Welcome: Brent Scowcroft, Chairman, International Advisory Board, Atlantic Council
Moderator: Frederick Kempe, President and CEO, Atlantic Council
Speaker: Thomas Enders, CEO, Airbus Group
Federal News Service
FREDERICK KEMPE: Good afternoon and welcome to the Atlantic Council. I’m Fred Kempe, president and CEO. It’s such a delight to have Tom Enders here. Personal friend for many years, one of the finest Atlanticists I’ve known, one of the most visionary and creative and courageous industrialists I know.
As many of you know, this evening Tom will receive the council’s annual award for distinguished business leadership. This is something we give not just for business accomplishment, but also for the kind of person an individual is in the world – the kind of integrity, the kind of principles, the kind of focus they bring with them. And befitting that recognition, one can hardly think of a business leader better suited than Tom Enders to put a capstone on the extraordinary events here at the council both yesterday and today marking both the impressive progress, but still daunting prospects, toward a Europe whole and free.
Tom, I must say, it’s nice to be at a somewhat lower security standard right now than the vice president, who came before you. That was – that was – that was quite something.
Your address will be the sixth event in the series we call the Atlantic Council Captains of Industry. The series aims to create a pre-eminent platform for the senior executives of business contributing to national security to address the public interests their companies serve and the public policies that shape their markets. We launched this series in October with an address by the chief executive of Excelis, David Melcher, and it’s been followed by appearances from Linda Hudson, who was then still head of BAE Systems; Ellen Lord, the CEO of Textron Systems; Dave Zolet, who heads – leads the public-sector business of Computer Science Corporation; and then earlier this month, a member, like Tom, of our International Advisory Board, General John Jumper, who delivered an insightful valedictory to his distinguished tenure as chief executive of Leidos.
I want to salute Steve Grundman for launching this series. It’s become one of the most popular series that we have now at the Atlantic Council. In a moment, the chairman of the Council’s International Advisory Board, General Brent Scowcroft, will come to the podium to introduce Tom. But first, let me just very briefly summarize a particular impetus for this speaker series.
First, there is a recognition that the business of defense is a vital thread in the fabric of our U.S. and allied national security and the national security across the alliance. Indeed, that realization is central to the establishment of the council’s M.A. and George Lund Fellowship. That position was made possible by a vice chairman of our Brent Scowcroft Center for International Security, George Lund. And as I said, that position is now headed by Steve Grundman.
The second impetus for this series is the recognition that the, quote, vital thread of national security is being transformed. It’s being transformed by the confluence of several contemporary changes in the landscape of this industry. Chief among those changes are, of course, the several manifestations of fiscal crisis, which is reducing national defense investments in nearly every capital of the West.
In addition, there is the fact that, while rapidly receding for more than a decade of counterinsurgency wars, allied militaries now face novel challenges to securing peace and prosperity where it isn’t altogether clear from year-to-year where one can best invest. Furthermore, advances in computing, sensing, communication and biotechnology, just to name four of the new century’s defining technologies, are further accelerating changes in the defense marketplace. Finally, defense industry investors are sounding new questions on how companies tethered solely to defense budgets will create value against the headwinds of slow growth and austerity. And, of course, Airbus has made very clear how it’s balancing, now, the challenges of defense spending by making the commercial side of its business larger and larger in proportion.
With that, I want to invite to the stage Brent Scowcroft. General Scowcroft is the only person ever to have served as national security adviser to two different presidents. He served – 29-year career in the U.S. Air Force, which I always announce whenever someone’s here who does things that involve flying. He was a 29-year career in the U.S. Air Force in assignments that included military assistant to President Richard Nixon and was given the Presidential Medal of Freedom, our nation’s highest civilian honor. His contributions to the Atlantic Council are without parallel. We are literally here today because of General Scowcroft, and I never miss a chance to thank him for it in front of this sort of audience.
But there is a new part to the Atlantic Council right now which I have to say right now, General Scowcroft, and that is the hashtag for this event. And Tom will explain to you the hashtag. But the hashtag for this event is hashtag ACCOI, which stands for Atlantic Council Captains of Industry. And the event will be live-tweeted from the Scowcroft Center new Twitter account: @ACScowcroft. And so you see your name is finding its way in all sorts of interesting places. So thank you, General Scowcroft, and thank you for coming here to introduce our featured speaker, Tom Enders. (Applause.)
LIEUTENANT GENERAL BRENT SCOWCROFT: Thank you, Fred, for those typically generous words. For a moment, I thought I was going to be the speaker. (Laughter.) Anyway, thank you, and good afternoon to all of you.
It is, for me, a great privilege and pleasure to introduce Tom Enders, chief executive of Airbus Group. To me, Tom is an Atlantic community entrepreneur, and I’ll talk about that in just a minute. Airbus, among its many triumphs, is one of the founding supporters of the Scowcroft Center for International Security of the Atlantic Council here today and for which I am deeply grateful.
The opportunity to hear from Tom is a fitting complement to the conference we just completed over the last two days. The sessions have tended to focus on the dimension of the trans-Atlantic relationship involving international politics. Tom represents, and can speak with authority to, another vital dimension of that relationship: the ties of commerce, economics and finance. The conference we just completed was a great triumph. As a matter of fact, I accused our CEO of staging the crisis – (laughter) – in Ukraine to make sure the conference was a success.
But exploring the dimensions of these two dimensions – that is, public policy and business – is the aim of this series: the Atlantic Council Captains of Industry. The series is a platform to engage business leaders who are at the intersection of public policy and the business of aerospace and defense.
Tom Enders, who will receive the council’s Distinguished Business Leadership Award this evening, exemplifies the captive of industry – I screwed up, excuse me – (laughter) – captain of industry in aerospace and defense. His 23-year career at Airbus and its predecessor companies I am sure you’re all familiar with. CEO since 2012 and the head of its commercial aircraft unit since 2007. Tom’s leadership has been instrumental to the normalization of the company’s governance, restructuring of its portfolio, and the enhancement of its growth and profitability – hence the entrepreneur title. His appointment two years ago to lead the entire corporation reflects his experience across the full breadth of the company’s business units and multilateral locations.
