Naval Group Looks to International Growth With Fincantieri Tie-up

by Richard Pettibone, Aerospace & Defense Companies Analyst, Forecast International.

Shortfin Barracuda. Source: Naval Group

As DCNS continues on its restructuring path, the company took another step in this direction and renamed itself Naval Group earlier this year.  The renaming is part of an effort aimed at improving the company’s exposure and recognition in international markets.

This move is the latest step in the firm’s 10-year restructuring effort (begun in July 2015) that aims to cut costs and grow revenues to some EUR5 billion over that period.  This plan focuses on cost reduction, as well as international expansion and diversification into ancillary maritime-related businesses.

In terms of international expansion, Naval Group and Italy’s Fincantieri have become partners following the Italian firm’s purchase of shipbuilder STX France.  Under a complex shared ownership agreement, Fincantieri gained an effective 51 percent stake in STX France, with Naval Group holding a 10 percent share.  According to a Reuters report, “In order for Fincantieri to take effective control, the French state will lend it a one percent stake. Paris will have the right to demand the holding back if Fincantieri does not honor commitments on jobs, governance or intellectual property.” The deal is expected to be consummated in 2018. The next phase would see expanded shipbuilding cooperation between France and Italy, which both face strong competition from Germany and a growing threat from shipbuilders in China and Russia.

Such a tie-up would be good for both companies as the joint entity would have a broader product range to offer potential clients.  Further, the entity would be well positioned to develop additional consolidation opportunities in Europe should the opportunity arrive.

In its own right, Naval Group continues to improve, with sales rebounding following years of decline.  The rise can be attributed to major programs for France, such as FREMM frigates; Barracuda submarines; and maintenance, repair, and overhaul work for the Navy.  In addition, Naval Group has found some success in the export market – especially in Brazil, India, Malaysia, and Morocco.  Looking ahead, these international markets are expected to be a key component in the firm’s growth.

One of the bigger international procurements is Australia’s SEA 1000 effort, which aims to replace the Navy’s fleet of aging Collins-class submarines.  Naval Group prevailed over its competitors by winning the estimated $50 billion program in early 2016.  The company was not as fortunate in Australia’s $10 billion frigate program.  Australia shortlisted BAE Systems, Fincantieri, and Navantia for the program, eliminating Naval Group and ThyssenKrupp Marine Systems from the field.

Overall, Naval Group’s FREMM-class frigate program is now the most important surface combatant project in Europe.  Numerically and financially, it completely dominates the European shipbuilding scene.  Lately, the order book for the FREMM has been very dynamic, with new order prospects emerging to compensate for the losses from multiple cancellations.  In recent developments, Italy succumbed to economic pressure and canceled the remaining four of its 10 ships, leaving just the four ships under construction to round off a squadron of six.  However, this cancellation was reversed when the Italians discovered that designing and building a new “low-cost” frigate would actually cost more than building repeats of the existing design.  Other nations have made the same discovery: the economical way to build warships is to order more of the class that is already under construction.

This recovery has been balanced by the French decision to cancel the three remaining ships in its building program, reducing their class build to the original eight ships – a major reduction from the 17 originally announced.  One of these eight ships has now been sold to Egypt.

Looking ahead, the FREMM has lost its luster in the Canadian Surface Combatant program.  This effort calls for 15 ships to replace the Algonquin-class destroyers and Halifax-class frigates in Canadian Navy service.  According to Forecast International’s Warships Forecast, Canada prefers the purchase of a class that is optimized to its requirements, and in which it has been able to insert a degree of its own design input.  Current opinion is that, at most, an interim order for two or three FREMM-class ships might be placed.

Finally, Naval Group has begun to diversify into energy markets.  The company is expanding into renewable marine energy, such as wind turbine and wave power farms in coastal areas.  To further its ambitions in the tidal energy market, Naval Group took control of Irish startup OpenHydro, which specializes in marine turbines.  With OpenHydro, Naval Group hopes to achieve a turnover of EUR1 billion in this sector by 2025.

With spending tight, warship producers will need to continually tune their operations appropriately through diversification, consolidation, or international penetration.  So far, Naval Group appears to be hitting all the right notes as it moves ahead.

The Defense & Aerospace Companies series focuses on worldwide aerospace and defense prime contractors and subcontractors. Concise reports provide data on individual corporations regarding recent mergers, restructurings, and joint ventures, along with a Strategic Outlook that examines the company’s strengths, weaknesses, and opportunities. Also included in each report are financial and industrial segment data, snapshot coverage of major aerospace and defense programs, and recent U.S. Department of Defense contract awards.

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