Search

 

Cablegate: Eads' Tanker Win - Anatomy of a (Very Big) Defense

VZCZCXYZ0350
PP RUEHWEB

ZNR UUUUU ZOC STATE ZZH
MSI4574
PP RUEHC
DE RUEHMZ #0094/01 0631804
ZNR UUUUU ZZH
P 031804Z MAR 08
FM AMCONSUL MUNICH
TO RUEHC/SECSTATE WASHDC PRIORITY 4316
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUEKJCS/SECDEF WASHDC
RUCPDOC/USDOC WASHDC
RUEHZG/NATO EU COLLECTIVE
RUCNMEU/EU INTEREST COLLECTIVE
RUCNFRG/FRG COLLECTIVE

UNCLAS MUNICH 000094

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EUR EUR/AGS, EUR/ERA, EB/IFD/OMA AND INR/I
PASS TO USTR MOWREY

E.O. 12958: N/A
TAGS: ECON EAIR ETRD PGOV EINV PREL EUN FR GM
SUBJECT: EADS' TANKER WIN - ANATOMY OF A (VERY BIG) DEFENSE
CONTRACT

SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET DISTRIBUTION.

REF: 06 MUNICH 558

-------
SUMMARY
-------

1. (SBU) THE FEBRUARY 29 ANNOUNCEMENT THAT THE U.S. AIR FORCE WOULD
AWARD A USD 40 BILLION CONTRACT FOR AERIAL REFUELING TANKERS TO A
CONSORTIUM FORMED BY EADS AND NORTHROP GRUMMAN, A DEAL THAT DEFENSE
EXPERTS HAD BEEN ALL- BUT-CERTAIN WOULD GO TO BOEING, LANDED LIKE A
BOMBSHELL AT EADS' CO-HEADQUARTERS OUTSIDE OF MUNICH. EADS HAD
HOPED TO GET, AT BEST, A PORTION OF A SPLIT DEAL WITH BOEING. THE
DEAL MARKS THE CULMINATION OF EADS' EFFORT TO BECOME A PLAYER IN THE
U.S. DEFENSE MARKET BY BUILDING ALLIANCES WITH U.S. DEFENSE
CONTRACTORS AND LOCATING PRODUCTION FACILITIES IN THE U.S.

--------------------------------------------- ---------
LARGEST PENTAGON CONTRACT EVER TO GO TO A FOREIGN FIRM
--------------------------------------------- ---------

2. (U) ON FEBRUARY 29, THE U.S. AIR FORCE ANNOUNCED ITS SELECTION
OF A NORTHROP GRUMMAN-EADS (EUROPEAN AERONAUTIC, DEFENSE AND SPACE)
PARTNERSHIP OVER BOEING TO BUILD 179 NEW "KC-45" AERIAL REFUELING
TANKERS TO REPLACE THE MILITARY'S AGING FLEET OF BOEING 707-BASED
KC-135S. THE IMPORTANCE OF THE USD 40 BILLION CONTRACT -- THE
LARGEST EVER U.S. DEFENSE CONTRACT TO GO TO A FOREIGN CONTRACTOR --
TO EADS, IS DIFFICULT TO OVERSTATE. THE NORTHROP/EADS KC-45 IS
BASED ON A MODIFIED VERSION OF THE EADS/AIRBUS A330 WIDEBODY
AIRFRAME AND WILL BE ASSEMBLED AT A FACTORY IN MOBILE, ALABAMA,
USING A330 SUBASSEMBLIES SHIPPED FROM EUROPE. AT LEAST 58 PERCENT
OF THE AIRCRAFT'S CONTENT, INCLUDING GE ENGINES, WILL BE SOURCED IN
THE U.S. THIS INITIAL AWARD WILL COVER THE FIRST PART OF A
MULTI-PHASED CONTRACT SPANNING SEVERAL DECADES, WITH THE FIRST KC-45
EXPECTED TO GO INTO SERVICE IN 2013. OVER TIME, THE AIR FORCE PLANS
TO REPLACE MORE THAN 500 KC-135S AT A TOTAL PRICE ESTIMATED AT MORE
THAN USD 100 BILLION. ACCORDING TO AIR FORCE OFFICIALS IT'S
POSSIBLE THAT LATER PHASES OF THE CONTRACT COULD BE AWARDED TO
BOEING, WHICH OFFERED A MODIFIED VERSION OF ITS WIDEBODY 767 IN ITS
BID.

