On September 15 Pierre-Eric Pommellet’s Naval Group colleagues were rejoicing over a long-awaited letter from an Australian government official saying the company had completed an important phase of its multibillion-euro submarine contract when he received a phone call telling him the whole deal was dead.
An Indo-Pacific security alliance signed between the US, UK and Australia whereby Washington would supply nuclear-powered submarines made the French vessels redundant, the chief executive of the state-owned defence company was informed.
The Franco-Australian submarine deal “was not just a programme, it was a transformation for the company, we were projecting Naval Group into a new world,” Pommellet told the Financial Times. “It was a transformation for France also. And so everything that is happening today is hard. It’s hard for the team.”
Some parts of the Australian government had apparently not been in the loop — hence the unfortunate letter, Pommellet said.
The ruptured contract will be a painful financial hit for Naval Group, and to a much lesser extent Thales, which owns a 35 per cent stake in the state-controlled defence company and had its own agreement to supply electronic systems. Safran, France’s third-biggest defence company, which had been assigned research and development work, said it was “analysing the effects” of the termination on its business.
The loss is bad news for French defence exports. Though they have increased in recent years thanks in large part to Dassault Aviation and Naval Group, irrespective of the Australian deal, orders have declined to an eight-year low last year, according to data from the defence ministry. It also comes two months after the Swiss government chose Lockheed Martin’s F-35 against competition from Dassault’s Rafale and Eurofighter.
Sash Tusa, an aerospace and defence analyst at Agency Partners in London, said people fall into two camps when it comes to what caused the contract’s failure: those who believe it is the product of “an Anglo-US stitch up”, and those who say it was caused by Naval Group’s operational faults. “It’s probably somewhere in between,” Tusa said.
In the Normandy port of Cherbourg, where the French submarines were to be built, the debate has hit morale and piqued workers’ pride. “We know this could have an impact on Naval Group’s reputation,” said union member José Baptista. “That’s why we’re making a big effort to say that this has nothing to do with the quality of our work and we are doing everything we can to make sure that we compensate for the loss of the Australian business with new contracts.”
Beyond the €840m Naval Group received for the portions of work it already completed, the deal would have generated about €500m in annual revenues, or 10 per cent of total revenues, for the “years to come”, according to Pommellet. “It’s a huge crisis,” he said. “But . . . the world is vast and there are many people interested in what we’re doing.”
President Emmanuel Macron has taken on the mission to show precisely that: on Tuesday he announced a $3bn contract for the delivery of three Belharra frigates to Greece. The ships will be built in France by Naval Group. The Greek deal represented a “vote of confidence as well as a demonstration of the quality offered by France”, he said.
France also announced this week that it would sell 52 Caesar artillery guns to the Czech Republic in a deal worth €257m.
Thales too needs to preserve its reputation. The day after the so-called Aukus deal, the group told investors it would have no material impact and confirmed its 2021 profit targets.
The company received about €65m in annual earnings before interest and tax from its stake in Naval Group pre-pandemic. Thales said that the maximum it stood to gain in any one year from the submarine contract via its stake in Naval Group was €30m, which still represents a fraction of its €2bn annual earnings in 2019.
Thales could also still sell electronic components to Lockheed Martin. Although the US defence giant had been due to make the submarines’ combat systems under the French agreement, some analysts believe it could yet become a supplier as part of the Aukus deal.
However, the slow pace at which the Naval Group submarine contract progressed, and a potential loss of credibility in France’s defence operations, could limit Thales’s growth in Australia, which has become a key market to the company in recent years, some said.
“Whether they like it or not, this is a black mark for Naval Group,” Tusa said. And, for Thales it represents a “loss of momentum in the Australian market, which takes the wind out of its sails”.
However Thales said that this was a “misunderstanding”.
“We have to keep in mind that Thales Australia, with its 3,800 employees across 12 major sites, is an Australian company, an industrial defence leader in the country” and has been a “trusted partner serving the Australian Defence Force for more than 30 years”, a spokesperson said.
As the financial details of a compensation agreement are ironed out by lawyers in Paris and Canberra, French defence companies will look for closer European co-operation, mirroring a push by Macron for a more coherent EU strategy. Defence experts have long called for greater consolidation of Europe’s fragmented defence industry, in part to help boost national budgets but issues of sovereignty have proven too difficult to overcome.
“Europe needs to pull closer together,” one French executive said.
As he announced an €8bn investment in EU defence initiatives over the next six years, Hervé Grandjean, spokesperson for France’s defence ministry, said the ruptured agreement should “lead us to . . . strengthen our partnerships with European countries”.
But some EU partners are sceptical. Christian Mölling, research director with the Berlin-based German Council on Foreign Relations, pointed out discussions about prospective industrial consolidation have been “going on for 30 years and nobody has consolidated”.
The French, he added, will never be “willing to integrate what they see as the crown jewels of their defence industry”.
French defence groups turn to Macron to redress submarine reputation hit
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