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AUKUS Lesson: Don’t Make Big New Weapons Buys From State-Owned Companies

By News Creatives Authors , in Business , at September 23, 2021

French outrage over the new Australia, United Kingdom and United States (AUKUS) partnership drives home the geopolitical risk of making big weapons purchases from France and other states that have significant “side-gigs” in the defense business. State-owned companies are a relative rarity in the West, but, for France, where naval shipbuilding and the state are almost indistinguishable, the rough-and-tumble of international defense contracting is clearly a poor match with the polite norms of conventional Western diplomacy. 

Western economies are still figuring out how to manage big, globe-spanning state-owned export-minded enterprises. In most Western countries, international arms dealers and diplomats make for uneasy partners, and a bright line firmly separates private industry and government. But France has gone farther than most in merging the State with the French defense industrial complex, making it hard for other states—and other companies—to distinguish between the two. 

Given the extensive interest the French State has in naval shipbuilding, the gruff French reaction to AUKUS reflects the extreme level of the state involvement. A look at State ownership records for French sub builder Naval Group SA show just how hard France is going to be hit by the unravelling of Australia’s $65 billion deal for twelve “Shortfin” Barracuda Class submarines. As of 2020, the French Government directly owns 62.25% of Naval Group, and indirectly controls another 35% of the shipbuilder via an investment by Thales Group, which is, in turn, partially owned by the French State. 

For France, arms dealing is a big component of national identity. French defense contractors are global players, backing the country’s independence, and France’s balance-oriented national security strategy. Other countries use innovative French defense marketing efforts as a template, and defense exports offer Paris a route to both international prestige and profit. And, up until now, the arrangement has worked well. In 2020, France exported $5.6 billion in defense materials, second only to Russia and the United States. 

But the outsized and over-emotional reaction to AUKUS suggests that France is now at a crossroads. It can either be a state or a defense contractor. It cannot continue to merge both roles without the risk of being effectively shut out of important geopolitical initiatives that have big implications for the French military-industrial complex. 

The Promise And The Peril of Arms-Dealer-States

Just as narco-states use state power to facilitate the drug trade, France’s corporate interest in the military-industrial complex is so tightly integrated into the French State, it is, at times, impossible to differentiate between the two.

In business pursuits, French-owned corporations are free to leverage the sophisticated intelligence and diplomatic tools available to the French State, while most competitors struggle to coordinate busy and often disinterested government stakeholders. 

With backing of the French State, French arms dealers are also free to pursue risky—if not reckless—business ventures, supporting customers few public companies might dare to engage, or making inroads in countries that other Western diplomats are unable to approach. As such, French deals, by their nature, attract contention and controversy. There is always a risk that things will backfire. In late 2010, France won a ground-breaking deal to sell up to four Mistral Class big-deck amphibious vessels to Russia, only to back out in 2015, after Russia’s forcible annexation of Ukrainian territory. The Mistrals ultimately went to Egypt.

For many big French defense contractors, the state is, in essence, a free insurance policy, lead-generator and strategic advisor. And, while liberating, this cozy arrangement enables France’s defense contractors to engage in all kinds of bad practices with few consequences. When an overseas arms deal is less important than the political influence bought with it, French State-owned corporations face far less pressure to be accountable for budget or performance milestones than regular corporations. And with state backing, French defense contractors can shrug off complicating challenges of offsets, information-sharing compacts or intellectual property issues that other companies struggle to complete. 

Customers can only lose so much leverage before they start looking elsewhere.  

It is hard enough for private industries to compete against France’s tightly integrated “All-of-Government” approach to defense exports. After losing one contract to another due to strong French coordination efforts—occasionally with the rumored assist from shadowy French forays into economic espionage or the occasional well-targeted bribe—some Western rivals may find it a bit difficult to constrain their enthusiasm on the rare occasions France takes an arms deal on the chin. 

But There Are Reasons To Commiserate:

While many defense export underdogs may cheer France’s temporary setback, there good reason to indulge France’s undiplomatic, board room-like response to this big business loss. The massive failure of a state-owned defense contractor shakes the strategic bedrock of modern France.

It is an enormous blow to French prestige. Aside from the deal’s size and potential for wider growth, the Australian submarine contest was fairly won on the technical and geopolitical merits. And with the win not marred by bribery or major misconduct, France was rightfully proud to have won a “clean” race. And yet, after all the effort, France still lost the deal. 

That’s a tough pill to swallow. No government enjoys the experience of being dismissed as a geopolitical liability and having their marquee defense product declared technically insufficient all in the same press conference.

The timing could not be worse. AUKUS exploded onto the scene just seven months before the French presidential election. France’s response likely reflects President Emmanuel Macron’s aggravation over a seemingly personal attack on his leadership. Aside from the extra political problem the broken sub deal presents, the former investment banker is likely irked that AUKUS sets back his wider scheme to have France lead—and ultimately win—in the slow-moving rationalization and unification of various European defense organizations.

The AUKUS loss also strikes at the heart of France’s fundamental commitment to strategic autonomy. France’s long-held aspiration to be an independent “above the fray” third-party during wider geopolitical confrontations is at real risk. At heart, AUKUS poses a bleak warning that France is running out of time to establish itself as the Western leader of a strategically meaningful block of “unaligned” nations. 

France’s initial exclusion from AUKUS, a likely foundation for a Pacific NATO, complicates French security. Over the short-term, France may enjoy being off of China’s expansionist menu, but, in a few years, China will be right back at work, redrawing sea borders, encroaching on France’s massive Exclusive Economic Zones, and eyeing France’s array of strategically-placed but lightly-held offshore territories. By then, France won’t be at the head of an “unaligned but well-armed” coalition. The country will be forced to either pick a side or be alone and threatened. 

In addition, Paris’ underlying faith in the capabilities of the French intelligence community is at risk. The sometimes-prickly path of French strategic independence has long been supported by big investments in the nation’s economic intelligence capabilities. It was a good security blanket, and, if not feared, French intelligence capabilities were always held in high regard. But with French intelligence missing fundamental changes in Australia’s strategic outlook, French intelligence looks far less formidable than it did just two weeks ago. As France’s economic rivals are emboldened, France’s forensic analysis into what went wrong will be a morale-sapping and time-consuming slog. 

In the end, if Naval Group SA was a private company, France could have easily shrugged off the loss. But now, having put the reputation of the French State on the line, France faces a long road back and a lot of soul-searching. As the initial storm passes, with palliative meetings scheduled and ambassadors on their way back to respective capitals, France needs to re-evaluate their approach to their large portfolio of state-owned enterprises.

And other countries, after watching the undiplomatic fracas, have some thinking to do as well, particularly in figuring out if it is ever safe to engage in big arms deals with state-owned companies.


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