-------------------------------------------
"WE'RE THRILLED, BUT HOLDING OUR BREATH..."
-------------------------------------------

3. (SBU) A SENIOR EADS OFFICIAL TOLD CONGEN MUNICH THAT THE AIR
FORCE ANNOUNCEMENT CAME AS A VERY PLEASANT SURPRISE; EADS HAD HOPED,
AT BEST, TO BE AWARDED ONLY A PORTION OF A SPLIT CONTRACT WITH
BOEING. HE ADDED THAT THE AWARD HAD NOT ONLY OPENED THE DOOR FOR A
SIGNIFICANT PHYSICAL PRESENCE IN THE U.S. FOR EADS, BUT WOULD ALSO
ESTABLISH A MINI-AEROSPACE INDUSTRY AROUND THE TANKER'S PRODUCTION
IN ALABAMA, GIVEN THE MANY SUB-CONTRACTORS AND OTHER FIRMS NEEDED TO
SUPPORT LARGE-SCALE AIRCRAFT PRODUCTION. THE EADS OFFICIAL SAID HE
WAS CONFIDENT THAT EADS' PERFORMANCE WITH OTHER U.S. DEFENSE
CONTRACTS, MOST NOTABLY WITH THE U.S. ARMY'S EUROCOPTER UH-72
"LAKOTA" LIGHT HELICOPTER (REFTEL), HAD EASED ANY CONCERNS THE AIR
FORCE MAY HAVE HAD WITH SELECTING A FOREIGN FIRM.

4. (SBU) THE SAME EADS CONTACT DID EXPRESS CONCERN, HOWEVER, THAT
THE AWARD WAS "NOT A DONE DEAL," GIVEN THE STRONG POSSIBILITY THAT
BOEING WOULD CONTEST THE DECISION, WITH THE SUPPORT OF CONGRESSIONAL
DELEGATIONS FROM ILLINOIS (BOEING'S HEADQUARTERS), WASHINGTON STATE
(WHERE 767S ARE PRODUCED), AND KANSAS (WHERE THE 767S WOULD BE
CONVERTED INTO TANKERS). THE EADS OFFICIAL ADDED, HOWEVER, THAT THE
GOVERNOR OF ALABAMA, ALONG WITH THE STATE'S CONGRESSIONAL
DELEGATION, HAD HAILED THE NEWS OF THE CONTRACT AWARD. HE ALSO SAID
THE CONTRACT REPRESENTED A VINDICATION FOR AIRBUS CEO TOM ENDERS,
WHOM HE CALLED "A BIG SUPPORTER OF THE TRANSATLANTIC STORY."

-----------------
"MADE IN AMERICA"
-----------------

5. (SBU) EADS VIEWED ITS 2006 SUCCESS IN WINNING THE USD THREE
BILLON CONTRACT TO SUPPLY THE U.S. ARMY WITH OVER 300 UH-72 LIGHT
HELICOPTERS -- EADS FIRST MAJOR ENTRY INTO THE U.S. DEFENSE MARKET
-- AS A STEPPING STONE TO THE MASSIVE AIR FORCE TANKER CONTRACT.
LAST YEAR A SENIOR EUROCOPTER OFFICIAL TOLD THE CONSULATE THAT IN
ADDITION TO IMPROVING THE STANDING OF EUROCOPTER WITHIN THE EADS
CONSORTIUM, EUROCOPTER'S SUCCESS AT BREAKING INTO THE U.S. DEFENSE
MARKET WOULD INCREASE THE PRESSURE ON HIS COLLEAGUES AT EADS TO WIN

ALL OR PART OF THE AIR FORCE CONTRACT.