And on that point, let me mention that among the locations of this quote, “European,” unquote, company is Mobile, Alabama, where Airbus will be assembling its A320 airliner beginning next year. A testament to the trans-Atlantic relationships Tom has built for his company is the presence today of the former governor of Alabama, Bob Riley, whose participation in these events we very much appreciate.
Less well known about Tom, perhaps, is that the first decade of his career was focused on academics, public policy and military service. He was a paratrooper and attained the rank of major in the German Army Reserve. He worked as an assistant in the German parliament and on the planning staff of the German Ministry of Defense. He even did graduate work at UCLA, earning a Ph.D. in political science. Tom is also a past chairman of the Atlantik-Brücke, an organization designed to promote German-American relations. He was instrumental to the establishment of Airbus’ business in the United States, represented here today by its current CEO, Allan McArtor, and his predecessor, another essential friend of the Atlantic Council, Sean O’Keefe.
The vibrancy of the Atlantic Council, indeed of the trans-Atlantic project as a whole, depends heavily on people like Tom Enders who know how to operate effectively in business and in the public policy sphere. Ladies and gentlemen, please welcome Tom Enders. (Applause.)
TOM ENDERS: Thank you very much, Brent, for these very flattering words. I have to say I’m very honored, Fred, to speak here in this prestigious series today, Captains of Industry. And I’m very happy and very proud that we are partnering the Atlantic Council since quite a few years, the Scowcroft Center, to be part of your International Advisory Board. And you’ve done a great job over years to really reinvigorate, revitalize the Atlantic Council and make it now one of the pre-eminent places for research, for discussion – not just in Washington, I think we’ve seen recently some rankings, but even worldwide – so a great achievement to our friend Fred.
Ladies and gentlemen, dear friends – lots of friends in this room, and I very much appreciate – you had a great conference before. You mentioned that, Europe whole and free; I think it was a roaring success. I didn’t know, Brent, that he was instigating the unrest in Ukraine, but being such an able president and CEO, I wouldn’t exclude that right from the start. I think Fred Kempe can do things like that.
There’s one thing I need to connect with, even though many of you were not here this morning. And that was when Nick Burns was saying this morning – I felt I should make a remark; we were tight on time and didn’t do it – says, German businessmen are traveling to Moscow and embracing President Putin. Well, I’ve counted two or three of my colleagues who’ve done that, so that – there shouldn’t be the impression that troves of German businessmen are traveling to Moscow to save their business and embrace the Russian president.
And I have to say I’m at least a little bit old-fashioned, but when it comes to international law, to the preservation of international law, the restoration – peace and security, I think that this has to have priority over business and over corporate profits. I just want to make that as a remark, because I felt provoked this morning when Nick Burns made these remarks, to add this to my presentation.
Well, I changed the entire introduction here, so I hope my speechwriters are not too unhappy about it, but I felt under the impression – under the impression of recent events, and also my own experiences, that I should do that.
Before flying over yesterday, I was in – I was in Warsaw, in Poland, on Monday, talking to government officials. And I have to say I was very impressed by the mood, the seriousness of the government, the focus clearly being on enhancing collective security through NATO, through the EU – focus on enhancing the Polish defense posture – all that, obviously, against the backdrop of a Ukrainian-Russian crisis or however you call it.
And I found the conviction in Warsaw that Poland will become a front-line state of NATO, a front-line country with hostile, or at least unstable, neighbors in the East in the foreseeable future. And I think there’s no doubt in Warsaw that Europe and the trans-Atlantic alliance are facing the biggest political and security challenge in a generation or so, the re-emergence of a rather aggressive Russia on its borders. At least that’s the perception in Poland, and not only there.
I read a comment by also a great friend, I think, of Atlantic Council, Thomas Ilves, president of Estonia – sometimes called the Estonian Cassandra, particularly when it comes to perception and judgment on Russia, I guess – in an interview with (the FT ?), where he remarked that Russia’s actions in Ukraine presented a, quote, “existential issue,” unquote, for the whole way of thinking about security in Europe in the past few decades.
Now, it’s not on me – I was working as an academic, as Brent mentioned, but that’s a long time ago – it’s not on me to analyze Russian policy or Ukrainian policy or the threat perceptions of the Polish and Baltic friends, but it strikes me, when I look into the media these days, that those people, so-called experts, particularly in Europe, who downplay the crisis, who practice equidistance to the, quote-unquote, “conflicting parties,” show even understanding for the events in Crimea and Ukraine – i.e., understanding for Moscow – are mostly the ones – and that I remember very well – who in the late 1980s were absolutely convinced that the Soviet Union was stable, even important for European peace, and that German reunification would never, ever happen.
By the way, I was in Warsaw to discuss possibilities for further cooperation in the field of aerospace and defense, as you would imagine, and particularly to promote one of a very few truly trans-Atlantic defense systems, a system developed by Lockheed and our European missile house, MBDA, on the contract to which Airbus is a major shareholder, on the contract from the U.S., the German and the Italian government. I mention this not only because I’m very proud of what we have achieved – I think the world’s best-performing high-end air defense system – but because it quite naturally leads to the question of trans-Atlantic cooperation and how industry can perhaps better contribute to security, prosperity on both sides of the North Atlantic, and which political prerequisites have to be put in place. In industrial terms or industrial language, how can we improve, how can we reinvigorate the supply chain? That’s why we chose the title, the Supply Chain for Peace, Security and Prosperity.
Ladies and gentlemen, as Fred mentioned, I’m leading a company that is predominantly in the commercial field, but my remarks today will be very much focused on defense. By the way, for the Q-and-A, we can change that. I’m obviously open also to discuss the commercial business, 80 percent in commercial business, most prominently, obviously, with our large commercial aircraft, the Airbuses. But the 20 percent defense business is important to us and to our defense customers, especially in Europe, and we are the number-one supplier in defense to the German, to the French and Spanish forces, and probably number two or number three in the U.K. With roughly 14 billion euro revenue in defense, we own the largest defense business in Europe.
And in the U.S. we are active on various fronts, was already mentioned, where we’re currently building , with good progress, a large facility down in Mobile, Alabama, to start turning out great commercial aircraft next year. But we’re soon delivering the 300th Lakota helicopter to the U.S. Army, on time, on budget. It’s amazing what we can achieve in the U.S., that – General Paloméros knows what I’m talking about – it’s a big mystery to me why we are often unable to do the same in Europe. But in the U.S., we are obviously much better.
