The Global Strategy Of Bae Systems Economics Essay

BAE Systems was formed in November 1999 merger of British Aerospace and Marconi Electronic Systems. wiki 4 BAE Systems is headquartered in London, United Kingdom, and operate around the world. It is the second largest defense company, the third largest national defense Airlines, also the third largest electronic Airline in the world. It defines its “home markets” to be Australia, India, Saudi Arabia, the UK and the US. (BAE Systems2012) BAE systems have a first-class system providing capacity, a very mature technology in naval platforms, in the manufacture of military aircraft, electronic products; system integration technology has reached the world leading level. This enables companies to provide services for international clients through major defense system and the domestic aerospace market.

EADS and BAE call off world’s biggest arms merger

According to BBC News reported on 10 October, 2012, EADS and BAE Systems issued a statement, they decided to cancel their planned due to unable to reach agreement of interests of the three governments. The statement said, obviously, both shareholders and government can not reach an agreement, and also can not agree with an accordant merger target. Thus, considering the best interests of the companies and shareholders, BAE Systems and EADS decided to terminate negotiations but continue each respective strategy. BAE Systems and EADS blame the failure of the negotiations on the government that in negotiations with the interrelated government, the two companies has not been able to fully reveal the details and benefits of the merger. They pointed out that, at the beginning of the negotiations, both sides have made it clear that as long as the structure of the merger is subject to the interests of shareholders, and to get the support of the shareholders, BAE Systems and EADS would spare no effort. The two companies have been working to achieve this structure.

2.1 Why BAE-EADS merger can not succeed?

Invesco Perpetual said “could not see the rationale for the merger between a British defence business and the owner of Airbus. Other than diversification – which investors can achieve for themselves more cheaply and simply – Invesco does not understand the strategic logic for the proposed combination.”(Guardian 2012)

2.2 Does strategic alliance actually succeed?

Strategic alliances refer to cooperative agreements between potential or actual competitors. (Hill, p488)

If the merger of the two companies had approved as we mention at the beginning, it will produce the largest comprehensive civil aircraft and defense manufacturers in the world.

In 2011, for example, the total income of BAE and EADS is more than $ 94 billion, while only $ 69 billion of Boeing’s total revenue. For a long time, BAE and EADS have good relations of cooperation, both joint venture MBDA is a famous weapons development and manufacturer. In addition the two sides in the Eurofighter project (“Typhoon”) has been maintained long-term cooperation. The two companies said that if the merger is successful, it would create a world-class enterprise groups, and their businesses would cover the aerospace, defense and security, and at the same time brings industrial advantage of France, Spain, the United Kingdom, Germany and the United States all together. (BBC News 2012)

The Global Strategy of BAE Systems

For most businesses, the primary goal is creating the highest value of the enterprise for owners and shareholders. To maximize performance of enterprise value, the managers have to increase the profitability of the company and its rate of profit growth by pursuing strategies in a long term. (see Figure 2) Managers can improve the profitability of the company through various strategies, such as reducing costs, increasing the value to the product, which are conducive to raise the price of the company’s products. Managers also improve the company’s profit growth through various strategic ways, as expand existing markets or develop new markets. (Hill 2011)

3.1 BAE Systems selling West Chester armored vehicle business

The Wall Street Journal reported that BAE Systems announced an agreement to sell commercial armored vehicles business to the homeland security and counter-terrorism specialist O’Gara Group in West Chester, Ohio. The transaction will be completed in the fourth quarter of 2012.(2012) O’Gara Group CEO Bill O’Gara said this deal will promote about 30% of O’Gara Group’s total revenues of its mobile systems division next year. Also it provide a platform for global expansion.(Newberry 2012) Erwin Bieber, President of BAE Systems, Inc.’s Land & Armaments pointed out, sale of commercial armored vehicle business and transformation of their remaining production work from West Chester site to Sealy improves their competitive, and allows them to focus on core capabilities, as well as reducing the cost, better positioning business in the future.(Advance 2012

3.2 The Development Strategy of military industry magnates in the globalization era.

Enterprise can founded a wholly-owned subsidiary in a country, either to establish a branch, the so-called greenfield strategy and also by the acquisition of a business in the target market. Acquisitions have many advantages: 1. Acquisitions are quick to execute. 2. Enterprises through mergers and acquisitions to seize market opportunities. 3. Relatively low risk (Hill 2011)

The termination of the Cold War open a broader overseas market for military enterprises, also make British arms dealer BAE systems globalization expansion plan comes true. BAE net sales revenue achieve an increase of 150% compared to a decade ago, while global military spending increased by only 50% over the same period. Behind the huge income index, BAE move faster than others, open the U.S. defense market using cross-border acquisitions, firmly grasp the commercial opportunity of the ground weapons in the ten years of anti-terrorist war, and successfully achieve incremental transformation.

