Euro Aircraft Builder EADS Seeks Emerging Markets

Countries in Europe are tightening their budgets and imposing austerity measures.

But Louis Gallois, who runs the largest European aerospace and military contractor, is not worried.

He is banking on emerging markets like China to help fill in any of the gaps left by the Continent’s tighter spending.

Gallois, the chief executive of European Aeronautic Defense and Space, the parent company of Airbus, said

Countries in Europe are tightening their budgets and imposing austerity measures.

But Louis Gallois, who runs the largest European aerospace and military contractor, is not worried.

He is banking on emerging markets like China to help fill in any of the gaps left by the Continent’s tighter spending.

Gallois, the chief executive of European Aeronautic Defense and Space, the parent company of Airbus, said

shrinking military budgets and lackluster growth in civilian air traffic in the West were requiring the group to shed some of its European identity.

“EADS was created as a European company, exporting mainly to European countries and to the United States,” he said.

“Now we are in a new world. We know growth in our company will not come from Europe or the United States. Growth will come from emerging countries.”

As evidence of how seriously this change is viewed,

Gallois said he hoped to appoint at least one top manager from Asia to the EADS executive committee by 2013

and to establish a headquarters in the region on a par with its sizable North American presence in Washington.

“I think we need to create this third pillar,” he said.

“We have one member of the executive committee located in Washington.

In two or three years, I think we will need to have members of the executive committee also located in Asia.”

“Some of the main managers of the company have to be located in emerging countries,” he added.

“That’s the only way to understand these countries.”

EADS swung to a net profit of 13 million euros, or $17.7 million, in the third quarter of 2010,

compared with a loss of 87 million euros a year earlier.

Revenue rose 18 percent, to 11.3 billion euros.

Austerity programs across Europe are widely expected to shrink regional military budgets 10 to 15 percent through 2012

and to make them contract further until at least 2014.

The $660 billion military budget in the United States — the world’s largest —

will probably be cut about 7 percent over the same period, analysts say.

Meanwhile, countries like China, India, Brazil, Qatar and Saudi Arabia

have been posting double-digit growth in military and security spending in recent years.

EADS has been pursuing lucrative deals in such markets to supply

• Eurofighter jets,
• Eurocopter helicopters and
• border security and surveillance systems.

Airlines in Asia, Latin America and the Persian Gulf region in the Middle East are also dominating demand for civil aircraft.

When President Hu Jintao of China visited France last year,

EADS announced an $8 billion order for 66 Airbus jets for China.

It was the latest in a string of major emerging-market deals announced in 2010,

including an $11 billion order by the airline Emirates, of Dubai, for 32 Airbus A380 jets,

bringing that carrier’s commitment to 90 of the superjumbo planes.

“These are the regions that are currently the most cash-rich,”

said Saj Ahmad, an analyst at FBE Aerospace, a consulting firm in London.

“They know there is liquidity there that their customers can tap into, which is less the case in Europe and North America.”

Indeed, EADS said that customer advance payments on new orders had helped to bolster its cash position.

Its net cash was 10.3 billion euros, up from 9.8 billion euros at the end of 2009.

But orders in emerging markets are increasingly coming with strings

that oblige manufacturers to build design and assembly facilities in customer nations

and to share critical aerospace technology.

“I am requesting from everybody inside the company, wherever they are,

to think of how to take into account that our growth will come from emerging countries,” Mr. Gallois said in the interview.

“What kind of footprint do we need to have in these countries?

I think it’s not only part of our manufacturing activities, not only part of our engineering capabilities.”

Lakshmi N. Mittal, the Indian-born founder and chief executive of ArcelorMittal, the world’s largest steel maker,

joined the EADS board as an independent director in 2007.

Gallois said Mittal’s presence was helping the company to recalibrate its focus overseas.

“He is helping us to change our mind-set, because he is not thinking locally,” Gallois said.

Ahmad of FBE Aerospace cautioned that adding — or moving —

production and design capabilities abroad, especially to lower-wage countries,

was likely to raise hackles in Europe.

Governments in Europe have invested heavily in infrastructure

and provided significant research and development support to EADS over decades

to ensure that highly skilled jobs remain there.

“I would think there is a very big risk that jobs are going to move at the expense of jobs back in Europe,” Ahmad said.

But Gallois stressed that EADS is committed to its home base of France, Germany, Britain and Spain.

“I want to be clear that we are not on our way to leaving Europe,” he said to the New York Times.

“But we need to build this third pillar in emerging countries.

And for sure, in the not-too-distant future, it will be as important as the other two.”