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Cablegate: Airbus -- Forging a Corporation From a Consortium

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RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHFR #0850/01 1211441
ZNR UUUUU ZZH
R 301441Z APR 08
FM AMEMBASSY PARIS
TO RUEHC/SECSTATE WASHDC 2877
INFO RUEATRS/DEPARTMENT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC
RUCNMEM/EU MEMBER STATES
RHMCSUU/FAA NATIONAL HQ WASHINGTON DC

UNCLAS SECTION 01 OF 04 PARIS 000850

SIPDIS


FOR COMMERCE FOR USTR ASSISTANT M O'NEIL and DAS PAUL DYCK

SENSITIVE
NOT FOR INTERNET DISTRIBUTION

SIPDIS

E.O. 12958: N/A
TAGS: EIND ECON ETRD EAIR PREL FR
SUBJECT: AIRBUS -- FORGING A CORPORATION FROM A CONSORTIUM

This is the first of two cables on Airbus and U.S. interests. It
was drafted by APP Toulouse with support from Paris and represents
the Consul's farewell report at the conclusion of a three year
assignment. A subsequent message will focus on export controls.

1. (SBU) SUMMARY: Airbus, a division of the European Aeronautic
Defense and Space Company (EADS), continues to face growing pains as
it evolves from a business cobbled together from national champion
aviation companies in France, Germany, Spain, and the UK into a
fully integrated multinational. Seven years after this merger,
remnants of the original fractured organization and its accompanying
corporate culture still hamper efficient operation. To address
organizational weaknesses revealed by the ambitious A380 program and
significant financial difficulties, the company's management has
launched a reform program that should place Airbus on the long and
bumpy road to becoming a true multinational corporation as long as
national governments stay on the sidelines. END SUMMARY.

AIRBUS: AN INTEGRATED EUROPEAN COMPANY?

2. (U) Announced in 1967 by the French, German, and British
governments as a consortium of national aerospace companies, Airbus
was designed to strengthen European cooperation and challenge U.S.
aviation dominance. In an effort to streamline decisionmaking, the
Airbus consortium reorganized itself into a single integrated
company in 2001. Incorporated under French law, the four national
entities -- France, Germany, Spain and the UK -- transferred their
assets to, and became shareholders of Airbus while retaining
separate legal structures. Headquartered in Toulouse, France,
manufacturing, production and sub-assembly of parts for Airbus
aircraft are distributed around 16 sites in Europe, with final
assembly in Toulouse and Hamburg.

3. (SBU) A single, publicly-traded European corporation for over
seven years, national interests remain apparent at Airbus and its
parent company, the European Aeronautic Defense and Space Company
(EADS). (The latter was formed in July 2000 by a merger of
DaimlerChrysler Aerospace of Germany, Arospatiale-Matra of France,
and Construcciones Aeronuticas SA (CASA) of Spain.) Governments
have helped finance the development of Airbus aircraft through low
interest loans repayable once a plane achieves profitability (i.e.
launch aid). To defend their national concerns, France and Germany
insisted on a complicated, nationality-based management structure in
which EADS had French and German co-Chief Executive Officers, with
Airbus oversight accorded to the CEO whose nationality differed to
that of the Airbus President. The 2007 end to this system required
the involvement of the German Chancellor and French President.
Under this new cross-reporting agreement, EADS is headed by Louis
Gallois, a widely-respected and well-connected French industrial
manager, to whom Airbus German President -- and former EADS co-CEO
-- Tom Enders reports.

A380 -- THE TEST CASE

4. (SBU) Airbus' A380 program -- the first aircraft fully developed
since the merger -- was expected to prove European transnationalism
at its best. At the plane's unveiling ceremony in 2005, the
British, French, German, and Spanish heads of state all highlighted
it as a triumph of the European "dream." In reality, the A380
demonstrated Airbus' overall lack of unity and the weakness of the
management structure. As short-lived Airbus CEO Christian Streiff
said after a 2006 review, "Airbus is not yet an integrated company.
Airbus doesn't yet have a simple and clear organization. There are
shadow hierarchies -- leftovers from the never-finished
integration."

5. (SBU) Although it claims to be multinational, national rivalries
persist at every level of Airbus. When the long-time German Chief
Operating Officer (COO), Gustav Humbert, succeeded Frenchman Noel
Forgeard as Airbus President in 2005, employees joined the French
public in expressing concern that France would be slighted in Airbus
decision-making. Airbus employees also have told Consul that some
claim the highest ranking American employee, COO Customers John
Leahy, is a spy. Therefore, even though he is highly respected, no
one could imagine him as the company's President. By the same
token, most cannot imagine a scenario in which a British or Spanish
citizen -- both integral parts of Airbus -- would become the
President.

