11 March 2010: Wall St Journal
By PETER SANDERS And PETER SPIEGEL
The decision by Northrop Grumman Corp. and its European partner this week to drop out of a $40 billion competition to build aerial-refueling tankers for the Air Force is the latest example of how trans-Atlantic defense ventures have faltered.
Many observers view the size of the tanker deal, and the prominent role played by Northrop partner European Aeronautic Defence & Space Co., as the most significant instance of how trans-Atlantic partnerships can get tripped up.
"There's no doubt that this outcome will reinforce the long-held understanding in Europe that the U.S. defense market is highly protected," said Alex Nicholl, a specialist on European defense companies at the London-based International Institute for Strategic Studies.
"This is not the first time that the rules of a U.S. competition have been rewritten to suit the American competitor. No doubt it won't be the last."
Last year, Defense Secretary Robert Gates canceled a $13 billion contract to acquire a new fleet of presidential helicopters built by Lockheed Martin Corp. with helicopter maker AgustaWestland, a unit of Italy's Finmeccanica SpA, and in 2007 the Pentagon canceled an $8 billion Army spy plane based on an aircraft built by Brazilian jet maker Empresa Brasileira de Aeronautica SA, or Embraer.
The tanker saga began in 2002, when Boeing Co. struck a deal with the Air Force to lease refueling jets. That plan was scuttled after running into opposition led by Republican Sen. John McCain of Arizona, who argued it would be better for the Air Force to buy the planes. In 2008, the combined Northrop-EADS team won a new contest to build the planes, but Boeing successfully protested that award, and last year the Pentagon started the process anew. When Northrop and EADS dropped out on Monday, they said the process was tilted in Boeing's favor.
U.S.-based analysts said there were few signs of protectionism within the Pentagon, arguing that partisan politics may have played a more prominent role.
Loren Thompson, a defense analyst at the Washington-based Lexington Institute, said EADS's North American division made an effort to appeal to a Republican administration and a Republican-controlled Congress when the competition began in earnest five years ago.
At the time, EADS chose a consulting firm headed by former Dallas Cowboys star Roger Staubach—a close family friend of then-President George W. Bush—to scout for a U.S. site for its new tanker plant and eventually picked Alabama, which has strong Republican representation. "They overkilled the right-hand side of the aisle," said Mr. Thompson. "It was the Northrop-EADS team that sought to leverage politics rather than the Boeing team."
Since then, the partisan tide has changed, culminating in the death last month of Rep. John Murtha (D, Pa.), the powerful chairman of the House subcommittee responsible for military appropriations. Rep. Murtha backed splitting the contract between Boeing and the Notrhrop-EADS team but was succeeded in the subcommittee chair by Rep. Norm Dicks (D, Wash.), one of Boeing's strongest supporters in Washington.
European officials have signaled that they view the Pentagon's reworking of the tanker's specifications as beneficial to Chicago-based Boeing, which is the sole remaining bidder.
The European Union's trade commissioner, Karel De Gucht, said it was "highly regrettable" that EADS felt it had to withdraw from the competition, and the European Commission said it would monitor developments for signs the tender's terms were aimed at squeezing out EADS.
On Wednesday, French President Nicolas Sarkozy said he would raise the issue of competitiveness between the European Union and U.S. when he visits President Barack Obama in Washington later this month.
The U.S. and EU have been engaged in a drawn-out case before the World Trade Organization concerning government subsidies EADS gets from European nations, largely for its Airbus unit. An EU ruling on whether these subsidies are illegal is expected in coming months.
The U.S. defense industry had consolidated through a series of mergers in the 1990s, and by late in the decade, Europe was following the same path.
In the late 1990s, industry and government officials believed deeper links would develop between the allied blocs.
Several defense projects appeared to be promising steps: The F-35 Joint Strike Fighter, Lockheed Martin's C27J transport aircraft and the European Meteor missile were all projects with significant contributions from both sides of the Atlantic. In 2001, Raytheon Corp. and Thales SA, of France, formed the first trans-Atlantic defense-industry joint venture, focusing on markets outside the U.S. and Europe.
—Daniel Michaels contributed to this article.
