Farnborough Air Show

French industry calls on Sarkozy to fulfill his promise

 - July 7, 2008, 6:25 AM

French aerospace orders last year remained at record levels but the long-term weakness of the U.S. dollar against the euro continues to erode profit margins and increase pressure on companies to move production away from France. Last year, just ahead of the 2007 Paris Air Show, new French President Nicholas Sarkozy took office on a pledge to address issues undermining the competitiveness of French industry. The country’s aerospace leaders quietly rejoiced at the prospect of issues such as the 35-hour workweek being confronted, but 12 months later it is hard to discern any tangible impact that the Sarkozy administration has had on the industry.

In an interview before this week’s Farnborough airshow, Charles Edelstenne, chairman of French aerospace industry group GIFAS, urged his government to do more to boost research-and-development efforts, increase the country’s defense spending and improve prospects for French exports. His hope is that France’s six-month presidency of the European Union, which began on July 1, will provide the catalyst for long-awaited change.

Nonetheless, in 2007, the French aerospace industry (which in January celebrated its centenary) bettered its record 2005 and 2006 results. Total unconsolidated revenues of the 260 GIFAS member companies increased by 6.9 percent to ?34.6 billion ($53.3 billion), with the civil sector generating 69 percent (a 10.8-percent increase), while defense production remained stable. Exports accounted for 62 percent of revenues.

Last year also saw strong new orders, which jumped 20 percent to reach €53.6 billion ($88.6 billion), 83 percent in the civil sector. Exports, accounting for 78 percent of the sum, saw a 24-percent hike, while domestic orders rose 7 percent. Military orders were at a low level, with no big export contracts outside the EU.
However, the results mask a “very worrying reality,” Edelstenne told AIN. “Some aspects of aerospace activity in 2007 are positive because the civil market is good and orders are up, but it is less profitable,” he explained.

The U.S. dollar, valued at an unprecedented low of $1.50 to $1.60 for one euro, continues to pose a serious problem for France and other European countries involved in aerospace. “We have a good civil market that is under permanent mortgage to the dollar, and while strategies such as currency hedging and raising productivity have already been adopted to compensate for the falling dollar, they are no longer enough, compelling us to move some of our activities abroad,” said Edelstenne, who is also CEO of Dassault Aviation (Chalet K7-8).

The GIFAS chairman also expressed concern at what he considers to be France’s inadequate defense budget. “This holds back the development of a real policy of partnership between the state and industry in order to develop tomorrow’s equipment needs and pursue the indispensable research into basic technologies and technological breakthroughs that will benefit both the defense and civil spheres,” he argued.

On June 18, the French government published its long-awaited white paper on future defense plans. This proposed that France’s military lose more than 50,000 jobs over the next six or seven years to free up money for intelligence operations and modernizing equipment. The policy document envisions the defense budget remaining essentially unchanged at €337 billion ($519 billion) between now and 2020, but a larger proportion, approximately €200 billion ($308 billion), will go toward new equipment.

Under existing budgets, stressed Edelstenne, job losses in defense firms are very possible. “There is a real problem with the defense budget, with programs facing postponements or being lengthened in time,” he added. GIFAS’s biggest challenge is
to stay competitive in a defense market that is still dominated by the U.S. and for which payment is in dollars while costs are largely in euros. “We have a very good and efficient workforce but the high labor costs are exacerbated by the exchange rate,” said Edelstenne. “France’s 35-hour working week has not helped to reduce costs, but the government is taking steps to phase it out.”

According to Edelstenne, France’s aerospace and defense sectors must follow the example of their U.S. competitors in improving competitiveness. To meet the challenge, GIFAS member companies are transferring all kinds of work–including some nonstrategic but high-technology activity–to low-cost or dollar-zone countries such as north Africa, the U.S., Mexico, eastern Europe, China and India. “The market is good and our production rates are high, so we are able to transfer work abroad without firing employees in France,” said Edelstenne.

French production rates are higher than they were two or three years ago, so despite delocalizing some production, direct employment in GIFAS-affiliated companies remains unchanged at 132,000, with another 80,000 employed by 4,500 subcontractors.

Nonetheless, Edelstenne still maintained that the French government is not providing help in the form of loans at the required level. “The whole system is incoherent: the European Union does not allow subsidies and this does not take into account the unfair impact of currency levels that seriously distort competition,” he said. “And I don’t know when or if it will end. The U.S. has a huge deficit; its export level is not very high, and is it improving only because of the low value of the dollar. The economy is weakening with the sub-prime question having a big impact. Even a change of U.S. administration, whoever is elected, will not have an impact in the short term.”

Meanwhile, GIFAS (Hall 1 Stand 18p) is campaigning to win more government backing for research and development, arguing that the amount it gives to French companies is well below that received by the U.S. industry. “Aerospace creates value and wins exports but the pressure on our profitability and our ability to self-finance research and development is endangering the industry’s future,” said Edelstenne.
GIFAS is again pinning its hopes on the French presidency of the EU. It wants the Sarkozy government to take the opportunity to push through key research-and- development initiatives such as the $2.5 billion Clean Sky program to develop environmentally friendly technologies.