6. (SBU) EADS LEARNED SEVERAL KEY LESSONS FROM THE EUROCOPTER
SUCCESS, WHICH IT APPLIED TO THE TANKER BID. FIRST, THE IMPORTANCE
OF PUTTING A U.S. "FACE" ON THE BID. IN THE CASE OF EUROCOPTER, THE
FACE WAS U.S. HELICOPTER MANUFACTURER SIKORSKY, WHICH WAS TAPPED BY
EADS TO PROVIDE CONTRACTOR LOGISTICS SUPPORT (CLS) AS PART OF THE
BID. EADS OFFICIALS TOLD US THAT SIKORSKY'S NAME AND FAMILIARITY
WITH U.S. DEFENSE CONTRACTING WAS KEY IN SELLING THE BID TO THE
ARMY. IN THE CASE OF THE KC-45 TANKER, NORTHROP GRUMMAN WAS THE
PARTNER. WHILE THE EADS KC-45 WILL BE SUBSTANTIALLY THE SAME
AIRFRAME AS AN AIRBUS A330, NORTHROP WILL MANAGE THE PROGRAM'S LARGE
NUMBER OF SUPPLIERS AND WILL INSTALL DEFENSIVE AND OTHER SYSTEMS ON
THE AIRCRAFT. BUT MOST IMPORTANTLY, THE PARTNERSHIP WITH NORTHROP
ALLOWED EADS TO MARKET ITS TANKER IN THE U.S. UNDER THE NAME OF A
RESPECTED PILLAR OF THE U.S. DEFENSE ESTABLISHMENT.

7. (SBU) SECOND, EADS LEARNED THAT IT NEEDED TO GIVE THE "MADE IN
AMERICA" LABEL -- WITH ALL THE ECONOMIC BENEFITS THAT IT IMPLIES --
TO ITS TANKER PROPOSAL. IN THE CASE OF EUROCOPTER, THE DECISION WAS
MADE TO LOCATE FINAL ASSEMBLY OF THE UH-72 IN COLUMBUS, MISSISSIPPI.
FOR THE KC-45 TANKER, MOBILE, ALABAMA WAS CHOSEN FROM SEVERAL
POTENTIAL SITES IN THE SOUTHERN U.S. THE WEB-SITE FOR THE KC-45
PROGRAM PROUDLY CLAIMS THAT THE TANKER PROGRAM "WILL EMPLOY 25,000
AMERICAN WORKERS AT 230 U.S. COMPANIES IN 49 STATES." IN JANUARY
2008, EADS FURTHER SWEETENED THE DEAL BY ANNOUNCING THAT IF IT WERE
AWARDED THE TANKER CONTRACT, IT WOULD ASSEMBLE ALL OF ITS A330
COMMERCIAL FREIGHTER AIRCRAFT AT THE MOBILE SITE AS WELL, CREATING
AN ECONOMIC "MULTIPLIER EFFECT" FROM THE TANKER PROGRAM. A SENIOR
EADS OFFICIAL TOLD THE CONSULATE THAT EADS/AIRBUS MIGHT ELECT TO
ALSO BUILD OTHER COMMERCIAL AIRCRAFT BEYOND THE A330 FREIGHTER AT
THE MOBILE PLANT IN THE FUTURE.