We are supplying the Coast Guard since many years with helicopters, with fixed-wing medium-light mission aircraft. We are supplying radar since many years at Lockheed Martin for the littoral combat ship. And we would have loved to supply tankers to the U.S. Air Force, as Governor Riley and Ralph Crosby and Al know very well. We came that close, at least close enough for the U.S. Air Force to tell us and everybody that indeed we had the best-performing tanker aircraft there is in the world. But we will not give up on that one, Governor Riley.
We’re talking about supply chains. We buy, Allan, roughly $14 billion, U.S. dollars, worth in the U.S. year after year. Ladies and gentlemen, that’s more than we buy in any other country in the world. We are the single-largest customer outside the U.S. of U.S. aerospace products. But most of that, obviously, goes into the commercial aircraft, where we have on average, I think, on our large commercial Airbus aircraft, roughly 40 percent U.S. content. And that shows how interwoven these businesses are trans-Atlantically. And sometimes people try to make you believe that it’s black and white, it’s Boeing against Airbus. If you look at the supply chain, you get a pretty mixed, very and thoroughly international picture.
The trans-Atlantic defense supply chain, however, is only a trickle of that. I will not surprise anybody, the reasons are well-known: national sovereignty notions, tech transfer restrictions, but also industrial policy employment, a lot of parochialism, but perhaps the biggest reason, vastly different markets. In the U.S. we still have a budget, all in all, of roughly 600 billion U.S. dollar. In the EU it was – it’s around 190 billion euros. So, clearly, less than the half. If you look at the procurement numbers or the R&D, research and technology, we’re talking about a difference of 74 – I’m not sure what number I have here, but I guess it’s 2012 numbers or so – 74 billion U.S. dollar in the U.S. versus 4.8 billion euros in the EU., in a region with a gross domestic product higher than the U.S.
Overall, I would say European defense is in an appalling state. There’s been a lot of declarations, a lot of initiatives in the last 25 years, particularly after the end of the Cold War, but very little tangible, substantial action on the ground. Between 2001 and 2010, European defense budgets declined by 25 billion, and I think we are still shrinking as we speak, perhaps the exception of Poland and the Baltic states, where the threat perception is now a different one.
On average, we have 1.5 percent of the GDP we spend on defense of the European Union, 28 nations. I think in the U.S., General Palomeros, it’s still over 4 percent. Two percent – somebody mentioned that, I found in Secretary Gates’ famous speech – U.K., France, Greece and Albania are above 2 percent. Everybody else is below. Some countries, NATO countries, are even at point-something percent. And even the two leading military nations, the U.K. and France – and that was remarkable, I found, at least – are unable to manage limited military operations – limited military operations, I’m talking about Libya – without massive U.S. support.
Europe has 17 production lines for tanks, armored vehicles, artillery, compared to two in the U.S.; 16 naval frigates in Europe, different ones, against a single class in the U.S.; 89 active weapons program in the EU versus 27 in the U.S. These are 2009 numbers, and I think it has not gotten any better. By one account, 20 percent of all development costs in Europe are just for certification, imagine that, because we have only national certification (rules ?), 20 percent.
We’ve seen some consolidation in the industry in areas like space, missiles and electronics. Again, I’m not talking about commercial aircraft, but just defense. But there has been almost none in military aircraft, in ships, ground systems. Again, the answer to that why is quite clear: too many national interests, too much overlap, and certainly too much waste. And European armament corporations simply cannot compensate for such a fragmented political landscape.
Secretary Gates, in Brussels in June 2011 – a lot of these people here in the audience will remember that – gave a pretty good, very blunt account of European defense efficiencies in his so-called farewell address to Brussels, when he pointed out that the U.S. share of NATO defense spending had risen to 75 percent against roughly 50 percent of the Cold War years; pointed out that due to the European shortcomings, NATO faced the, quote, “very real possibility of collective military irrelevance,” unquote; pointed out that if current trends – this is his words – “if current trends in the decline of European defense capabilities are not halted or reversed, future U.S. political leaders may not consider the return on America’s investment in NATO is worth the cost,” unquote.
Well, ladies and gentlemen, very blunt words, but from a departing secretary of defense. Let me say maybe these messages would make more of an impression with European governments if they were part of an inauguration address or something like that. But perhaps the events in Ukraine are more effective in holding the downward trend Gates was describing. As I said before, at least some European – East European countries have now vote to increase their defense spending to 2 percent and beyond.
The European defense malaise, if I may say so in my undiplomatic style, has, of course, serious negative consequences for the industry. The obvious one is the procurement and R&D budgets are significantly smaller. Most of the investment is still spent on national programs. There’s a lack of economy of scale; that’s pretty obvious. If the U.S. Air Force orders – what was it, 175 or 179 tankers in the first batch, Britain will order 14; a factor of 10. That’s probably most of the aircraft that get ordered. France is discussing an order in the same kind of magnitude, and then everything else you can forget.
Less obvious is perhaps that even the big multinational programs – because the Europeans have years ago drawn the right consequences of the fact that this is a fragmented market, that this is not a single market like the U.S., and the consequence – the obvious, obviously, we need to have multinational programs, we have to pool our defense needs. But even the big multinational programs are conducted very inefficiently, and that despite the fact that we have procurement agencies – a European procurement agency in Europe, OCCAR. But the nations hold OCCAR on a very short leash. When I say the nations, that’s the national procurement directors, who jealously watch over OCCAR that OCCAR doesn’t become really effective and does what it – at least I think in its statutes – was required to do.
National work-shares, national requirements, national certification – I mentioned that – national procurement rules: All this prevents scarce budgets being spent wisely and efficiently. I gather that these practices, ladies and gentlemen, have cost each the European taxpayer, but also industry, in the last decade alone, billions and billions of euros. I sometimes wonder on the – if you’re operating under such circumstances, why we are still able to manage a successful or a profitable defense business, but not – by far not as profitable, at least on average, as that of our American peers.
These practices certainly do not result in what the Americans call a healthy industrial base. By the way, I’ve never heard that in Europe, speaking – somebody speaking about a healthy industrial base, because that means an industry that should be allowed to make decent profits and should be incentivized to be in this field of business. Rather difficult notion, in Europe.
