Defense Trade

With the end of the Cold War and the subsequent decline in military spending in the United States and Europe, defense companies on both sides of the Atlantic began looking to each other's market for additional sales. To gain political advantage when competing in the other's market, U.S. and European contractors began forming transatlantic business alliances. GAO found that U.S. defense contractors prefer teams because they can choose new partners for each competitive market without forming permanent alliances, but European governments do not like the subsidiary role to which they are sometimes consigned. A joint venture is a separate legal entity that two or more companies form to pursue a discrete market. They share risk, decision making, and technology. U.S. companies see a drawback because work may be divided according to the country's investment as opposed to a country's skill. Subsidiaries are not favored because no one country in the fragmented European market has an impact to market access in another country, and large U.S. defense companies have not favored merging with or acquiring major defense companies. Although the U.S. companies reviewed do not consider the U.S. legal and regulatory environment to be a major impediment to forming an alliance, they are concerned with the effect that a slow technology transfer can have on the operation of an alliance and the regulation requiring foreign governments to seek U.S. consent before transferring alliance products to third parties.

GAO noted that: (1) U.S. and European defense companies create teams, joint ventures, and subsidiaries and sometimes merge with or acquire one another in order to compete worldwide for the sale of military weapons systems; (2) two or more companies form a team by negotiating an agreement to work together to pursue a particular government procurement, with one company acting as the primary contractor and others as subcontractors; (3) in contrast, a joint venture is typically a separate legal entity, either a partnership or a corporation, that two or more companies form to pursue a discrete market; (4) a subsidiary is different from both a team and a joint venture because it is wholly owned by one company and is physically located in another country so that it may pursue that country's defense business; (5) defense companies form these alliances and subsidiaries to access and increase their competitiveness in other markets; (6) large U.S. companies prefer to engage in flexible alliances whenever possible; (7) U.S. defense contractors said they prefer teams to other alliances because teaming allows companies to choose new partners in each market in which they wish to compete, increase company capabilities without forming permanent relationships, and access unique technology needed to meet military requirements; (8) however, European governments are not always receptive to teams because they perceive them as alliances led by U.S. companies using U.S. technology that consign European participants to a subsidiary role; (9) U.S. companies see significant disadvantages with joint ventures because the U.S. often abandons multilateral programs before completion and all governments supporting the joint venture make decisions that adversely affect its operational efficiency; (10) large U.S. defense companies do not favor merging with or acquiring major European dense companies; (11) however, European acquisitions of small and medium U.S. defense companies are common because they provide access to the U.S. defense market, which is the world's largest; (12) companies GAO reviewed do not consider the U.S. legal and regulatory environment to be a major impediment to forming an alliance or a principal determinant of the type of alliance chosen; and (13) U.S. companies are concerned with the effect a slow technology transfer process can have on the operation of an alliance and with the effect that a regulation that requires foreign governments to seek U.S. consent before transferring purchased alliance products to third parties may have on future alliance sales.