3.2.1 British state-owned enterprises descent

Before the merger of BAE and Marconi Electronic Systems of GEC company, BAE is a complete monopoly of the British aviation in the field of technology equipment manufacturing, it had deep relationship with the government, with a strong platform integration capabilities, in the progress reforms by Margaret Thatcher, the identity of BAE transfer state-owned into privatization; while GEC control most traditional of British aviation, electronics and shipbuilding, its subsidiaries MES has the unsurpassed ability of electronic systems. Select vertical integration with MES, BAE Systems thus became the third largest Aerospace Defence integrated company in the world ranking after Boeing and Lockheed Martin.

3.2.2 Abandon Europe to the United States to transfer geographical focus

After mergers and acquisitions, the renascent BAE no longer satisfied in domestic market which growth was almost stagnant, the arrival of the peaceful epoch removed more barriers for growth abroad.

From the arms dealer’s point of view, the importance of the European market was self-evident, but compared to the tiny, intense competition in Europe’s military supplies market, the advantages of the U.S. defense market was obvious – where the defense spending budget remains kept increasing year after year, the growth rate three times as on the European market, the number of military contractors is less than 1/2 of the European market.

(Figure 1 Share of world military spending for the top 10 spender, 2011)

In the huge U.S. market, there are several major full system suppliers: Lockheed Martin, Northrop Grumman, Boeing, the competition is slightly less, which urge the United States to introduce more open competition mechanisms in the weapons and equipment procurement policy, and the introduction of the Allied military enterprises to improve the microclimate of the local closed defense industry, which undoubtedly produce catfish effect, stimulate innovation, and cost control. In addition, facing from military to economic, political and other aspects of the integration trend is increasingly evident in Europe, the United States needs a solid ally as United Kingdom, to deepen the two countries’ defense integration to fight the centrifugal force from the European.

3.2.3 The budget decide direction, BAE make the transition to ground weapons

Changes in the national security situation that decide what the people think, and determine the focus of the defense budget, the arms dealers’ purse strings. After 911, the break out of the war in Afghanistan and Iraq, the demand of land & armaments related military safeguards increased sharply, congressional budget tendency to focus on transfer to terrestrial services, ground equipment industry which has been neglected more than 10 years of is facing a major turning point.

With the growth of the U.S. operations, Surplus funds of BAE kept increasing, net operating cash flows rose to £1.884 billion in 2004, rising to 201% compared to 2003. BAE with abundant funds began to transform a series of ground-based weapons. The only highlight in the land was it served as technical guidance for McLaren since 1997. In order to involved in this business as soon as possible, BAE taken strategy of “following acquisition”, which keep an eye on the strategic objectives of the industry leader General Dynamics.

In military industry, only General Dynamics are unique in terrestrial business of armored vehicles. Alves is the main armored vehicles manufacturer in the UK, 90% of the in-service armored vehicles in British army, more than 30,000 armored vehicles in 40 countries around the world were from Alves, if successful acquisition Alves, General Dynamics will undoubtedly expand monopoly advantage. However, three months later, BAE announced acquired Alves’s for £ 268 million. On this basis, BAE merged its RO Defence departments and Alves, completed a re-integration of the ground system business of the United Kingdom, Sweden, South Africa, the United States was completed in the first half of 2005, thus became largest ground-based weapons manufacturer in Europe. Smoothly open the vast American defense market, BAE quickly cut into the “anti-terrorism” in the rising demand for ground weapons business, BAE smooth sailing in the U.S. defense market with the infiltration of triphibian development.

3.3 Who is the next “American” market?

At the moment, the traditional sense of the European and American markets in terms of wrestling with a financial crisis cut military spending, instability region as well as emerging market demand for arms is constantly rising. According to the statistics showed by Swedish Peace Research Institute, global military spending in 2010, Europe has become the only continent which reduce defense spending, fell by 2.8%, while in Asia, the Middle East, Africa, South America, respectively, rose to 1.4%, 2.5%, 5.2% 5.8%. Also according to the data of the Peace Research Institute, the U.S. arms exports amounted to $ 46 billion in 2011, nearly double compared to 2010. The military enterprises not only were not impacted from the financial crisis; on the contrary, it became another branch of the forces driving economic growth in the United States and Europe, it would further promote the global expansion of the military industrial enterprises.

Sweden, South Africa, Saudi Arabia, Australia and India are regarded as home market for BAE. BAE once held 30% of the shares of Swedish SAAB group, sold Gripen fighter with SAAB. Saudi Arabia is a rich patrons arms market, however lack of a sense of security, because of its neighbor Iran. he country’s defense spending to GDP ratio is 1:10, ranking first in the world. In 2007, the Ministry of Defence of Saudi Arabia signed a trade of 72 Typhoon fighter with BAE, the initial value of the contract has reached 4.43 billion pounds, plus the cost of the supply of weapons and maintenance services, the contract value is expected to reach 20 billion pounds in the next 20 years, which is called “Century orders.

Also South Africa is the valuable market for BAE. For most countries, due to its narrow domestic defense market, independent military enterprises often difficult to survive; South Africa is a typical case. Its largest state-owned military enterprises Daniel Group involved gigantic losses and had to determine the “partial privatization” and “strategic alliance” strategy, and ultimately the divided the controlling stake of number of subsidiaries. BAE also plans to acquire the Daniel Group aerospace and ordnance segment of 30% stake, but the deal eventually fell in 2002. However, BAE and Daniel Group remains the relationship of the business alliance to jointly expand the international military market.

