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Cablegate: Navigating a Mess: Eads Officials On Galileo

VZCZCXRO2107
PP RUEHAG RUEHDF RUEHIK RUEHLZ RUEHPOD RUEHYG
DE RUEHMZ #0412/01 1941356
ZNR UUUUU ZZH
P 131356Z JUL 07
FM AMCONSUL MUNICH
TO RUEHC/SECSTATE WASHDC PRIORITY 4036
INFO RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHBJ/AMEMBASSY BEIJING 0291
RUEKJCS/SECDEF WASHDC
RUCPDOC/USDOC WASHDC 0026
RUEHZG/NATO EU COLLECTIVE
RUCNMEU/EU INTEREST COLLECTIVE
RUCNFRG/FRG COLLECTIVE

UNCLAS SECTION 01 OF 04 MUNICH 000412

SIPDIS

SENSITIVE
SIPDIS

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

E.O. 12958: N/A
TAGS: ECON TSPA EAIR ETRD PGOV EINV PREL EUN FR GM
SUBJECT: NAVIGATING A MESS: EADS OFFICIALS ON GALILEO

SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET DISTRIBUTION.

REFS: A) Paris 2634, B) Frankfurt 3043, C) 06 Munich 715

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

1. (SBU) Senior EADS-Astrium officials told ConGen Munich the
recent collapse of the Galileo consortium of private firms resulted
as much from squabbling between EU states over apportionment of
contracts as a failure to find a workable economic model. They
described the current economic model as a "macroeconomic" one, in
which the EU funding will create jobs and end-user applications that
will boost member nation economies. Additionally, Galileo would be
able to charge for enhanced services beyond the basic free signal.
Our contacts said China, no longer a participant in Galileo, appears
to be rapidly and successfully developing its own positioning,
navigation, and timing technology. The officials said that rather
than being concerned about Galileo's potential use by enemy forces,
the U.S. should view Galileo as a complement to GPS's capabilities
for our own forces. Our interlocutors were confident the political
will exists in the EU to field Galileo satellites despite the
numerous obstacles, perhaps as early as 2012. End Summary.

--------------------------------
GALILEO -- CURRENT STATE OF PLAY
--------------------------------

2. (SBU) ConGen Munich Pol/Econ Officer and Economic Specialist met
on July 9 with Hanspeter Kuhlen, EADS-Astrium's Galileo Program
Director and Thomas Mayer, the firm's Chief of Business Development
for Galileo. Astrium is the "space" division of EADS (European
Aeronautic Defense & Space), offering equipment and services for
launchers, manned spaceflight, civil and military satellites and
ground systems. EADS-Astrium has a central role in the design and
development of Galileo, the proposed European counterpart to the
Pentagon's Global Positioning System (GPS). Conceived almost a
decade ago as a partnership between the European Commission, the
European Space Agency (ESA) and the private sector, the project was
intended to provide navigational, telecom and transport services,
with the operational phase originally expected to begin in early
2008.

3. (U) EADS-Astrium was a member of a consortium of eight private
firms that has since dropped out of Galileo's
Public-Private-Partnership (PPP) financing mechanism. The
consortium was to have paid two-thirds of the costs of the program,
with the EU taxpayers covering the remaining third. The consortium
included EADS, Alcatel-Lucent (France), Thales (France),
Finmeccanica (Italy), AENA (Spain), Hispasat (Spain), Inmarsat (UK),
and TeleOp (Germany). The consortium would have gained long-term
concession rights to operate Galileo with a share of the profit.
Contract negotiations which should have led to the deployment and
operation of Galileo's network of 30 satellites stalled this year,
with the consortium demanding that the public sector guarantee its
commercial risks. The EU transport ministers decided to suspend the
PPP after the consortium firms failed to develop an organizational
structure by May 10. Reportedly, firms were not even able to agree
on a common representative. The transport ministers from the 27 EU
governments then failed to agree June 8 on a plan to salvage
Galileo, postponing until the fall a decision on how to come up with
the 2.4 billion Euros needed to keep the project afloat. As a
result of the delays so far, deployment has been pushed back to 2012
or later.

-------------------------------------
POLITICAL INTERFERENCE - IN THE EU???
-------------------------------------

4. (SBU) Kuhlen did not hesitate to blame massive political
interference from EU governments for the consortium's demise. He
noted Spain, in particular, had been a problem because it insisted
on receiving 25 percent of Galileo's contracts. Madrid had argued
that as two of eight firms in the consortium were Spanish, they
should also receive 25 percent of the work, even though the Spanish
government's financial contribution to the program was half that,
according to the Astrium officials. They said, in contrast, the
German government's financial contribution is 20 percent of the
program - the largest within the EU.