It will not have gone unnoticed on this side of the pond that we, as a company, but also we as an industry – defense industry in Europe – are massively reducing capacities and workforce in Europe. So if you speak about the need to restructure and to revamp NATO as a defense alliance, work certainly has to start in Europe. That’s the weak spot.
And there let me say, however, not everything is dark and hopeless. I don’t want to conclude this European chapter on too gloomy a note. For instance, for the first time in five or six years the European Council has held a defense summit last September. And this was not least thanks to President Barroso and President Van Rompuy’s initiative.
Now, there’s been a lot of criticism of this defense summit. A lot of people have said, lovely statements, little action, no integrated defense strategy. I’m here a little bit more optimistic. I think the glass is at least half-full here. I mean, they have discussed concrete projects, they have already scheduled a follow-up meeting, but still, we are far, far away from an effective European defense strategy.
Other positive examples: pooling. Nine EU countries, plus Norway, have signed a letter of intent to pool their acquisition for tanker aircraft. France and the U.K. have done, not just recently, but over many years have engaged in enhancing bilateral cooperation. And let me say very clearly, and not only because my friend General Paloméros is sitting here, and (Stéphane Abrial ?) in the audience: I sincerely believe that if Europe is really serious – will become serious about defense ¬– it has to start with the two core nations when it comes to defensive military postures: That’s France and the U.K. This is one reason why it’s so important that the U.K. remains also in the European Union, not just – not just in NATO.
Another one – positive example – is the U.K. government. The current U.K. government has created a so-called U.K. Defence Growth Partnership, which is a very positive thing, because a great example of government engaging with industry on a more strategic footing, letting us be the partner that we can be. And here I can say it’s not just a nice – a nice label: Defence Growth Partnership. They put money where their mouth is, so this is undergirded by concrete budgets. And I think, again, this is something that’s very positive.
A last example: acquisition reform. I should say I applaud the work that Secretary Hagel, Secretary Kendall and Congressman Thornberry are doing with Better Buying Power 2.0 and other efforts to simplify the processes at the Department of Defense: removing barriers to entry, minimizing unique specifications, using existing authorities instead of creating new ones and so on. Ladies and gentlemen, this should be a win-win for industry and for the government, and certainly a serious case that NATO should look to – to adapting that initiative.
As a company, or as companies, we also try to do a lot. We try to be open to products that are initially developed for the commercial world, reducing the military requalification burden, open to architectures and, I say, limited sovereign or national customization, allowing for easier and faster upgrades later on; and also open to reviewing legacy combat systems that might get in the way of the crucial goal of commonality.
Now let me say a few words about trade. Of course, any conversation on defense or competition is incomplete if we don’t mention trade. In fact, I don’t think that the link between the economies and the security has ever been any stronger. Secretary Rasmussen has said many times that a healthy economy and strong security are part of a virtuous circle.
And let me – let me cut this short and say, look, this is why the TTIP is such an important initiative. The TTIP is about – well, you – everybody has his numbers: plus 400,000 jobs, so many billions of additional efforts, et cetera. But it must be clear to everybody in the defense community that, particularly against the current background – the current backdrop – TTIP is a very strong contributor to our alliance and to a reinvigorated and strengthened reliance (ph) between Europe and the U.S.
Some people have asked me whether I could imagine a TTIP for defense. Yes, I can do this, but not now; in some years. First, otherwise it would be completely unrealistic. The Europeans have to do their homework, and defense will certainly not be part of a current TTIP initiative.
Let me – of course, I’m looking at the watch. I think Fred was looking at the watch. Let me cut a few things here. But one thing I need to – I need to touch upon – so to say the final link in our supply chain – that’s people. That’s talent.
I could not agree more with Linda Hudson from BAE North America, that last year gave the Captains of Industry speech, when she said that as an industry, we must get much better at recruiting and retaining talent. She said we must be more inclusive, attractive and inspirational. And she’s right. And she’s certainly not the first one to ring the alarm bells about growing risks on the industrial side, or what’s being called the specter of a hollow force on the military side. The New York Times Magazine summed it up well by asking, I quote, “Why do we smart, quantitatively trained engineers, who could help cure cancer, instead want to work for the latest social app?” End of – end of quote. What’s important was what’s cool. That seems to be the choice here, but certainly a false choice.
And if Linda thinks it’s bad over here, ladies and gentlemen, it’s much worse in Europe. I mean, how can we – how can we paint a positive picture of a future for young engineers to work in defense? (On top comes the ?) problem that working in defense industry, in quite a few countries in Europe, at least, and certainly including mine, is not something that has a – has a good reputation, that comes with a good reputation. Many see it as kind of a dirty industry. Yes, we must do it, but kind of embarrassed about working in defense. That makes it very, very difficult to gain talent and to regain talent.
As a large commercial company, when we look at all the capacity cuts that we are doing right now, I think we have a bit of an – we have a bit of an advantage. We can, for instance, at least for a while, hibernate military aeronautic skills inside the larger commercial box, but that certainly has a limit. We need also to think more about R&D programs, at least to the – to the stage of demonstrators that produce something tangible for our people, for our engineers. Proud people don’t want to work in this industry if all they do is doing some simulations on the computer screen, never do any hardware.
This is not a new problem. I remember we discussed that already in the ’90s, right after the Cold War: So now that we don’t need these huge production lots anymore, we don’t – we can – we can ramp down our defense budgets, how do we keep a skilled workforce? How do we keep the skills and competence? And I think this is more topical than ever before.
I come to the end. Ladies and gentlemen, I believe that the Atlantic community – a restructured, a healthy, a vibrant trans-Atlantic alliance – remains our best hope, our best asset for the future, a future that will be – that will be – that will not be void of challenges and threats economical, political, military.
I draw the conclusion that despite many disappointments and frustrations about each other – the NSA scandal – as we call it in Europe at least; I’m not sure you call it NSA scandal over here, but it’s a very strong, very real problem in Europe – comes to mind when I speak about frustration, but that nevertheless, this is the time for more, not less, trans-Atlantic cooperation.
We have to strengthen the economic fundament of our alliance – and this is where TTIP can make a very huge difference – as well as its security and defense posture.
