Foreign Policy

By Sally B. Donnelly/Columbus

Ask a military officer what Columbus, Miss., is known for, and he will tell you it produces a lot of good Air Force pilots and a good lot of fiances. The tiny town near the Alabama border feels authentically Southern: it's host to a regional bass-fishing tournament, and Tennessee Williams once called it home. So it is curious to discover that an ambitious global-defense contractor has established a beachhead here.

On a grassy, 40-acre pasture at the end of the local airport's lone runway, the European Aeronautic Defense and Space Co. (EADS)--the world's second largest aerospace firm, with headquarters in France and Germany--has built an 85,000-sq.-ft. helicopter assembly-and-repair facility under the inelegant name American Eurocopter. It is from this spanking-new building that EADS (2004 sales: $42 billion) is staging part of an aggressive push into the U.S. defense market.

EADS is not alone. In recent years foreign companies have streamed into American burgs to tint themselves red, white and blue enough to tempt the world's biggest shopper: the U.S. Department of Defense. The 25 countries of the European Union spend only about half what the U.S. does on defense, even though the Continent has a larger GDP than the U.S. has. Since Sept. 11, the Pentagon's budget has increased 41%--to $419 billion a year. Ralph Crosby, the West Point graduate and defense-industry veteran who runs EADS's North American operations, says the company, which sells everything from ballistic missiles to mobile medical units, has a clear target: "The U.S. military market is simply the biggest and most important market in the world."

"Made in the USA" used to be mandatory for military procurement, but the Pentagon, under pressure to buy more efficiently, has opened bidding beyond U.S. borders--and foreigners are piling in. The Colt handgun, first used by the U.S. military in the Mexican-American War of 1846, has been replaced as standard-issue infantry gear by an Italian-designed Beretta. A Brazilian-made Embraer surveillance plane will soon patrol battlefields for the Army rather than a Gulfstream jet produced in Savannah, Ga. Britain's BAE Systems contributes avionics to the F-16, F-18 and F-117 bombers. Rolls-Royce, the British aircraft-engine maker, does more business with the Pentagon than it does with the British Ministry of Defense.

Then there is the recent contest to build Marine One, the President's helicopter. For the first time, the Pentagon has decided not to buy from Connecticut's Sikorsky Aircraft Co., instead choosing an Anglo-Italian chopper that initially will be made in Europe by a consortium of firms in partnership with Maryland's Lockheed Martin. "The Marine One decision was highly symbolic," admits John Douglass, president of the Aerospace Industries Association, a U.S. trade group. "It showed that foreign companies can compete and win on the most sensitive programs."

American contractors like Lockheed Martin, Boeing and Northrop Grumman still share the bulk of U.S. defense spending, of course. But waves of consolidation have narrowed the domestic field to a small--and, critics say, often uncompetitive--number of major players. And even those firms are looking abroad: Boeing, the world's top aerospace firm and the U.S.'s biggest exporter (2004 revenues: $52 billion), outsources jet components to Japan and Italy. "It's not just a cliche to say the world is getting smaller," says Mark Ronald, CEO of the U.S. arm of BAE Systems.

No company has exploited the Pentagon's openness more effectively, in fact, than BAE, which claims to be the "first truly transatlantic defense company." Since arriving in 1999, BAE has bought 12 defense-related companies in the U.S. and partnered on hundreds of Pentagon programs with domestic firms. Its U.S. revenues have risen from $2 billion in 1999 to $5 billion last year, nearly a quarter of total revenues. BAE now has almost as many employees (25,000) in the U.S. as in Britain.Ronald acknowledges that the special relationship between the U.S. and Britain is a door buster. When the Pentagon recently requested proposals for antibomb technology, BAE asked for and got permission from the British government to offer a classified product. The trust goes both ways: the Pentagon had no complaint when BAE announced last month that it was buying United Defense Industries, which makes the U.S. Army's critical transport, the Bradley fighting vehicle.

EADS will not be as welcome. The decision by the company to make a significant move into the U.S. comes at a sensitive time. The U.S. is still smarting over French and German opposition to the war in Iraq, and Washington is angry about the European Union's intention to lift an embargo on arms sales to China. (EADS is controlled 30% by Germany's DaimlerChrysler, 30% by SOGEADE--half owned by the French government--and 5% by the Spanish state holding company; 35% is publicly traded.) EADS is also the parent of Airbus, the jetmaker that has been squabbling ad nauseam with Boeing over what the U.S. says are unfair subsidies Airbus gets from European governments.

It is a highly charged political environment. Yet EADS is making progress--the firm already has about 50% of the U.S. nonmilitary helicopter market--with the biggest opportunity being the pending battle to replace the U.S. Air Force's aged refueling-tanker aircraft fleet. The contract, which may be worth $20 billion, was the source of a huge scandal involving Boeing last year over illegal and unethical efforts to land an overpriced deal; Boeing's CEO and CFO lost their jobs, as did top Pentagon officials. That has allowed EADS to get into the game with its own tanker. "The U.S. tanker deal is fundamental to us," says Crosby. He announced the company's intention to assemble the jet in the U.S. should EADS win. EADS will probably partner with a U.S. company, perhaps Northrop Grumman, to make the proposal more attractive to the Pentagon.

Appearances clearly matter in the battle for defense dollars, which is one reason EADS has focused so steadily on making itself part of the American landscape. Its print ads feature a former Marine who runs one of its 21 U.S. operations. Dressed in a big black cowboy hat, he is standing in front of a patriotically painted helicopter, with the tagline "I am EADS." The company has also figured out how to play American-style politics: in contrast to Boeing, whose most vociferous political proponents are Democrats in Washington State eager to protect the company's Seattle-area jobs, EADS is building a base in the Republican-dominated South. Two weeks ago, it opened another plant in Alabama, a Republican state, and has hired a former top aide to Mississippi Republican Senator Trent Lott as an executive.

It's a clever strategy that hasn't yet paid off (although the company will soon offer a Light Utility Helicopter for the Army that it says could be worth $1 billion). EADS's American work force is still very small--just 2,000 jobs. Dozens of those 72 positions are recent hires in Columbus. Some are working on used maintenance equipment bought from Texas-based Bell Helicopter. Ask any flyer what Bell was once best known for, and he will have the answer: Bell made the Pentagon's favorite military helicopters. Now EADS is angling to own that spot. Ralph Crosby hopes that before long, U.S. military pilots will have equally strong attachments to EADS.