6. (SBU) Many experts believe the confused management reporting and
strongly nationalistic culture contributed to the significant delays
in the A380 program. The refusal of French and German engineers to
use the same software in developing the A380 -- and the failure of
Airbus senior management to compel them to do so -- clearly

PARIS 00000850 002 OF 004


illustrates Airbus' challenges. Due to this lack of technological
communication, a five centimeter shortfall in 530 kilometers of
wiring became apparent on the final assembly line. The inability to
connect cabling between A380 sections led to a two-year delay in the
program and the need to send 1300 German mechanics to Toulouse --
local French workers could not undertake the job since Germany is
responsible for this part of the plane -- to painstakingly re-wire
every aircraft at the final assembly line.

REFORM TAKES FLIGHT

7. (SBU) In total, Airbus' difficulties in the industrialization of
the A380 will cost EADS around USD 6.6 billion. At the same time,
Airbus is grappling with its first military program, the A400M, and
embarking on its A350 program. The market for the latter represents
the industry's future with Boeing having sold over 900 of the 787
and Airbus sales of the competing A350 at over 300. Late to the
market after several unsuccessful, cheaper versions, the A350
program will require an investment of approximately 12 billion
euros. Furthermore, the falling dollar has led to record losses
given Airbus sells in dollars but has significant Euro-dominated
costs. In 2007, the company recorded an operating loss of 881
million Euros (i.e. approximately 1.35 billion USD), up from 572
million Euros (i.e. 879 million USD) in 2006.

8. (SBU) In an attempt to cope with this financial situation and
address its structural weaknesses, Airbus embarked in 2006 on a
reform program entitled Power8. Intended to be more internally
focused than previous projects, which primarily sought to pressure
suppliers to lower prices, Power8 aims to significantly restructure
the company. An eight point project, it seeks to radically cut
Airbus' internal and external costs through a hiring freeze and
renegotiating procurement contracts, speed up development by
bringing suppliers into the process earlier, and streamline the
production process through a rationalization of manufacturing
sites.

9. (SBU) Viewed by suppliers, Power8 does not depart significantly
from previous programs, such as Route 06, even though Airbus'
current COO argues that two-thirds of savings have come from
internal changes. Under the guise of Power8, Airbus procurement is
pressing for development cost sharing (i.e. suppliers' seconding
engineers for product definition and defraying charges for product
testing and certification), along with the usual significant price
reductions. Given current exchange rates and the strength of the
U.S. aviation industry, Power8's increased emphasis on a global
supply chain should be a golden opportunity for U.S. suppliers. In
reality, numerous U.S. executives have told Consul that they must
seriously evaluate each work package's business case and sometimes
choose to not bid due to stringent profitability conditions imposed
by their own boards and stockholders. Although this situation is
bleaker for French companies given that Airbus requires bids in
dollars, U.S. business contacts have complained that their
competitors can accept less favorable conditions, because the French
government will subsidize them if losses become too great.

10. (SBU) For Power8's desired risk sharing to succeed, Airbus must
overcome an insular, balkanized corporate culture found at all
levels. Its goal to integrate large, often American, suppliers into
the early stages of product development will fail if Airbus
engineers refuse to truly cooperate due to fears of losing control
of the process, according to industry sources. U.S. suppliers often
complain that Airbus' working level -- both arrogant and afraid of
downsizing -- keeps tight control of information, imposes changes,
and rejects input. Recognizing this situation, the company's
management recently emphasized at a large suppliers' conference that
any supplier with a previously-rejected, cost-reducing proposal
should re-submit it. A high-level supplier summarized its role in
Airbus' reform as "We are the change agent," meaning Airbus
management is relying on outside partners to stimulate new operating
practices since it is unable to force change from above.

11. (SBU) The plan to manage costs by awarding larger work packages
to fewer suppliers -- the upcoming A350 will have around 70 aircraft
systems contracts as compared to approximately 160 for the A380 --
also will stumble if Airbus succumbs to significant political
pressure to continue to buy directly from local small and
medium-sized enterprises. Airbus executives have told Consul that
the company has devoted significant resources to explaining its new
procurement concept (i.e. reduce the overall number of Tier 1
suppliers from more than 3000 to less than 500 with the expectation
that the latter will employ the former as Tier 2 suppliers) to the
relevant French authorities, including government agencies, the
French aerospace industry association, and Chambers of Commerce.

PARIS 00000850 003 OF 004


The company asserts that the latter accepted the need to reform even
though local politicians continue their criticism.

