The plane drain

Aerospace was to be the Daimler-Benz route into a new dimension - instead it has got it into trouble

DASA IS not one of the famous names in aviation: few people outside its native Germany have even heard of it. Burrow into its list of subsidiaries, though, and names well-known to every schoolboy are revealed - Messerschmitt, Dornier and Fokker all live in Dasa's fold.

Not that they have done Dasa - Daimler-Benz Aerospace - much good. Last Monday, its chief executive, Man- fred Bischoff, detailed the latest round of lay-offs at a press conference in Dasa's home town of Munich. Around 8,000 of the 30,500 aircraft jobs are to go - mainly at Airbus, where Dasa is the German partner with British Aerospace and Aerospatiale of France. Three of its production plants are also earmarked for closure. Meanwhile, difficult talks continue with the Dutch government about the future of its subsidiary Fokker, which makes small commercial aircraft and huge losses.

The job cuts come in the wake of last month's announcement that Daimler- Benz had lost a whopping DM1.56bn (pounds 707m) in the first half of this year, far worse than investors expected. The main culprit was a DM1.2bn provision at Dasa.

But few people believe the cuts are anything like enough. When BAe faced a similar crisis three years ago, it shed 56,000 jobs, wrote off pounds 1bn and sold off big subsidiaries, including Rover. The truth is that this crucial component in the mighty German industrial machine has run into potentially catastrophic problems - and it is not clear that the man pulling the levers is prepared to take the drastic action needed.

Jurgen Schrempp, Daimler-Benz's new chairman, seems unwilling to make root and branch changes, let alone unwind Daimler's disastrous diversification strategy. Dasa is at pains to stress that no more job cuts are planned unless the dollar sinks even lower against the German currency. And despite playing hardball with the Dutch, Mr Schrempp seems reluctant to throw Fokker, the baby he brought into the Daimler family, out with the bathwater. "We think it (Fokker) has been the right strategic decision," says Dasa spokesman Andreas Breitsprecher. "We are just struggling at the moment to help it survive."

The five months since Mr Schrempp took over at Daimler-Benz have been eventful, to put it mildly. First he had to cope with an amazing personal attack by Gerhard Liener, Daimler's former finance director, on Mr Schrempp's predecessor, Edzard Reuter, the architect of Daimler's ill-fated foray away from the core car business in the late 1980s.

Next, in a farcical turn, the new chairman and two colleagues, fresh from an agreeable meal at a chic restaurant, were detained for several hours in a Rome police station after an embarrassing 2am fracas with the local caribinieri on the Spanish Steps.

Then came the horrendous figures from Dasa - particularly embarrassing for Mr Schrempp, who was personally responsible for buying Fokker when he ran the aerospace division in the early 1990s. Fokker was meant to be part of Dasa's - and Daimler's - ambitious strategy to become an integrated technology group, taking in aircraft, missiles and satellites, built on the back of the highly profitable Mercedes-Benz car and truck activities.

It was also an attempt to build a national defence and aerospace industry virtually from scratch. Backed by the German government, Dasa was created in the late 1980s through the integration of MTU (aero and diesel engines), MBB (the Messerschmitt military aircraft division), and Dornier (turbo- prop jets), all formerly independent companies. Fokker was bought to form a division making medium-sized regional aircraft. Half of Dasa's DM17.4bn sales last year came from the aircraft division, military and civilian.

Many of Dasa's near-term problems can be laid, paradoxically, at the door of Germany's phenomenal post-war industrial success, which now sees the deutschmark - virility symbol of the economy - trading at DM1.39 to the dollar: good for German tourists, but bad for exports.

The new cost-cutting measures envisage annual savings of DM700m. They are intended to return Dasa to profitability from 1998, but they assume the dollar will weaken only a little further, to DM1.35.

