17 mars 2020 | International, Naval

‘You need two to tango’: Naval Group CEO Hervé Guillou on business in Europe and Down Under

By: Sebastian Sprenger

COLOGNE, Germany — Hervé Guillou, who took the helm at France's shipbuilder Naval Group in 2014, will retire from the company later this month due to an age limit that comes with the job. He made consolidation in Europe's naval sector a key tenet of his tenure, though there has been little movement so far other than Naval Group's cooperation with Italian shipyard Fincantieri and the resulting Naviris joint venture.

With fears of demand drying up at home, Naval Group made an aggressive sales push across the world, perhaps most notably with the multibillion-dollar Australian Attack-class submarine program. The project received some criticism in Australia in recent months, though Guillou brushed it aside and said the Australian government remains committed to the program.

Guillou spoke to Defense News' European editor, Sebastian Sprenger, by phone on March 10 about the international marketplace and industrial cooperation.

With talk of a need for the European naval industry to consolidate, to what extent do you view Naval Group as a European company?

We are the European leader of naval defense and as a strategic pillar we are willing to contribute to the building of the Europe of defense. We could not deliver the value to our shareholders if we didn't have a reasonable balance between our national programs like Barracuda or FDI frigates, coupled with a number of significant programs for export. Like Dassault Aviation, we need about 40-60 percent of value added for export if we want to maintain competences and competitiveness on the full scope of our offer.

In our effort for internationalization, we have two streams. One is direct sales; we have established 10 new companies outside France. We have seven new customers in seven new countries such as Belgium, Netherlands, Argentina and Romania. That completely changed our international base. The second aspect is Europe, starting with the joint venture with Fincantieri. We have always said other companies can join. The process is slow, but we are absolutely clear that consolidation is needed if we want European sovereignty to be preserved.

We are on the way. Naviris is one step. I hope there will be others. But it's a slow move, particularly in the naval industry because of the political visibility and because of the huge differences between the operational concepts of the European navies. Today, the closest to the French Navy would be the British Navy. But the British are on another agenda after Brexit [Britain's exit from the European Union]. On the submarine side, our closest partner in terms of worldwide, expeditionary capacity for oceanic operations are the Netherlands. On surface ships, because we have done Horizon and FREMMs together, it is Fincantieri.

Today, Italy and the Netherlands are the likely first steps in our European road map, but others are welcome to join.

In late 2018, you said you would make an overture to Germany's ThyssenKrupp Marine Systems for some kind of cooperation agreement once the Australian submarine deal is settled. Did that happen?

No. You need two to tango. I don't know yet what is the consensus — or not — between the ThyssenKrupp leadership, government policies and parliament. It's not for me to interfere in that. I have been sending clear and open messages, and [Fincantieri CEO] Giuseppe Bono did the same, publicly. But today, we have no real answer.

Germany and France have a land project together, the European battle tank, and two air projects, the Eurodrone and the Future Combat Air System. Do you think a naval project besides those is feasible?

I think you cannot copy the aircraft or the land model to the naval sphere. Again, there are no likely bilateral or trilateral programs with Germany in the naval business because Germany has very different operational needs for their Navy than France or Italy. Their submarines are more coastal submarines, geared toward the Baltic Sea. Their surface ships — for example, when you look at the MKS 180 — are of a total different specification than the FREMM or the FDI, which are heavy, weaponized, combat-focused frigates.

The Germans have no need for anything like an aircraft carrier, and they are not going to build SSNs [attack submarines]. So today, in my view, if we do something with Germany, it would be more of an industry agenda, as we did first with Italy, to be able to add and find synergies in our international presence, rather than relying on a bilateral program. And the way our industry consolidates is very different.

But we have a survival issue in industry, to be able to find volumes, procurement synergies, export opportunities among ourselves and being mindful that the real competitor is more China and Russia and not Germany, Italy or the Netherlands.

We continue to explain that, but we need to be patient. I understand well where the Germans come from. With three German yards — TKMS, Lürssen, and Blohm and Voss — it's more fragmented and difficult for them.

What about the argument that it would be hard to mix a former state-owned company like Naval Group with shipyards who don't share that kind of heritage?

