkozy was a prominent member of this interventionist government and so it remains to be seen whether he will truly deliver on his electoral rhetoric.
“My feeling is that politicians’ behavior will change regarding industrial problems,” commented Edelstenne. “Sogerma was sold to TAT Industries, and in the end it seems to work. But the unions there must take into account the reality of today’s very competitive world where you cannot give more and more because there are competitors with lower costs.

“Labor laws should not compel companies to keep employing people if they are not needed,” he continued. “Politicians are accepting this little by little. Mentalities are changing and we are hoping to find an acceptable solution from the government.”

But despite its relatively high labor costs, the French aerospace industry, according to GIFAS, remains competitive with low-cost competition from Asia and other parts of the world. The GIFAS chairman argued that the industry’s workforce is highly trained with professionals who are faithful to their companies. Staff turnover is low–perhaps partly because layoffs are virtually impossible–and French industries generally master a high level of technology.

“The infrastructure is good and we have a strong French market,” said Edelstenne, brimming with optimism. “There is also a European dimension because [for non-European companies] going into France means entering the European market and France can be an acceptable solution. We would be very competitive without the dollar/euro problem.”

Small and medium-sized French aerospace companies continued to be under extreme pressure because of the weak dollar and France’s rigid employment rules. Edelstenne insisted that French companies are still able to compete in the world market but he added that the dollar/euro exchange rate imbalance continues to be their “biggest headache” and that market conditions are particularly harsh for small and medium-sized companies.

“I don’t see any structural solution except for smaller companies subcontracting to low-cost countries,” Edelstenne told AIN. “And for the time being I don’t see any political solution on the euro/dollar question because of the U.S. [trade] deficit and European policy, as France is no longer master of its own currency rates.

“The G8 nations and the European Bank are very happy with the currency rates but we are the only place in the world that has a very strong currency policy. It might be good for some industries but it is a very big problem for aerospace.”

Consequently, GIFAS’s 240 members will continue to face strong pressure because prime contractors have to transfer part of their currency exchange risk as they cannot bear the burden of a low dollar alone.

R&D Funds Critical
Research and development is a key issue for France’s high-tech, long-cycle aerospace industry. Coordinated public support, both at national and European level, is crucial in this field, the GIFAS chairman said. “Our current success is the result of 20 years of R&D investments,” he added.

While President George Bush has declared that aerospace R&D is a national priority for the U.S., in France loans through the Directorate of Civil Aerospace Programs have fallen 53 percent since 1990 and budget spending on basic research by the country’s defense procurement agency (DGA) has dropped 37 percent, despite some increase over the last few years.

“We now devote €5 billion [$6.7 billion] a year to R&D, half of which is funded by manufacturers, representing 17 percent of their annual revenues,” stated Edelstenne.

“We have tried to get solutions from the government because we are one of the rare French industries in competition with the U.S., but the exchange rate makes our costs higher. GIFAS wants France to recognize the significance of aerospace as a technologically strategic industry that is vital to the country’s economy and security through the implementation of a genuine civil and defense research policy.”
Edelstenne said he welcomes further consolidation in the French industry but warned against merger for the sake of it when synergies are not sufficient. “Competitors have to be ever more responsive to remain competitive, especially in export markets.

“Apart from innovation and cutting costs, an active policy of mergers and acquisitions and investments is necessary. I am not against mergers when they make sense but companies must not risk neglecting their core businesses,” he said.

GIFAS is pressing the French government to maintain current levels of military spending. “But we already know it is not enough to finance or launch programs,” said Edelstenne. “This means cutting or postponing present projects because of inadequate budgeting–the caterpillar solution. Unless something is done, this situation could become risky.”

Milestones and Money

Dassault Aviation CEO Charles Edelstenne pointed to several major events for GIFAS member companies over the past year: certification and entry into production of both the Airbus A380 super-large airliner and Dassault’s new Falcon 7X business jet, the launch of the A350XWB program, Eurocopter’s first major contract with the U.S. Army for 322 light utility helicopters and the success of the Ariane 5 ECA space program with five new launches.

Also in 2006, unconsolidated revenues for GIFAS-affiliated companies rose 9 percent in a year, to €32.1 billion ($42.7 billion), driven by 16-percent growth in the civil sector, which brought in 67 percent of all revenues. But domestic and export defense revenues fell 2 percent.

The French industry’s €18.7 billion ($24.9 billion) in total exports last year represented an all-time record, accounting for 73 percent of revenues. Nonetheless, the value of new orders taken in 2006 actually fell by 7 percent due to a drop in export orders, but Edelstenne pointed out that this decline must be measured against record levels of total orders logged in 2005.

In fact, the €50.2 billion ($66.8 billion) in orders posted last year represented a 30-percent increase over 2004’s showing. It was the industry’s second best year ever and exceeded revenues for the 13th consecutive year.

GIFAS equipment producers registered an overall 13-percent growth, due mainly to a significant demand from systems manufacturers. Orders fell 12 percent but, similarly, this compares to 2005’s record 60-percent growth.