I think we are reminded these days that military power continues to play an essential role in international relations, like it or not. Diplomacy, soft power, speaking softly, can achieve only that much if it’s not backed up by credible military options. It’s a big stick that I think Theodore Roosevelt was talking about; speak softly, but carry a big stick.
We at the aerospace industry today, we contribute a lot – I include the commercial – to global mobility, connectivity, to prosperity. And let me say we stand ready to contribute to our nations’ security – hopefully more effectively, hopefully more efficiently. And ladies and gentlemen, we are proud to do so. Thank you very much for your attention. (Applause.)
The hot – the hot chairs?
MR. KEMPE: These are the new chairs, Tom. (Laughs.)
MR. ENDERS: Yeah? The hot chair.
MR. KEMPE: (Laughs.) The hot chair. That was really a lot of – you honored the quality of this audience with the quality of that address, so thank you so much. There are a lot of experts in this audience, so I think I’d rather turn to them more quickly this time around. So I’m going to just ask one question and then turn to the audience and maybe intersperse a little bit.
You spent a lot of time on TTIP. So I wonder – you know, I get the feeling, even at a time when you would imagine that Ukraine would make it all the more urgent to do something of this nature for strategic reasons and global reasons, that it’s losing some steam. And particularly in Germany, I get the feeling on my latest trip in Germany that because of the NSA business and other things, that it’s lost some steam. We also have problems in the United States with the Trade Promotion Authority and the Trans-Pacific Partnership in front of it.
What’s your reading of the situation with TTIP in Europe? Does it face dangers? And just how bad would it be – it’d be great if it came along – but how bad would it be if it doesn’t?
MR. ENDERS: Well, Fred, I’m certainly not a TTIP expert here. I would say that my observation is that the opposition to TTIP is at least as strong in France and the U.K. than it is in Germany. But it boils down to what was discussed in one of the panels this morning: It boils down to leadership.
And right now I perceive the major governments in Europe a little bit oscillating between taking a strongly positive stance and letting things drift, which I think is very – is very dangerous. And the other thing is that – that’s criticizing, a little bit, my own community – that I think the business community has not yet done enough to position itself very clearly. With that I don’t mean just the large associations that come with their standard kind of boilerplate – good arguments, et cetera – but I’m not sure that is really, really convincing. I think this needs to spread also to companies – not just associations, to companies – also to smaller companies, to the entire supply chain, to make people aware what is at stake. And particularly in Germany we have benefited so much from globalization, trans-Atlantic trade, of course, that the fear is largely irrational. But if there’s no strong leadership from politicians and from the business community, we might indeed see that there’s more – there’s more opposition to come. I think likewise here, probably, in the United States, if there’s no strong leadership pro-TTIP, the negative forces might prevail.
And what is at stake is that we would not exploit a huge potential for additional growth, for additional employment, for additional GDP, and would also lose the opportunity to set standards, perhaps for the rest of the world. I wouldn’t overemphasize that point, but if we leave the leadership to others – I mean, a lot has been said this morning about this great – Vice President Biden was talking about this great achievement, the Atlantic alliance. Why would the Atlantic alliance let such a possibility go? But the situation is fragile, is volatile in the publics, and leadership is required.
MR. KEMPE: Have you calculated for your own company – I know you said that you didn’t expect a defense TTIP, but, for the 80 percent of your company that’s commercial, have you calculated what it would do, what help it would give your –
MR. ENDERS: I think in our specific case it doesn’t have much of a – doesn’t have much of an impact. Because, let’s face it, we have a lot of harmonization already, trans-Atlantically. I mean, if I talk about certification, the FAA, the European counterpart, the EASA, are already cooperating very much on the same standards, on the same certification procedures, et cetera. If one certifies an aircraft, the other certifies it as well. There’s been huge progress.
So all these kind of things, but I think in the overall context for us will be very positive. I cannot put a tag on that and say we will sell that many more hundred aircraft, et cetera, but it’s certainly good for the European, for the – for the North American markets and our – particularly our commercial business follows the economic development and growth very, very closely.
MR. KEMPE: So Steve Grundman wouldn’t forgive me if I didn’t ask one question that we’ve asked I think almost every who’s been a participant in this speaker series: The difficulty defense executives are having is where to place bets and where to take risk. And at one end on the spectrum we’ve heard defense executives saying that they got to wait for the military customer to say what’s needed and what’s necessary. At the other end, we heard from Ellen Lord of Textron Systems that successful companies have to get ahead of a defined customer need. Where do – where do you stand on that?
MR. KEMPE: I certainly go with the second opinion. I think it’s particularly on large companies to try to not manipulate, but influence, lead, certain requirements on the military side. I mean, Ralph and I have a couple of wonderful examples. When Ralph was at Northrop Grumman and I was still at Daimler Aerospace, we thought about some of the things that would make a lot of sense, would meet the requirements – there were some basic requirements. We’re talking about introducing the Global Hawk into Europe, talking about NATO AGS. We were just – we were just discussing it over the table. We were not terribly successful here. The Euro Hawk story in Germany was not – was not with a happy ending, and AGS is not what it – what we thought it should be 10 years ago or 12 years ago.
That’s just one example. Because we said, look we shouldn’t wait for governments to address us. We read their requirements. We can understand that. We should come with suggestions. I think this is what big companies should do. But it’s a fine line here to take between being accused of manipulating requirements, et cetera, and being proactive with the – with the military customer.
MR. KEMPE: Thank you. Good answer.
Q: Thank you. I’m Walter Stadler. My background is foreign service and before that military, and I’ve had tours, multiple times, in Germany as well. I’ve been associated with the National Defense University for the last 20 years. I was very pleased to hear about collaboration on the military side, and that’s a very good example. The problem, in a way, is that that particular sector does not attract the attention, really, of the – of a large general public and to those who should be paying attention to that.
So my question is, really: What about joint ventures on the commercial side? I mean, this is aside from componentry and whatnot between large companies. And the obvious example, of course, would be Boeing and your company. Has any thought been given to that, and have you been doing any of that at all? In other words: projects that are large enough to attract the attention of governments and, more importantly, politicians.