Observers believe this is a dangerously optimistic assumption. "The Germans and the Dutch just don't have the production base at the right price," says Chris Partridge, a leading aviation economist. According to BAe, Dasa's UK rival and an Airbus partner, aerospace labour costs in Britain are 52 per cent cheaper than in Germany.

But not all of Dasa's problems can be blamed on the strong mark. After all, Mercedes-Benz - also under the Daimler umbrella - faces similar problems, but is one of Europe's most profitable car makers.

Moreover, Dasa's travails continue as the turnaround at BAe goes from strength to strength, after the company pulled back from the brink of insolvency three years ago. In sharp contrast to Daimler's lacklustre stock market performance in Frankfurt, BAe's shares are among the best- performing this year in the FT-SE 100.

Dasa's fundamental problems have deeper historical roots. Post-war Germany has never had a defence and aerospace industry of a similar size and national importance to those of Britain or the United States, so the Bonn government has never been a big and reliable customer.

The Federal Republic's constitution, drawn up by the Allies almost 50 years ago, placed severe restrictions on West German companies selling arms or defence-related products abroad. The ban, which is still in place, forced German defence companies to look for joint venture partners in other Nato countries to give them access to world markets.

Although German companies have successfully exported submarines and Leopard tanks, selling combat aircraft abroad has been well-nigh impossible. That in turn has limited scope for technical spin-offs with commercial aviation applications.

"Export restrictions are very stringent," says a senior German defence source. "They hurt Dasa very much. They cannot be a leader in anything. If they want to export, they have to ask; the highest levels of government deal with it on a case-by-case basis. It is a very long and cumbersome process. It makes Dasa an unreliable partner. You never know if they can export." Dasa would like the rules on export licences harmonised within the European Union, though it accepts this is still a long way off, given opposition in Whitehall - and increasingly in Jacques Chirac's government in France - to anything that might impinge on national security issues or smack of a common European foreign and defence policy. Another legacy of the Second World War was a huge brain drain, as some of Germany's best engineers and technicians took their expertise elsewhere. Creating Dasa was an attempt to rectify that situation almost overnight. And by acquiring Fokker, a leading supplier of small regional jets, Dasa sought to reduce its dependence on the defence industry at the end of the Cold War. "The Germans are trying to catch up by buying technology," says Mr Partridge. But overcapacity among suppliers and poor growth prospects for the commercial regional aircraft market have made this policy look foolish. Despite rising profits, airlines remain reluctant to buy new aircraft. "Customers can pick and choose and just about name their price," laments a BAe source. Smiths Industries last week warned that civil aircraft production is expected to fall next year to its lowest level for more than a decade. Boeing, the world's largest aircraft maker, sees no substantial pick-up until the next century. Against this gloomy backdrop, and with passengers continuing to shop around for the cheapest seats, Mr Partridge sees potential for only 2,000 civil aircraft sales in the next six or seven years, split among a dozen manufacturers across the range. "Who's going to make money out of that?" he asks. One solution for Dasa might be to team up in its regional jet business with other European suppliers, a la Airbus. But it is still not known whether Fokker will join BAe's consortium with Italy's Alenia and France's Aerospatiale, which will collaborate o n small jets and turboprops. BAe shows no sign of letting Fokker in yet, and a heated row between Germany and Britain about the allocation of work on the Eurofighter project - of which BAe and Dasa are both members - again shows the limit of cross-border co-operation on prestigious aerospace projects. Another option for Dasa is to move aircraft production to soft-currency countries such as the UK. Dasa's loss might be BAe's gain, albeit temporarily. For the future destination of aircraft assembly is likely to be in the low-cost "tiger" economies of th e Far East. "The Germans see the Toyota factor," notes Mr Partridge. "They see the entire European aerospace industry destroyed by low-cost producers, as happened in cars and television. Aeroplanes are just another component. You just bolt the parts together. It doe sn't matter if you do it in Swansea or Sichuan." Unless, of course, you want to build a national defence and aerospace champion, as Mr. Schrempp has tried, but so far conspicuously failed, to do.

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