Manoeuvres in aerospace fail to spark interest they deserve

As an Arsenal supporter, I don’t much care whether Rupert Murdoch takes over Manchester United, save to say that there is an unhealthy Anglo-Saxon paranoia over vertical integration in any industry. It may be fuelled by Murdophobia in the media that he doesn’t own – and that’s why this deal will eclipse other, more important, business stories for weeks to come. But it has to be said that vertical integration isn’t necessarily the commercial public enemy many Brits automatically appear to assume it is.

The privatisation of the utilities industries under the last Government would be more widely considered a success if they had been allowed to retain or develop a degree of vertical integration. As it is, the electricity generators were denied ownership of both the nuclear industry and the means of power distribution, while operating a duopoly that was neither pluralistic nor consolidated. The delay for water companies in the development of multi-utility businesses cost British companies dearly in the development of cable television and telecoms interests.

The Americans, meanwhile, despite a rigorous anti-trust environment and because of the US’s vast land mass, have developed an altogether more tolerant attitude to vertical integration in the utilities industries and, consequently, across its industrial base. It’s this attitude to industrial development that will have generated some of the more interesting conversations this week at an arena of far greater importance to the British and European economies than Old Trafford – the 50th Farnborough Air Show.

British Airways has just secured a 33 per cent discount from Airbus on a 3bn order for 75 aircraft, freezing out Boeing.

Airbus and its suppliers would normally expect a gross profit margin of some 15 per cent, so the industry is rife with speculation that Airbus has bought the business as a massive loss leader in order to erode Boeing’s leading edge. If this is even partly true, then the

Government’s line that this is a good deal for Britain may ring a little hollow with the shareholders of the British companies, including British Aerospace, that participate in the Airbus consortium and which, presumably, will have to share in consequent losses.

If member governments of the Airbus consortium have underwritten such losses, of course, then regulatory authorities such as the World Trade Organisation – not to mention irate Americans and European taxpayers – will want to know all about it. The issue also raises serious questions about the development of the transatlantic aerospace industries and of the potential dangers of European protectionism within it.

The defence industries of the Western alliance, and aerospace in particular, have been through a period of radical and painful change since the end of the Cold War. If the unification of Europe is largely complete and the West’s security stance has been adjusted to take account of it, then the third phase of these industries’ millennial development must be a realignment of the industrial base that underpins the Atlantic Alliance.

The American industries have been through a period of rapid consolidation off the back of the peace dividend, creating giants such as Lockheed Martin, Raytheon and Northrup Grumman. These have been pulled up short by anti-trust authorities from joining forces themselves. The national boundaries of Europe make similar consolidation more of a problem – leading to considerable competitive nervousness from standard bearers such as BAe and a national government consortium such as Airbus.

The danger must be that any residual “Little England” attitudes in government will develop into a Fortress Europe posture with our continental cousins – what the more enlightened officials in the Foreign Office refer to as “Eurofluffiness”. Such a development would be bad for business and bad for pol itical policy.

It would be bad for business precisely because there isn’t enough trade to go around in the new European market. The opportunities for pooling research and development resources could develop one of the most form-idable transatlantic axes the commercial world has ever known and there is evidence that, in these industries, partnerships with American companies work without one party seeking to oppress the other.

It would be bad for politics only – but vitally, because competition for commercial contracts will increasingly take on a politicised nature and will serve to poison the “special relationship” that has secured Europe for more than half a century.

I’m sorry if this sounds unduly alarmist, but reading the Farnborough situation this week stirs the darkest concerns. These concerns are deepened by fears at Farnborough and throughout the defence industry that a Government which is so concerned with image is much more likely to focus on a press baron’s ambitions for a football club than on issues facing far more serious industries.

Still, the two may come together. I read that 600 jobs might go at a defence-stretched Vickers plant in Newcastle, which may, I suppose, attract political attention were a media tycoon (Conrad Black?) to bid for Newcastle United.

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