MR. ENDERS: Well, last time I tried to attract the attention of politicians, that went awfully wrong. That was when we tried the merger with BAE Systems, but that was on defense. No, but we have not given any thought to start venture between Boeing and Airbus, simply because it’s completely unrealistic. I mean, I don’t think our customers would appreciate that, to start with, nor the regulatory authorities, because over a large spectrum of our portfolio we have a duopoly today. I mean, the Chinese may come in a couple of years, with the Brazilians. The Canadians are in the lower segment – hundred-seaters, et cetera. But this is completely unrealistic.
But I think in the years ahead we might see some consolidation. Difficult to predict how it – how it – how it pans out between the larger and smaller manufacturers, but certainly not between the two big elephants. And I think Governor Riley would violently object to that anyway.
MR. KEMPE: Yeah. Please. Yes. Here and then in front.
Q: Sure. Byron Callan, Capital Alpha. Can you talk a little bit about the European requirements? And if the budgets do turn, what do you think are the most pressing defense needs in Europe right now? Is it transport, mobility, munitions? Where are the opportunities going to be if this does change?
MR. KEMPE: The opportunities in Europe – what are the biggest opportunities in Europe in the defense side?
Q: In the defense side – in the defense side.
MR. KEMPE: And how have – and do you believe – let me add something to that – do you believe they’ve changed in the face of Ukraine? Is there – are there some shifting winds at all that you’re already noticing, or not?
MR. ENDERS: Well, I believe that the – the defense summit in December, which I mentioned, basically got it – got it right. I mean, they put their finger on some of the glaring deficiencies, like unmanned aerial systems, like strategic surveillance and reconnaissance, strategic communication. It wasn’t on the list, but if we go Libya, one of the things is obviously also smart munitions. I mean, if you have a low-intensity campaign and you run out of smart munitions after a couple of days, that is certainly not something that encourages you to think that the Europeans could do limited operations, at least, in the future.
MR. KEMPE: Please. Yes.
Q: My name’s Martin Apple. I’m a scientist. So I want to look at a hypothetical game. The game is a table full of McDonald burgers.
MR. ENDERS: What?
Q: McDonald burgers. And so, you walk by on one side of the table, I walk by on the other. And every time you walk by, you take one. And I’m on the other side and the only thing I can defend that against is, I got the biggest sledgehammer in the world. But I’m not willing to deploy it for taking one hamburger. How many hamburgers can you get away with before I finally deploy? And that’s really the question we’re facing in general, isn’t it?
Q: This is in Ukraine, now. How many Ukraines can you take off the table before he deploys his sledgehammer?
MR. ENDERS: I’m not the expert to – Fred, you –
MR. KEMPE: Let me – let me move from McDonald’s to a related question, which was the other one, which is: What do you feel the impact has been thus far of a more predatory Russia in Europe? Are you seeing differentiated moods? And does this animate a conversation that will allow you to take on, or allow politicians and industry to take on some of the issues you’re talking about in terms of changing the way things are done in Europe?
MR. ENDERS: Well, again, I, you know, don’t feel I’m the right man to answer that in the presence of General Paloméros, General Voyle (ph) and General (Abrial ?) and others here. I don’t know. But my sense is that the requirement side of the North Atlantic alliance is going to be discussed in much more seriousness now than it has been in the past. And one would hope that the decision-makers – not just the national ones, but also the ones that are heading NATO – are using the opportunity to come back to these glaring deficiencies and encourage the various actors, and not just the Eastern Europeans, because the Eastern Europeans obviously get it. I was amazed to see that some of them had also point-something percentage on GDP, so I think this is – this is going to change.
I think one of the – if I may slightly deviate, one of the big challenges for America will be – and I think somebody mentioned this morning – that you don’t put too much strain in the alliance. I mean, America and the East Europeans versus the Western and Southern Europeans who quote-unquote “just don’t get it.” That, I think, could be – could be a problem, but then again I hope that there’s also a serious intra-EU discussion about it.
And by the way, let me – let me – let me say one thing, because I heard that recently. Somebody said, forget this – all this EU nonsense; we should focus and concentrate everything on NATO. I think that’s – that would be a absolutely wrong approach. Europeans have progressed – with lots of problems and challenges, still, but nevertheless, in terms of integration – that far that NATO – strengthening NATO and strengthening the EU for me is one is thing. And I think it’s in the long-term strategic interests of the United States to strengthen a EU – let me call it defense caucus, whatever it is. And more than that, we are still many, many years away from having a European defense minister or something like that, and hopefully not that many years away from having a functioning, empowered procurement organization. OCCAR is in place, but as I said, it’s kept on a – on a – on a short leash. So if the U.S. is really interested long-term in a – in a strong – in a strong partner, we should also very much support the EU activities in organizing a more powerful defense in Europe.
MR. KEMPE: Thank you very much.
Q: Hi, Michael Bruno with Aviation Week & Space Technology. How do you view America in regards to business expansion potential? Is it a place to look for mergers and acquisition or is it simply just a place to try to get in on some Pentagon programs? How do you – how do you look at it for the next few years for Airbus?
MR. KEMPE: Anything you’d like to announce here is – (laughter).
MR. ENDERS: Sure. It’s always good to have it first in Aviation – in Aviation Week & Space Technology. That’s for sure. Well, look, I mean, we are here because this is simply a market too large to ignore. The U.S. still sets the standards on the commercial side and certainly on the military and space side. I would say Ralph and Allan and Sean, after so many years, we have been successful. I mentioned all the things that we are bringing to the – to the U.S. war fighter, to the – to the Coast Guard, et cetera. We have – we have very competitive activities in helicopters, we have very competitive activities in large, fixed-wing aircraft – derivatives of the commercial aircraft, the Airbuses. We have very competitive activities in space, in – on launchers, on satellites, in missiles. I mentioned at the outset MBDA; that, I think, is the second-largest, at least, missile activity in the world. And miraculously, it even works well as a joint venture, even though I have to say I’m not necessarily a big fan of joint ventures or – (inaudible) – ventures. And certainly not exclude activities or the acquisition of businesses or companies over here if the right one comes away at the right time, but that is not the main focus.
I mean, we are building – we’re building on the businesses that we have and we are selling many more helicopters – right? – than these 300 that we will celebrate in a – in a week’s time or so. So I’m very happy with the U.S. business we have, and let’s not forget we are building a huge footprint in commercial in Alabama, and that is because the U.S. is the premier market in single-aisle aircraft. And from then we will see how we will proceed. So we will proceed on two or three prongs: in commercial and in defense and space as well as on helicopters, which is typically dual for – dual-use for commercial and for defense.