5. (SBU) Kuhlen joked that Galileo "should have 27 control

MUNICH 00000412 002 OF 004


centers," one in each EU member state, so that politicians could
have their own ribbon cutting ceremonies and tell voters their
country was in charge. Mayer offered an example to illustrate the
point. The German space agency was operating a satellite earth
station dish in Weilheim, Bavaria. Even though the equipment was
perfectly suited for Galileo, a second dish had to be built in
Belgium to satisfy political demands. Our contacts confided that
while risk apportioning between the public and the private sectors
had played a role in the collapse of the consortium, in their view,
it was less of a factor than the intra-EU squabble over apportioning
of contracts.

------------------
NORTH-SOUTH DIVIDE
------------------

6. (SBU) Kuhlen noted that while the southern European partners
such as Spain, France and Italy were pushing Galileo with the intent
to win a disproportionate share of contracts, the northern European
states appeared to lack the enthusiasm to match their funding. He
continued that Germany and the UK contributed nearly half of
Galileo's financial support to date, and thus had the most to lose
from its failure -- particularly the UK, which produced the bulk of
the critical electronic "payload" aboard the satellites.
Nevertheless, London was fixated on "value for money," rather than
the less tangible returns of the program, such as prestige and
macroeconomic benefits. Our contacts underscored France's desire to
be at the center of Galileo. Implying that French dominance of key
decision-making posts impacting Galileo gave the French an advantage
over other EU states, Kuhlen noted that "[EU Transport Commissioner]
Barrot is very close to ESA DG Dordain." Offering a compliment of
sorts to the French, Kuhlen added that France's embracing of grand
ideas like Galileo was probably necessary, as the Germans would be
too worried about potential pitfalls to propose such a major
undertaking.

--------------------------------------------- --
"WHY BUY PEPSI WHEN YOU CAN GET COKE FOR FREE?"
--------------------------------------------- --

7. (SBU) When asked about the apparent lack of a viable economic
model for Galileo, our interlocutors conceded that firms found it
hard to find a viable business model, given that the GPS signal was
free. Kuhlen quoted the line: "Why buy Pepsi when you can get Coke
for free?" Then, making an argument we had not heard from EADS
officials in the past, he said the economic model should not be
looked at purely in terms of profit generation, but rather in a
macroeconomic context. He cited a 2001 Pricewaterhouse Coopers
study that showed Galileo would produce a benefit to cost ratio of
4.6 to one for European economies, given job creation, tax revenue,
and the incentive for the private sector to provide end-user
products and services such as personal navigation systems. Kuhlen
added frankly that another reason for keeping the project afloat was
that if the EU were to remain a player in space and high technology,
it could not simply cede satellite navigation to the U.S., Russia
and China.

8. (SBU) Our sources insisted that basic Galileo signals would
remain free, but offered that there could be fees for enhanced
services used by civil aviation, truck fleets, taxis, etc. An
example would be in the "safety of life" area. For instance, rescue
services in a mountainous area would need very precise coordinate
and elevation information to determine whether a car accident took
place on a bridge crossing a valley, or on a road below the bridge
on the floor of the valley -- a simple grid coordinate would be
insufficient. When asked if the EU might attempt to recoup
Galileo's costs by requiring the use of fee-based services within
the EU (i.e., for intra-EU aviation), Kuhlen said this could be a
logical step, but Mayer noted that it would most likely be
prohibited by an agreement with the U.S. that prevents charging for
basic GPS signals.

----------
NEXT STEPS
----------

9. (U) Given the collapse of the PPP, European Transport
Commissioner Jacques Barrot has called for full public funding of
Galileo, to the tune of nine billion Euros over the next several
years. While Barrot continues to serve as a cheerleader for
Galileo, his EU colleagues appear more reticent. German Transport
Minister Wolfgang Tiefensee has said he supports the program in

MUNICH 00000412 003 OF 004


principle, but conceded that a complete failure of Galileo was
possible if financing could not be found. Former British Transport
Minister Stephen Ladyman said he welcomed indications that the
project "would have to be ended if it is not affordable."
Reportedly, Denmark and the Netherlands are also unenthusiastic
about the supporting the project.