That is totally wrong, and it's totally badmouthing. We are a company with a private status and an independent board even if we have a French government shareholder. Governance guidelines apply to Naval Group like they apply to all French industry in the market. The government does not interfere with the social interests of the company, and my board would not accept it. The same applies to the false charge that we get government subsidies. It is totally untrue. If it was the case, everybody could file claims against us in the European courts.

Some of your competitors have argued that Naval Group is too diversified to be compatible with firms that do nothing but shipbuilding.

Again, this is not true. Diversification has been put under control. During my time at Naval Group, I closed two big projects in the nuclear area, which were losing money. I have restricted hugely the area of marine energy production, concentrating on offshore wind and geothermal. We are 98 percent focused on naval business. This is not a good subject for our competitors to argue about.

What are your expectations of the new French aircraft carrier and Naval Group's role in the program?

Naval Group's role is very clear: We shall be the prime contractor for such program. We are the only one capable of designing and integrating such a warship, which includes the concurrent engineering of the combat system and of the platform, including aircraft, drones, the new electromagnetic catapult from the U.S. — more than 200 functions in all.

The hull will be built in St. Nazaire, at Chantiers de l'Atlantique, where the big dock for cruise ships will be used.

We expect a decision on the future aircraft carrier program sometime this year. I cannot predict the exact timing, but I am optimistic that the decision will be made this year. We have delivered to DGA [the French defense procurement agency] our preliminary studies, our cost-capability tradeoffs; we have given a lot of details as well on the timing of the possible entry into service of such a new aircraft carrier. The government now has all the information they asked to make their decision.

Naval Group has been criticized in Australia about the Attack submarine program recently. Did that catch you by surprise?

I must say I'm more disappointed than surprised. We have very, very strong support from our customer and from the Australian government. We know where these attacks come from, and we know how it is used in Europe to damage our reputation for ongoing and upcoming competitions. The first crisis was about postponing by five weeks a design review for a 30-year program. The attacks around that are unfair.

The other controversy was about including local industry. What is the official plan on workshare for Australian companies?

There is no contractual obligation. But we are in a strategic partnership, and there is a clear commitment from Naval Group to reach 60 percent of local content, which is more than the Collins class. And based on our experience in Brazil or in India, we truly believe that at the end of the day we will reach it. It will take time. It is a long, long way to train new industries, to train people, to transfer technology. But we are absolutely committed to Australia, to this partnership to deliver sovereignty, and to deliver this very, very significant percentage of Australian contracts.

Do you think the EU is on a good trajectory to foster defense cooperation?

I don't know yet. There are two sides of the coin. On the defense side, I would say the progress made in the last three years is absolutely huge. The European Defence Fund and the European Defence Industrial Development Programme, for example, are significant achievements of the previous commission. Is it due to U.S. new policies? Is it due to Brexit? I don't know. It's probably a mix of a lot of things.

With the new commission, my understanding is that there is a clear intention to continue in this direction. Nevertheless, there is the budget discussion, which is not completely finished, and where the budgets dedicated to defense are still under threat. We need time to see what the results will be. I'm rather optimistic.

The second issue is more in the civilian-economic area, where we still have a significant issue with the rules for anti-trust in European rules. Those are currently preventing European industry to consolidate at a time when we see the Chinese, Korean and U.S. industries are consolidating. In that context, in the shipbuilding sector, we're not hearing good things about the Fincantieri/Chantiers de l'Atlantique case. This is a big worry for us, as this would prevent European players to turn into world players.

How will the European Patrol Corvette become a truly European program?

Of course, it cannot be a 27-country project. So Europe has to start with two, three or four. This is a Franco-Italian initiative, which is supported by our two navies and our two governments. It was initiated by Fincanteri and Naval Group, and is carried out by Naviris, our joint venture.

Greece has declared their interest formally to join the program. Spain is starting to study the case, though they have not declared officially. If we are three, four countries, it's good enough to start.

https://www.defensenews.com/global/europe/2020/03/16/you-need-two-to-tango-naval-group-ceo-herve-guillou-on-business-in-europe-and-down-under/

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