Keep it in the Family

Brows have been furrowed in German ministries ever since DaimlerChrysler started looking for foreign buyers for its defense sector subsidiary MTU Aero Engines. Chancellor Gerhard Schröder and his ministers have already made their standpoint clear. "Germany has an interest in the mass of capacities we have in defense staying in Germany," Schröder said on Friday.

Several potential buyers have already expressed their interest in the Munich aero engine manufacturer, among them the Carlyle Group from the United States. The German government is apparently concerned that German defense firms will be sold off, in particular to U.S. competitors.

This isn't the first time a German defense firm has attracted foreign interest. In March 2002, the U.S. investor group One Equity Partner acquired the Kiel shipbuilder Howaldtswerke Deutsche-Werft (HDW), the world's leading producer of submarines. Now HDW is up for sale again, and this time another U.S. firm, Northrup Grumman, is one of the heavyweights among the prospective buyers. Chancellor Schröder has already indicated that he would prefer a "German solution" -- or at least a European one.

Fear of lost know-how

Instead of just wringing its hands in anguish, the government has decided it should have the last word in defense industry sales. It has announced that a bill will be presented to parliament this fall to make it more difficult to sell German defense firms to foreign companies. The bill would allow the government to veto the sale of a German company specializing in defense if foreigners intend to acquire more than 25 percent in the firm. Defense Minister Peter Struck (picture) said in an interview on Tuesday that such company takeovers result in a sudden absence of German know-how.

The German defense industry doesn't think much of the planned legislation. A specialist in the defense industry at the Federation of German Industries (BDI), Timm Meyer, expressed the fear that foreign investors could be scared away and German defense firms could find it more difficult to maintain their involvement in the European defense industry.

"Cross-border alliances are indispensable," Meyer said in an interview with Deutsche Welle. The stricken German defense industry, which has shrunk by two-thirds since 1990, has no choice given the low number of contracts, he said. "The question is how the companies can survive. If they don't find partners in Germany or Europe, the transatlantic solution is the only option."

Insular U.S. market

The European Aeronautic Defense and Space Company (EADS), a German-French-Spanish cooperation, views the German government's plans as a step backwards. "There are too few contracts available in the defense industry. Instead we need more investment in the field of defense and above all reliability in planning," Rainer Ohler, a spokesman for EADS in Germany, told Deutsche Welle. He favored a model such as in Britain. "There the nationality of a defense firm doesn't matter. Instead the point is what the company can contribute to Great Britain," Ohler said.

EADS plans to increase its defense sector by two-thirds, to €10 billion ($11 billion), by 2005. But on the European market there's limited room for expansion; the United States is still the , most lucrative market. There, however, European competitors are hindered by strict regulations that favor U.S. firms. Only U.S. companies, for instance, may sell security technologies there. "Here too, we are against insularism and for open markets," Ohler said.

Ohler was hopeful that EADS could win the Pentagon's confidence. It has already delivered helicopters to the U.S. coast guard and police forces. However, things still don't look good for European defense companies in the United States. On the other hand, U.S. firms already own one-fifth of the European defense market.

Finance Minister Wolfgang Clement, who has supported proposing the new, limiting legislation, offered an additional possibility in a newspaper interview on Tuesday: "Maybe one could even appeal to the patriotism of company heads," he said. "In the U.S.A. it would be a matter of course."