--------------------------
MITIGATING THE WEAK DOLLAR
--------------------------

8. (U) BECAUSE ALL LARGE COMMERCIAL AIRCRAFT ARE PRICED IN U.S.
DOLLARS REGARDLESS OF WHERE THEY ARE MANUFACTURED, EADS/AIRBUS HAS
COMPLAINED OF A TREMENDOUS FINANCIAL STRAIN DUE TO THE RELATIVE
STRENGTH OF THE EURO TO THE DOLLAR. IN NOVEMBER 2007, AIRBUS CEO
TOM ENDERS TOLD THE MEDIA THAT "THE DOLLAR'S RAPID DECLINE IS
LIFE-THREATENING FOR AIRBUS," AND THAT "THE DOLLAR EXCHANGE RATE HAS
GONE BEYOND THE PAIN BARRIER." ENDERS ADDED THAT PART OF THE
STRATEGY TO COMBAT THE IMPACT OF THE WEAK DOLLAR WOULD BE TO
POSSIBLY SHIFT SOME PRODUCTION TO DOLLAR-ZONE COUNTRIES. BY
ASSEMBLING THE KC-45 TANKER AND A330 FREIGHTER IN ALABAMA, EADS HAS
FOUND A WAY TO LOWER ITS PRODUCTION COSTS WHILE SIMULTANEOUSLY
SELLING THE ECONOMIC BENEFITS TO THE U.S. ECONOMY.

-------
COMMENT
-------

9. (SBU) THE KC-45 TANKER AWARD IS THE LARGEST U.S. DEFENSE
CONTRACT TO EVER BE AWARDED TO A FOREIGN CONTRACTOR, AND REPRESENTS
ONE OF THE LARGEST ORDERS IN AEROSPACE HISTORY. FOR EADS, IT ALSO
REPRESENTS RECOGNITION THAT THE FIRM IS A PLAYER IN THE U.S. DEFENSE
MARKET, AND CAN HOLD ITS OWN AGAINST FORMIDABLE COMPETITION SUCH AS
BOEING -- A FACT THAT WON'T HURT EADS' SALES WORLDWIDE. EADS IS ALL
TOO AWARE THAT EUROPEAN GOVERNMENTS, FACING INCREASING
DEMOGRAPHIC-INDUCED SOCIAL COSTS AND A LACK OF PUBLIC SUPPORT FOR
INCREASED MILITARY SPENDING, WILL NOT PROVIDE SIGNIFICANT
OPPORTUNITIES FOR THE FIRM'S FUTURE GROWTH. WITH THE U.S. SPENDING
MORE ON DEFENSE THAN THE REST OF THE WORLD COMBINED, EADS MADE A
STRATEGIC DECISION TO GO "WHERE THE MONEY IS" -- A BET THAT APPEARS
TO BE PAYING OFF BEYOND EADS EXECUTIVES' MOST OPTIMISTIC
EXPECTATIONS.

10. (U) THIS REPORT HAS BEEN COORDINATED WITH EMBASSY BERLIN.

11. (U) PREVIOUS REPORTING FROM MUNICH IS AVAILABLE ON OUR SIPRNET
WEBSITE AT WWW.STATE.SGOV.GOV/P/EUR/MUNICH/ .

NELSON

© Scoop Media

 
 
 
 
 
World Headlines

 

Werewolf: Gordon Campbell On North Korea, Neo-Nazism, And Milo

With a bit of luck the planet won’t be devastated by nuclear war in the next few days. US President Donald Trump will have begun to fixate on some other way to gratify his self-esteem – maybe by invading Venezuela or starting a war with Iran. More>>

Victory Declared: New Stabilisation Funding From NZ As Mosul Is Retaken

New Zealand has congratulated the Iraqi government on the successful liberation of Mosul from ISIS after a long and hard-fought campaign. More>>

Gordon Campbell: On The Current US Moves Against North Korea

If Martians visited early last week, they’d probably be scratching their heads as to why North Korea was being treated as a potential trigger for global conflict... More>>

ALSO:

Gordon Campbell: On The Lessons From Corbyn’s Campaign

Leaving partisan politics aside – and ignoring Jeremy Corbyn’s sensational election campaign for a moment – it has to be said that Britain is now really up shit creek... More>>

ALSO:

Another US Court: Fourth Circuit Rules Muslim Ban Discriminatory

ACLU: Step by step, point by point, the court laid out what has been clear from the start: The president promised to ban Muslims from the United States, and his executive orders are an attempt to do just that. More>>

ALSO: