Boeing Sends Shivers Through Europe Sets Sights On European Defense Industry

When the Czech Republic said it would sell a stake in military-aircraft maker Aero Vodochody to Boeing Co. and McDonnell Douglas Corp., the estimated $33 million transaction attracted little notice in the U.S.

But the May announcement sent chills through the European aerospace industry. The Czech Republic, Hungary and Poland are expected to spend billions modernizing their weapons as they prepare to join the North Atlantic Treaty Organization.

Boeing and McDonnell Douglas, which plan to merge, are going after these sales. European competitors - already concerned about Boeing’s growing strength in commercial jets - now worry about the company’s threat to their defense business as well.

“They’re buying their way into the Eastern European market,” complained Jean-Louis Fache, director of strategy at France’s state-owned defense and space company Aerospatiale SA.

Boeing will be the biggest aerospace company in the world after it buys McDonnell Douglas for about $16 billion this summer, making it the No. 1 seller of military as well as commercial aircraft. It will also be the richest, and perhaps the most aggressive, marketer as it draws upon decades of competition in the cutthroat jetliner market.

“Boeing’s plan to merge with McDonnell Douglas has been a real wake-up call for the European industry,” says Manfred Bischoff, chief executive of Daimler-Benz Aerospace, the aerospace unit of Daimler-Benz AG.

Its dominance in military and commercial aerospace will give Boeing a big advantage in export markets where winning business often requires a promise to put new plants, equipment and jobs in the buyer’s country. Having both large commercial and military divisions would give Boeing more jobs to offer.

Consider Eastern Europe. Nations there are in the market for new fighters, and they’re looking at McDonnell Douglas’s F/A-18s, sizing them up against planes made by British Aerospace Plc and Dassault Aviation SA, Europe’s biggest warplane makers. Lockheed Martin Corp. of the U.S. is also in the running.

The competition requires companies to do a certain amount of work on the buyer’s home turf. European executives say they’re worried that Boeing will be able to offer more such “offsets” than their companies can.

This has made British Aerospace, for one, a little nervous about going head to head with Boeing.

True, the company has commercial aircraft work it could offer as an offset through its 20 percent stake in Airbus Industrie, the European consortium.

Trouble is, that European consortium is shared among four partners in four nations - including Daimler-Benz AG in Germany, British Aerospace Plc and Construcciones Aeronautica SA of Spain - and it is difficult for the group to shift work out of those countries, where unemployment is high.

Boeing, meantime, says it is eager to send more work out of the U.S., where almost all of its manufacturing is done. The company hired 20,000 people last year to meet surging demand for aircraft, and its militant union is less concerned about work going abroad. Rather, some Boeing employees worry they are working too many weekends building airplanes.

One place work may go is to Aero Vodochody. Boeing and McDonnell Douglas could ask workers there to make more parts for Boeing jetliners and McDonnell Douglas fighters.

“That will be very useful to them when they go to sell F-18s to the Czech Republic,” said Mike Turner, head of British Aerospace’s commercial aircraft business.

Alan Mulally, the new president of Boeing’s defense and space group, makes no bones about wanting customers to do one-stop shopping with the Seattle-based aerospace giant. Considered one of Boeing’s master marketers, Mulally led the company’s effort to build the 777, a fast-selling twin-engine jetliner.

But beyond having a big catalogue, Boeing says it won’t have an enormous advantage over any of its military or commercial rivals, as regulators from the European Union allege.

The EU says buying McDonnell Douglas will give Boeing access to a wealth of Pentagon funds that it could use to subsidize research on its commercial aircraft business.

Boeing retorts that if that were the case, McDonnell Douglas would have a thriving commercial aircraft business, instead of one that won less than 10 percent of new orders last year.

“We want McDonnell Douglas so we can become a more balanced company,” said Dave Suffia, a spokesman for Boeing.

European executives aren’t buying it. They say the expertise and government money that come with McDonnell Douglas’s defense businesses are sure to seep into Boeing’s commercial aircraft work by supporting its engineering staff.

“You cannot underestimate the value of their technology base,” said John Weston, head of British Aerospace’s defense unit and head of sales for the Gripen and Eurofighter jets.