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Budget squeeze seen

hitting French

defence firms

PARIS: France's defence contractors, already weakened by years of spending curbs, are bracing for a new round of cuts as the new government seeks to reduce its budget deficit.

Defence spending, the second biggest item after education in the French budget, has been reined in hard in preliminary plans for the 1996 budget announced this month.

Total spending in 1996 is due to rise just 1.5 percent from a revised 1995 budget presented in July to 241.4 billion francs ($48.84 billion) a cut in real terms given expected inflation of more than two percent. Defence spending is also notorious for outstripping price increases in civilian markets.

Of special interest to firms hungry for contracts, only 95 billion francs ($19.22 billion) has been set aside for equipment procurement 10 billion francs ($2.02 billion) less than originally planned in a six-year procurement budget approved by parliament last year.

The effects on individual firms will depend on how the budget is translated into actual orders, but one thing is clear there is not enough to keep the whole industry happy.

"These will be difficult years. At 95 or 96 billion francs it is not a budget which will allow the whole industry to get by without problems," said a senior aerospace company executive. Whichever way the government decided to make its cuts, it would be bad for somebody, he said.

At risk could be orders for Dassault Aviation's Rafale fighter jet, or helicopters made by Eurocopter, a joint venture between Aerospatiale and Daimler-Benz Aerospace.

A senior air force officer said the armed services are being asked to do too much on the money available. As a post-imperial power France has a big military presence overseas, but has to square that with efforts to cut its huge budget deficit.

How the contracts will be distributed this year and next will depend on recommendations due this autumn from a strategic committee which is conducting a defence review for President Jacques Chirac.

The committee will also make a separate review of longer term spending -- choosing between piecemeal cuts spread among the various programmes, or axing whole projects to consolidate spending around a chosen few. A draft bill on a six-year defence programme is expected early next year.

France is still locked into big arms programmes started during the Cold War, including the Leclerc battle tank made by Giat Industries, Rafale jets, and the Charles de Gaulle nuclear-powered aircraft carrier.

Analysts believe the government will use "salami tactics" by slicing a little off each programme, rather than scrapping entire projects -- which would lead to big job losses at a time when the government has made unemployment enemy number one.

But industrialists fear this piecemeal approach will mean smaller orders and more programme delays, reducing potential economies of scale and squeezing slender profit margins.

However some programmes have already been targeted as vulnerable, including the NH90 utility helicopter for the army and navy, and the Future Large Aircraft (FLA) army transporter.

Eurocopter chairman Jean-Francois Bigay has defended the NH90, which is planned for French, German, Italian and Dutch services after 2000. The firm currently holds a contract for pre-development work, which runs to the end of the year. Cancellation would incur hefty penalties, which would save no money for the taxpayer, Bigay said.

The government could delay further development contracts or cut the orders, analysts said.

Armed forces chief General Jean-Philippe Douin has said there is not enough money in the six-year procurement budget for both the FLA and Rafale. If forced to choose, he said he would opt for the Rafale and buy U.S.-built Lockheed Martin Hercules C130J planes.

Alternatively, the air force may have have to trim its orders for the Dassault Mirage 2000-5, analysts said.

Another potential casualty of budget tightening is research and development, a concern frequently voiced by Dassault chairman Serge Dassault. He says R&D cuts threaten the competitiveness of French firms, which fight for exports with U.S. companies that receive research funds from the Defence Department and the NASA space agency.

But further ahead, analysts say there is too much duplication in France and cuts could lead to consolidation.

France has two plane-makers, Aerospatiale and Dassault, two missile firms Groupe Lagardere's Matra and Aerospatiale, and three big defence electronics companies Thomson-CSF, Dassault Electronique and Sagem.

Analysts note budget cuts in the United States and Britain forced a major concentration around a few strong companies. But one banker said the budget squeeze is unlikely to have the same effect in France, where tough labour laws and business cultures tend to protect the status quo.

The French aerospace industry including defence and civil sectors has seen turnover shrink 20 percent over four years to 105 billion francs ($21.25 billion) in 1994. Some 5,000 jobs were lost last year, making a total of around 20,000 since 1990.

The only potential bright spot is export sales. Last year France passed the United States as the world's biggest exporter of arms to the Third World, the U.S. Congressional Research Service said this month. It said French sales jumped to $11.4 billion in 1994, outstripping U.S. sales at $6.1 billion.

The French government disputed the report, saying it wrongly included sales to Middle East countries that were not part of the Third World.-Reuter