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Farewell to Arms: Spanish Defense Industry Retools for Civilian Markets

May 20, 1990

MADRID, Spain (AP) _ The reduction in world tensions due to the political and economic changes in Eastern Europe and the Soviet Union could have sent Spain’s defense industry reeling.

But officials say that while arms manufacturers in other Western nations are entering a slump, Spain’s revamped defense industry is adapting to civilian technology and on the verge of profitability.

″The defense industry is technology, and that race continues at a faster pace than ever,″ said Angel Garcia Altozano, head of the defense division of the state-controlled holding company, the National Institute of Industry (INI).

″Overcapacity and aging, inefficient plants forced us to begin restructuring in 1985,″ said the 40-year-old Garcia, whose INI division dominates the Spanish arms industry. ″In a way, that gave Spain some lead- time to shift toward civilian products.″

Spain strove for self-sufficiency in arms production in the period following World War II when the country was isolated and ostracized for having earlier favored the Axis. Exports to Middle Eastern and Latin American nations came later.

Entry in the European Community in 1986 allowed Spain to begin the shift from Third World defense markets to high-tech civilian business in Europe.

In contrast, neighboring Portugal only launched an overhaul of its state defense industry last year, and its main state company, Indep, is still looking for private joint-venture partners for new civilian product development.

Portugal’s defense industry grew up in response to its 14 years of colonial wars in Africa that came to an end in 1974.

Arms companies in Norway, Sweden, France, Belgium and the Netherlands also are reporting declining business and exports and are now scrambling to develop civilian product lines, according to industry analysts.

INI’s chief arms companies are aircraft maker Construcciones Aeronauticas SA (Casa), shipbuilder Bazan SA, electronics group Inisel, and arms, munitions and armored-vehicles maker Santa Barbara SA.

Casa is the holding company’s leader in civil technology and since the mid- 1980s has made an ambitious move into European civil and military cooperation programs and become a supplier of the European Space Agency.

Garcia said INI’s goal was to have Casa break even this year after years of losses.

Casa holds Spain’s 4.2 percent stake in Airbus Industrie, the increasingly competitive passenger jet consortium formed with Aerospatiale of France, Messerschmitt-Boelkow-Blohm of West Germany and British Aerospace PLC.

Last year, Casa’s sales of parts to the Airbus project accounted for a third of its sales.

The company lost 3.7 billion pesetas ($35 million) last year on revenues of 85 billion pesetas ($800 million). Exports reached 62 billion pesetas.

Shipbuilder Bazan earned profits in 1988 for the first time in 22 years.

And last year Inisel posted profits of 984 million pesetas ($9.2 million), with 45 percent of sales in the civilian sector.

Bazan is adapting motors built for navy patrol boats to generate electricity for Spanish utilities, and Inisel is reworking defense electronics and computer software to design cost-saving controls for industrial energy use and manufacturing systems. Both are examples of how INI companies have used defense industry know-how to meet civil industry needs.

Last year, the holding company’s defense division lost 9.8 billion pesetas ($86.7 million), almost all from Santa Barbara and Casa, on revenues of 155 billion pesetas ($1.37 billion).

But the situation has greatly improved since 1987, when division losses totaled 27 billion pesetas ($254 million).

INI defense division exports have steadily increased from a 1987 low of 47 billion pesetas to 73 billion pesetas last year - and an estimated 40 percent of exports were civilian products like parts of airliners and satellites.

Using government statistics, a study by the Center for Peace Research, a private Madrid think tank, showed Spanish arms exports peaked in 1982 at 125 billion pesetas and slumped in 1987 to a low of 16 billion pesetas.

The study also showed that between 1980 and 1987, 40 percent went to Egypt, Iran and Morocco, although government export certificates in the case of Iran showed Jordan, Libya and other third countries as the official recipients.

INI president Jordi Mercader has identified Santa Barbara as the group’s biggest headache, with losses of 6.8 billion pesetas on revenues of 25 billion pesetas.

The decision of the government of Socialist Prime Minister Felipe Gonzalez to slash the Spanish army from 270,000 to 195,000 troops since 1983 has hit Santa Barbara hard, according to Mercader.

″With the situation in Europe as it is,″ Mercader said, ″we’re going to have to incorporate civilian products in every defense line.″

The restructuring of the INI defense division coincided with the end of a 10-year economic recession and the start of a four-year boom during which Spain’s economy has grown 20 percent.

In the process, INI slashed 7,000 jobs at Bazan shipyards and Santa Barbara arms factories to get down to its current 25,000 payroll, he added.

Defense spending was still important to the industry’s growth.

″The entry into NATO in 1982 and state spending on arms modernization since then has greatly helped the arms industry recover in Spain,″ said industry analyst Arcadi Oliveres, a Barcelona university professor.

″The government’s 1983 program to overhaul state industry later included restructuring of arms companies and assigned top priority to reindustrialization in electronics, computers, new materials, aeronautics and energy, all essential to defense.″

State spending on defense has averaged 2.4 percent of the gross domestic product (GDP) between 1985 and 1989, he added, pointing out that the overall economy has grown enormously.

Casa’s expertise in carbon fiber production is key to its construction of Airbus airliner tail components and fuselage pieces for McDonnell-Douglas MD- 11 passenger jets.

Projections of greatly increased air traffic and passengers in the 1990s and aging airliner fleets are stimulating a boom in demand for Airbus jets expected to continue through 2000.

Casa’s biggest military project is Spain’s 13 percent stake in the $37 billion European Fighter Aircraft (EFA) program to build the European fighter jet of the 1990s. The other partners are the main aircraft companies of Britain, West Germany and Italy.

Casa also produces civilian and military versions of its own CN-235 turbo- prop military transport plane and its sister C-212 transport. Turkey recently signed for 52 CN-235s for $500 million.

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