3.3.1 BAE Systems joint venture company in India

Mahindra & Mahindra Ltd. and BAE Systems, has signed an agreement to create a land systems focused, joint venture defense companies, which headquartered in India. Mahindra Group ranks in the top 10 industrial enterprises in India. Mahindra is the leader in multi-utility vehicle in the Indian market. It made a milestone entry into the passenger car segment with the Logan. Mahindra & Mahindra is the only Indian company among the top tractor brands all over the world.(Mahidra Rise,2012)

Guy Griffiths, Group Managing Director International, BAE Systems, said:

“As winner of the 2009 Frost and Sullivan Award for Customer Value Enhancement, which recognises excellence in customer service, customer retention and ultimately customer base expansion, Mahindra Defence Systems is a great choice to be our land systems partner in India. “The skills and knowledge of the two companies are an excellent fit, and the values and vision which we share will allow this venture to prosper and innovate. India recently became BAE Systems’ seventh home market; this new company is a central part of that strategy.”

The cooperation of BAE Systems and Mahindra & Mahindra Ltd. is in order to make better respond to market competition, so as to achieve a win-win. However, the cooperation before, BAE must take into account of the determinants of national competitive advantage in India using a Porter’s Diamond.

Porter explains that there are four factors responsible for such diversity. He calls those factors the “diamond of national advantage”. The diamond includes: Factor conditions, Demand conditions, Related and supporting industries, Firm strategy, structure and rivalry. In this report we will analysis the above diamond based on the actual situation of defense industry in India.

Indian defense industry is one of the fastest growing defense markets in the world.

Factor environment-Private sector play a significant role in the defense industry sector subcontractors and supporting industries. Major private sector involvement in defense institutions and ordnance factories of raw materials, semi-finished products, parts and components. Its world-class expertise and high-tech private sector participation will not only increase India’s indigenous defense production capacity.

Demand conditions-Terrorism has sharply cut the defense budget growth and a shorter sales cycle, providing a huge market demand for defense manufacturers. Because India faced nature of the security threats, Homeland Security growth opportunity mainly in the aviation, mass transportation, and maritime security markets.

Related strategy and supporting industries-Defense industry, requires a lot of investment, backed by strong research and development, may be completely dependent under government control, because it’s critical. Under the unique industrial policy, large numbers of defense production and infrastructure, including 39 Ordnance Factories, 8 Defence PSUs and 50 Research & Development laboratories was set up in India.(Indian Defence Industry,2012)

Firm strategy, structure, and rivalry-The Indian government decided to open the defense industry in May 2001, private sector participation up to 100% with foreign direct investment allows up to 26% – are subject to licensing. Managing their offset obligations especially due to the restricted FDI limit could be the biggest challenge for foreign companies. However, Indian government under the pressure from the industry bodies and key corporate companies, it is estimated that the FDI limit as part of joint ventures is expected to increase to 49%.( Second Line Of Denfense 2012)

3.3.2 Seeks slice of Asian-Pacific defense industry market

Due to the impact of the current economic crisis, Western countries continue to cut the defense budget, result in further shrink in Western arms market Competition for the arms market in the developing countries, will be more intense, Asia will become a market full of competitors, but this big cake should be shared by Western arms manufacturers and local companies. Currently, BAE Systems occupies a market share of approximately $ 200 million of the defense market in Japan. Britain and Japan are going to develop weapons, after Tokyo named the UK as its first overseas defense trading partner after United States. (Watt 2012) Component of the defense market in South Korea can not be ignored. In the competition with US defense group Lockheed Martin in the upgrade South Korea’s F-16 fighter jets contract, BAE finally defeated strong opponents, wins Korean F-16 upgrade contract with $ 1 billion. (Telegraph 2012)

Expansion of emerging markets

However, in the rapid rise of emerging markets, mergers and acquisitions surgery has gradually force the incompetent. In one hand, in majority of developing countries, military science and technology is relatively backward, it is hard to find quality acquisition targets; in the other hand, for the maintenance of local military industries, there exist barriers to mergers and acquisitions due to public policy. Therefore, the weapons sales will become an important means of BAE expansion in emerging markets. Fortunately, the expansion of cross-border market, BAE has its own outstanding place, such as its innovative technical capabilities keep up with the pace of the market, it lunch non-lethal laser weapons in the period of rampant piracy, make tanks disappear on enemy’s radar incarnation as a pacing of cattle and sheep, all the details reflects research and development capabilities of accurate understanding of the customer psychology. The strategy of providing lifetime warranty for military products is also sharp weapon for competition conquers new markets, extending the profit chain.

Figure 2: determinants of national competitive advantage: Porter’s Diamond

Source: Reliving MBA Days 2012

porters-diamond

Figure 3: Determinants of Enterprise Value

Source: Hill 2011

Reduce Costs

Profitability

Add Value and

Raise Price

Enterprise

Valuation

Sell More

In Existing Market

Enter New Market

Profit Growth

Figure 4: Generic procedure for the market entry in foreign economies

Source: Marketing in China 2012

China Market Entry