10. (SBU) While our Astrium contacts indicated frustration with the
current state of uncertainty over Galileo's future, they said they
expect Galileo will continue as a purely public project under the
authority of the Global Navigation Satellite System (GNSS)
Supervisory Authority, or "GSA." In contrast to its forerunner
organization, the "Joint Undertaking," GSA is exclusively an EU
entity operating under the supervision of the Directorate-General
Energy and Transport of the EU commission without the participation
of third states such as China. While program management would be
with GSA, the ESA in Paris would be the contracting agent. Our
contacts were confident that ESA would take account of the work
already done and the know-how thus far accumulated when handing out
contracts to industry. Under this scenario, deployment could, in
the best case, begin by the end of 2012 -- four years behind
schedule.

-----
CHINA
-----

11. (SBU) Originally a part of Galileo as a member of the "Joint
Undertaking," China has since dropped out and developed its own
satellite navigation system called "Compass." Our contacts insisted
that China was not given access to any sensitive technologies on the
project -- mostly "passive" components, such as the construction of
an orbiting laser reflector. Mayer said China had attempted to
purchase "Rubidium" atomic clocks, a key component of satellite
navigation systems, from EADS for Compass. EADS refused to sell the
clocks, so China went directly to Switzerland and acquired them from
"Temex Time."

12. (SBU) Our contacts said China appeared to be doing very well
with Compass. They related how the Chinese delegations had
aggressively lobbied for participation in Galileo and technological
transfer. Mayer recalled that when the Chinese first started
working with EADS, they were very secretive about even the existence
of Compass, and its forerunner "Beidou." Our contacts said they
have been impressed with the recent advances of Chinese space
technology, including the testing of a killer satellite in orbit,
and the increasing sophistication of the Chinese delegations they
deal with.

------------
MILITARY USE
------------

13. (SBU) Military use of Galileo has always been on the table.
According to the European Commission's own website: "Galileo will
underpin the common European defense policy that the Member States
have decided to establish." On May 16, EU Transport Commissioner
Barrot told the press: "You cannot exclude a user because he is
military. It will be civilian controlled...but there will be
military users." When asked about the potential military
dimensions of Galileo, Kuhlen referred to the obstacle of the UK's
instance that Galileo was exclusively a civilian project and its
fierce opposition to any use for military purposes. In any case, he
explained, Galileo signals were not really tailored for pure
military purposes such as missile guidance, although the EU had
adopted a similar architecture to GPS, aiming to provide a series of
"open access" signals intended for civilian use with the addition of
separate encrypted signals similar to GPS' more precise military
"M-code."

14. (SBU) Kuhlen said U.S. concerns Galileo could be used by an
enemy military or terrorists to guide weapons against U.S. targets
were overstated. Galileo (presumably in consultation with the U.S.)
would be able to be selectively turned off or made less precise in
the event of a security threat. Indeed, he argued, Galileo would
effectively augment GPS for the Pentagon by doubling the number of
navigation satellites available to U.S. forces, allowing for
enhanced precision, particularly in areas where it is presently
difficult to receive a GPS signal alone.

-----------------
WILL IT BE BUILT?

MUNICH 00000412 004 OF 004


-----------------

15. (SBU) Our contacts said that despite the many obstacles facing
Galileo, including funding and political turf battles, the political
will exists to complete the project. They added that members of the
European Parliament backed Galileo across party affiliations. The
EU could not afford to leave this field to the U.S., China, and
Russia. Having said that, they agreed many important questions will
have to be answered before work on Galileo can begin in earnest,
making the day when end-users will actually be able to navigate by
Galileo anyone's guess.

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

16. (SBU) We were struck by the shift in the portrayal of Galileo
as a profit-making business model to one that provides
"macroeconomic" benefits -- a description that could be given to
most any government program. We left our meeting with EADS-Astrium
officials with a similar impression as that which followed our
meeting with EADS officials a year ago in the midst of the Airbus
crisis (REF C). EADS and its various divisions have a tremendous
amount of technical capability -- capability frequently frustrated
by the multi-state environment in which EADS operates. Just as
member state influence over EADS/Airbus resulted in a convoluted
manufacturing system spread across Europe and the questionable
decision to build the A380 superjumbo to the detriment of the
potentially much more lucrative A350 program, EADS-Astrium is a
company whipsawed by bickering among its EU state clients. We have
no doubt that the EU will manage to cobble together the necessary
funds and apportion contracts across various states in such as way
that Galileo will indeed be built. But the ultimate cost, both to
the EU taxpayers, and arguably in terms of European "prestige," will
be very high.

17. (U) This report was coordinated with Embassy Berlin.

18. (U) Previous reporting from Munich is available on our SIPRNET
website at www.state.sgov.gov/p/eur/munich/ .

NELSON

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