MR. KEMPE: So doing my colleague’s bidding for him, you’re not confirming or denying that you’re looking for acquisitions? (Laughs.)
MR. ENDERS: You summarized it well, Fred. (Laughter.)
MR. KEMPE: Questions? Please.
Q: Tom, can you talk a little bit about – (receives microphone) – thanks for this – can you talk a little bit about China and how you see that growing as far as either you being a competitor or partner with the Chinese in building – mainly commercial?
MR. ENDERS: Thank you very much. Yes, generally what – that is a very – that’s a very pertinent question. Certainly we anticipate that the Chinese will build large commercial aircrafts in the future. They’ve just – after many, many years of delays they’ve just gotten, on their end, their regional aircraft, kind of a hundred-seater, I guess, or a 90-seater. They are currently developing an aircraft that goes head-to-head against the 737 and our 320 family. So it’s only a matter of time. It’s not a question of – question of when. You would think that a nation that brings men into space and back – that’s the – that’s the real challenge in space, as we now – (laughter) – immense – immense – immense space will also be able to build a great commercial aircraft.
We are preparing ourselves for that by developing an industrial footprint in China, by assembling, delivering large aircraft out of China, out of Tianjin, very successfully I should say. We have a lot of partners in China in our supply chain, et cetera. But we see them coming as a competitor. Our goal here is that even if they have established a formidable commercial aircraft competitor there, that they should still be interested in not just a monopolist situation. You know, it’s a bet kind of, but I think that’s the best we can do right now, like many other companies in other branches of the industry.
Defense is something to watch. I think it got our attention. Then the Turkish decided to procure a Chinese air defense system. Wow. I mean, OK, there may have been other intentions than just the performance of that, but that is something to watch. They are developing very sophisticated UAVs and stuff like that. So I think the Chinese will become, very quickly, a serious competitor internationally also in defense. I mean, we’ve been talking many years about can we at some point export defense products into China? Can we cooperate with them? Now, that is – that is close. I think that discussion is gone. The discussion is more how far will China be a serious competitor in our, quote, unquote, “Western” markets and in Asia-Pacific and other parts of the world.
MR. KEMPE: If you were – if you were to predict when there will be a Chinese Airbus-Boeing, so it doesn’t become a duopoly, it becomes whatever the three part of this is, how far off is that?
MR. ENDERS: I hope many years. (Laughter.)
MR. KEMPE: Sherri Goodman.
Q: Thank you. Sherri Goodman, Center for Naval Analysis. Continuing a Europe that’s whole and free likely depends on a more strategic approach to energy and energy security than we’ve had to undertake in the past. What role do you see for industry in the – your industry in particular in the emerging debate within Europe about changing the equation of energy security, energy independence, more – developing more alternatives to dependence on Russian oil and gas, and also better to interconnect, within Europe, transmission of various types of energy?
MR. ENDERS: Well, they are certainly not a forefront event. I mean, we are an aerospace company and want to stay an aerospace company, no plans to venture into – into the energy sector. But let me say, the initiative that I think has been largely formulated by Polish Prime Minister Donald Tusk is not being treated by everybody so far in Europe –
MR. KEMPE: Well, European energy union, right?
MR. ENDERS: The European energy union I think is a right – is a right idea, however it gets operationalized. And Vice President Biden was speaking about that just before – before lunch as well. But it will take a while because we have a lot of different vested interests in Europe. Not everybody is immediately enthusiastic about it.
We are doing for our small perimeter – we have a lot of work going on for alternative propulsion of aircraft. I mean, there’s a famous saying that the last drop of fossil fuel that will be burned on this planet will be burned in an engine of an aircraft, right? That may well be, because we are particularly dependent in aeronautics on fossil fuel today, but since quite a few years we, but also our – our competitors, of course we are engine makers, have a lot of research going on and demonstrations on alternative fuels.
We just created some headlines last week where we flew completely electrically, but I have to – I have to admit that was not a hundred-seater but was a one-seater. Then we will have two-seater, a four-seater not a problem. We think we can scale it up to a regional aircraft in the next 20 years. We have close cooperation with companies like Siemens, GE and Sauflon and the engine – the engine makers. So I think the industry, the aeronautic industry, is doing what it can to reduce the dependence on fossil fuel for aeronautic propulsion right now.
MR. KEMPE: Thank you. Yes?
Q: Thank you. Peter Flory with QinetiQ North America, before that at NATO and responsible for the NATO AGS program, which you mentioned earlier, which I think, on balance, is a relative success story but not all that we might have hoped that it would be. And what I wanted to ask you is, from an industrial perspective – I mean, you have a good sense of what the challenges are from NATO AGS, from MIADS (ph), from a number of other programs.
At the end of the day, these programs typically have a lot of political support but are very hard to actually put into practice. I mean, ultimately what are the elements that you think would make for a successful program along these lines? And I guess maybe this should have been the first question. At the end of the day, from an industrial perspective, are programs like this – is the game – is the game really worth the gamble?
MR. ENDERS: Well, to be frank with you – and I briefly touched on the issues with multinational programs. I mean, for most of the players in the industry, multinational programs have become a horror because they are very, very difficult to manage. They are difficult to manage on the industrial side. They are difficult to manage on the – on the political side.
There are some positive examples, and this is when there’s one lead on the customer side rather than a concert of customers or, you know, new agencies that are created for horror, and one lead on the industrial side so that one company leads and has subcontractors and has at least a significant degree of freedom to select the right contributors, the right suppliers.
All the catastrophes we have seen, to put it very bluntly, all the – diplomatically, the difficult programs in the last 10 or 20 years – and, you know, talking about A400M, talking about the NH90 helicopter. The NH90 helicopter we have more versions than we have national customers. Imagine how efficient that can be and how much money you can make out of something.
A400M, it’s no secret that the industry would have preferred the one supplier that was known to be knowledgeable about large turboprop engines, Pratt & Whitney Canada. We conceded to a European consortium that had never worked together on that stuff. We tried to develop an engine by committee, I should say, up to a certain crisis point when this was – when this was changed. That has cost taxpayers billions. That has cost industry billions.
