Few commercial contracts flatter to deceive the way defence contracts do. India’s decision to select Dassault Aviation for exclusive talks on a $15bn-$20bn fighter jet order is a case in point. It may well be a bonanza for the French defence sector. The problem is that the deal (which is not final but is Dassault’s to lose) is likely to delay the development the sector really needs – consolidation.
The US and UK defence sectors, with their histories of cost overruns, are hardly models of value. But they have consolidated around one or two core champions: Lockheed Martin and Boeing in the US and BAE Systems in the UK. That offers scope for cost savings. France’s defence sector is rife with cost duplication, however, despite the best efforts of the government to encourage consolidation and co-operation.
The India contract keeps alive the business case for the Rafale fighter jet. So far, its only customer is the French air force; even Switzerland rejected it last year. So an Indian victory could be game-changing for Dassault. As the core manufacturer, it should reap a majority of the value from the contract (60 per cent, according to Deutsche Bank estimates). Thales, which supplies the Rafale with avionics (and in which Dassault owns a 26 per cent stake), and Safran, which makes the engines, should benefit, too.
Dassault has secured pole position by being cheaper than the rival Typhoon offered by the EADS-led Eurofighter consortium. So margins may be thin. EADS also owns 46 per cent of Dassault Aviation, yet it was competing for the same contract. That is the type of cost duplication that should drive increasingly cost-conscious defence ministries and investors mad. Armed with bragging rights from India, however, Serge Dassault, patriarch of the family at the centre of the French defence industry, has less incentive than ever to want to address it.
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