12. (SBU) Even more sensitive than procurement reform is the sale of
plants in France, Germany, and the UK (internally titled Zephyr).
Intense political pressure, especially in France and Germany, to
balance the divestitures influenced the choice of factories and time
lines. A theoretically open process, Airbus ended up choosing
companies from the country in which the sites are located as
preferred bidders (i.e. choosing the French Latecoere for two French
factories, British GKN for the one in England, and German OHB/MT
Aerospace for three in Germany). Off-the-record, suppliers and
Airbus contacts have stated their expectation that the reconstituted
businesses will seek government funding after the sales. Airbus
thus would benefit by not only removing employees from its payroll
but also obtaining more state support -- though indirect -- than
under the old system, which always required a careful balance of
competing German and French interests. In informal conversations
with executives at the French business Latecoere, they mentioned
that they used their comparative appeal to French unions as a French
company during negotiations. Playing off fears of American business
practices, they highlighted that labor leaders would accept them
more easily.

13. (SBU) In March, Airbus and OHB/MT Aerospace ended talks without
an agreement, and EADS has announced that it will proceed by
creating a holding company for the three German plants. This
development may put the entire process in jeopardy if political
forces interfere. Local industry sources have told Consul that the
governments want Airbus to divest in France and Germany at the same
time to ensure that one country does not have more Airbus
production. Airbus currently is denying this scenario, and
Latecoere's integration of Airbus personnel appears on track.
Nonetheless, French unions have once again called for strikes in
response to the perceived preferential situation in Germany.

THE FUTURE OF REFORM

14. (SBU) Any revival of national tensions could create larger
problems for Airbus, which is still struggling with the
modernization of its peculiar governance structure. The
Franco-German shareholders' pact, which officially delineates
government influence over EADS, remains complicated. The agreement
has created an imbroglio between political interests and market
participants that has proved difficult to unravel, vesting
representation of national interests in private shareholders (the
French firm Lagardere and German Daimler-Benz), both of which are in
the process of exiting the business. The Financial Times reported
in March that France and Germany were near agreement on a proposal
to give each country a "golden share" with veto power over sales to
new shareholders of more than 15 percent of the company's stock. The
EU Commission opposes this scheme, but France and Germany may argue
that aeronautics is a "strategic" industry or could ask shareholders
to adopt a poison-pill defense that has been used successfully by
other Netherlands-registered companies.

15. (SBU) For its part, Airbus appears to realize that government
involvement can be detrimental to the company. Although it sought
and received launch aid commitments for the A350 from the
governments of France, Germany, Spain, and the UK, it has not yet
drawn this money. According to high-level sources in government
affairs at Airbus, it still may employ this financing depending upon
the outcome of the WTO case filed by the U.S. and internal reform.
If the company can succeed in reducing costs, use of government
assistance to develop the A350 appears less likely. Interestingly,
during discussions of Airbus' financial difficulties, neither
industry leaders nor the media currently mentioned launch aid as a
response.

16. (SBU) Instead, in light of the continuing weakening of the
dollar, Airbus has begun "Power8 plus," with a strong emphasis on
low cost country/dollar sourcing. With Airbus currently claiming it
spends 46 percent of its procurement budget for "flying parts" in
the U.S., it especially is pushing suppliers in this direction.
Airbus primarily will focus efforts on decreasing significantly the
percentage of its employees based in Europe. According to the
company's current COO, Airbus aims to reduce in the next ten years
its European workforce from 97 percent of total employees to between
70 and 80 percent. Plans to open final assembly lines -- the
company's strongest symbol -- in China and Alabama will assist this
goal. So far, Airbus has mastered the communication related to this
controversial move, suffering little political or union backlash.
However, if the French begin sensing a loss of Airbus jobs and
equilibrium with the Germans, this calm could quickly end.

PARIS 00000850 004 OF 004

17. (SBU) COMMENT: Airbus' recent reform program shows that its
upper management recognizes the necessity of becoming a more
integrated, global company in order to succeed, especially in light
of the falling dollar and efforts to forego launch aid. However,
such a transformation will not occur quickly or smoothly because of
the rival vision of relevant governments and parts of Airbus itself.
They still view the corporation as a collection of national
champion companies, which primarily exist to advance national pride
and create well-paid employment. As long as aircraft sales continue
at their current extraordinary rate, allowing globalization to occur
without threatening European jobs, Airbus should manage to slowly
implement its vision. Any number of factors -- a further
depreciation of the dollar, significant tariffs on planes due to a
negative WTO outcome, the rise of an aircraft manufacturer in China
or Russia, a French government decision to use Airbus as a last
stand against globalization -- could upset this precarious balance.

Stapleton

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