September 2023 Letter

Dear Fellow Franco-/Aero-philes,

In June, Le Bourget returned after a four-year absence, and I didn’t write about it. Permit me to make amends. It was a great show. But the best part was visiting Paris for the first time since the pandemic. Happily, the quirky retail I love had survived. Favorite used bookstore? Still there. Patisserie specializing in marzipan cartoon figurines (like Asterix and Obelix!)? Yep! Oddball St. Germain shop that only sells Le Petit Prince souvenirs? Still there too. Economies of scale? Nowhere in sight. Big box stores, Amazon, or rapacious private equity landlords and investors haven’t killed what makes Paris great.

That’s true for France’s defense industry too. French industry, unlike UK or German industry; was protected from the predations of late-stage capitalism during the post-Cold War downturn (higher budgets kept the US in better shape, but US industry was still hit by the same forces; for a good reckoning, see here). I toured Dassault’s many facilities in 1997, and they all seemed well-staffed – there was no talk of rationalizing, merging with anyone, or closing anything, despite relatively low output that year (31 Mirages, down from 75 in 1985).

As a result of government protection in the 1990s and 2000s, France’s defense industry is more capable than any other European country’s – it can provide everything from national combat jets to nuclear weapons to tanks to nuclear submarines. France’s industry supply chain is also vertically national, to a far greater degree than any country except Russia (although India and China, two countries that are even more statist than France, want to follow this path). Aside from MBDA and a few other exceptions, what happens in French defense mostly stays in France. With exports, of course.

But this impressive level of sovereignty and breadth of capabilities may be holding France’s defense industry back. Consider the Rafale. For a purely national fighter, it’s remarkable, and 100% French (primarily with Safran and Thales, but dozens of other French suppliers). And the market wants it, with 170+ on backlog – mostly for exports – and more orders being negotiated. Yet in the first half of the year, deliveries came to…four.

Four Rafales? Equities analysts rate companies “Neutral” or “Outperform” or “Underweight.” Four deliveries earns Dassault a rating of “Adorable.” Quaint boutique production like this I associate with Santa’s Workshop in the Macy’s Christmas windows of my youth.

Clearly, scaling up a national industry is a lot harder than scaling up a globalized industry. Last year, ten times as many F-35s were delivered than Rafales (141 to 14). The F-35 draws on the production resources (and investment capital) of over a dozen countries, with Germany’s Rheinmetall added to the list of major suppliers this year. Yes, US industry and defense budgets are much bigger than France’s, but at its 2010 peak the four-nation Eurofighter hit 57 aircraft; Dassault and its French partners got to two Rafales per month in just two years so far. Maybe they’ll get back to two per month next year. Maybe, a year or two later, they’ll get to three.

Also, consider France’s role in Airbus, the largest jetmaker in the world. It’s headed to 90 jets per month in a few years – thanks mostly to the fact that it’s globalized, with major European partners, plenty of foreign suppliers, and four final assembly lines outside France. France’s defense industry, in stark contrast, is stuck in first gear.

There is one big consequence of this scaling problem: countries seeking a non-aligned weapons supplier are in a tough spot. Until the Ukraine invasion, there was always Russia as a source – India was their biggest customer by far, and Russia was India’s biggest supplier. Even India thinks that needs a re-think. China isn’t an option because few countries see them as good partners (as I’ve written). Anything pan-European is problematic, since Germany is viewed as unreliable due to its old-fashioned concern for human rights.

That leaves France as the second weapons source of choice, which explains the Rafale’s sudden popularity. India, Egypt, Qatar, Indonesia, and most of all, the UAE are reluctant to rely solely on the US, so they’ve placed large Rafale orders, with more coming. Since Saudi Arabia likely won’t get a second Eurofighter tranche anytime soon (again, due to Germany), they’re likely to be a large Rafale customer too. But given production constraints, when can they expect to get them?

Unless France can scale up, and until emerging suppliers throughout the world bring their new platforms to market (South Korea has gotten a good start), US industry will increasingly dominate. According to SIPRI, US arms transfers last year jumped 32% over 2021. France, by contrast, actually declined last year, somehow.

France’s strategy of circling the wagons and hunkering down, protecting industry against market forces and external pressures, clearly worked great during the hard times, but it’s also stifling France when markets are booming. Policies need to change with the times.

SCAF could be a test case. I’ve written that the idea of a Franco-German fighter jet is deeply flawed; perhaps in the context of this need to globalize, it might actually make sense. But given its stance on exports, Germany wouldn’t be the best partner. And consider: when Eurofighter was created, France was invited to join; they demanded 46% of what would have been a five-nation program. They were then disinvited. That’s how Rafale was born instead.

In short, don’t expect France to change. Either they successfully scale up alone, or their industry stays constrained. If France’s defense budget, capital, skills and technology were integrated into a greater European industry, the continent would enjoy critical mass. Without France, and with the UK going its own way too, the rest of Europe is going to stay a collection of relatively small producers. These will have their own problems scaling up. If the US is one day viewed as a less reliable supplier (for political reasons), how will Europe take up the slack?

Yours, Until Washington Gets A Quirky Shop Selling Dassault Merch,

Richard Aboulafia