I have to say, after that many years in the – in the industry, I’m determined, at least for my company, not to ever again go into such – walk into such a program consciously, and rather resist contracting and say, no, we’re not doing that. And industry has made this mistake time and again. We’ve said, oh, we know the budget is not sufficient, the timeline is too short, but let’s have – let’s have all your intake first. There’s a window of opportunity. My goodness, five nations or more are for once on the same requirement line, et cetera. Let’s correct the order and we will – we will figure it out in five or seven years.
That hardly ever works. At the end, again, industry has a lot of egg in the face. We’re losing lots of money, and that should not – that should not happen again. I mean, we are trying as industry – and we particularly – on all levels to discuss that with our customers if future programs should be set up. (Inaudible) – is thinking about the famous, never-ending story on UAVs in Europe, for instance, but we do it the right way, that we’re not repeating the many mistakes we’ve made in the past.
But also, I mean, really, the United States – (inaudible) – is a good example. We have developed together since 2004 I think all in all more than 4 billion, was it U.S. dollar probably? The Germans, the Italians, the Americans create an air defense system, really high end, 360-degree capability, the only system on the planet that can – that can battle and shoot down missiles that come from completely different trajectories – one from the front, one from behind – and have proven that, and the U.S. walks out of it.
And the – and now we’re trying as industry to make the best out of it with our partner Lockheed Martin trying to convince the Germans, the Italians to stay with the system. As I mentioned, the Poles as well and probably others. So, so many programs are lacking in consistency over time. That makes it also very, very difficult.
But in general, industry should have much more say on how we do the programs. The requirements are the militaries or – maybe defined by military or whoever. But the execution should be – the authority for execution should be much more on the industrial side. So far all we have reached at best is a kind of half-half situation. And that always – almost always ends in disappointment, to put it wisely.
MR. KEMPE: Thank you, Tom.
I have time for a last question and I’m going to piggyback on that with a quick one as well. Please.
Q: Thanks, Tom, for the presentation. I’m Nikolai Varaburyov (ph). I’m a Ukrainian journalist, just recently came to D.C. So I have actually plenty of questions and I will ask two short. And first is about the sanctions which were put on the Russians, so how it impacts on your – impacts your business. Second, did you have some – any negotiations with Ukrainian side after the revolution, and what are the main challenges for you having to incorporate – (inaudible) – like Eurasian region, accept, like, corruption, monopolies and the same?
So I just want to emphasize that it’s really difficult to – for Ukrainian people to travel, so I have to pay much more to get to Germany for it now than even to the United States. That’s why. So it’s because of monopoly and they don’t let you to come to their markets. So can you explain? The first is about sanctions and the second cooperation with Ukraine. Thanks.
MR. ENDERS: Well, first about sanctions. Are we impacted? I mean, that, I should say, remains to be seen. It depends on how this crisis develops. But we have – and that’s no secret – we have business with Russians on titanium – i.e. we have supply – a huge part of our titanium that comes from Russia. Titanium is a very essential material in building aircraft, even in a time when carbon fiber is more and more used on the – on the structures.
We are not the only one – aeronautic company that has a huge business with Russians on titanium, and so far no sign that this should run into a problem, but you can imagine scenarios where this could become a problem. I think we’re realizing these days in industry and elsewhere this is not the year 1990 when there was literally no business at all with the Eastern world, with Russia. Over the last 25 years we have developed a lot of business with Russia, with former parts of the Soviet Union.
Obviously there’s a – there’s a strong, I should say, mutual dependency, and this is why this sanction business is not clear-cut who is to – who is to – who is going to win and who is going to – who is going to lose, besides the fact that I think that the current sanctions are worse than no sanctions, but that’s a – that’s a – that’s a different story, I mean, in a sense, to convince the Russian leadership of stopping their – their moves, because you can easily sit in Moscow and don’t find that very serious or even ridiculous of what the West is leveraging on you.
Ukraine – well, I hope that we can do business with Ukraine in the – in the future. So far there is no business really, but that will very much depend on the development there, whether we are dealing with a stable Ukraine or not. And that not just goes for our company or for aerospace company. That goes for a lot of – lot of industries.
MR. KEMPE: We’re out of time but I like to close very often with someone of your stature, global CEO with the businesses you have sprawling across the globe, with a question that might require a long answer but I encourage you to give as short one, which is the best CEOs in the world know how to seize opportunities and know how to manage risk. What is the biggest opportunity, very briefly, that you’re seeing in your business with Airbus? What is the biggest risk you feel you have to manage right now that worries you, keeps you up at night?
MR. ENDERS: Well, the biggest opportunity is certainly that with 80 percent of our business we are the operating in a still-growing market. The commercial aircraft market, I mean, we’re not at the end of a line here. We are talking about Europe, and U.S. is a pretty saturated market. You have replacement waves. There is currently such a wave here in the U.S. certainly. But in other parts of the world, particularly Asia-Pacific, there is still a strong growth – growth trends. Well, you see airlines going up and down, but over the next 20 years we are pretty confident – we’re pretty bullish, all of us, in aerospace that this will – this will continue.
But this is, at the same time, the biggest risk – at the same time the biggest risk. The biggest backlog, the largest backlog we have today on the commercial side is in Asia-Pacific, and it’s – and it’s growing. So, I mean, we are all focusing right now on Ukraine. Before, the focus was much more on Syria, but particularly also on the Chinese-Japanese skirmishes and what’s developing in this area. And we can only hope that at least on that, quote, unquote, “front,” things stay quiet, because that would have a tremendous negative impact on a lot of business, almost all business in the Western world who are deeply in the Chinese market.
MR. KEMPE: Fascinating. Tom, let me just say a couple of things in closing. First of all, thank you for what in the diplomatic businesses would be called full and frank conversation across a wide range of tough topics. I think there is just a lot to chew on here. It will be on the site. You’ll be able to look at this, anything that you’ve missed.
Second of all, I want to declare at this point our Toward a Europe Whole and Free conference closed. We were delighted to add this special feature to it. I think that everyone got a lot out of it. And thanks to you who came for this feature and thanks to you who have been here throughout the last two days. And, Tom, we look forward to honoring you tonight. Thank you.
MR. ENDERS: Thank you. (Applause.)