In the past, European governments made several attempts to integrate the European defense market using a variety of organizations. OCCAR’s impact on the European defense market will largely depend on the number of programs that it manages. European government and industry observers have noted that European defense industry is reacting to pressures from rapid U.S. defense industry consolidation, tighter defense budgets, and stronger competition in the global defense market. While economic pressures to consolidate exist, European defense companies face several obstacles, according to European government and industry officials. Complex ownership structures also make cross-border mergers difficult because many of the larger European defense companies are state-owned or part of larger conglomerates. Although most cross-border industry cooperation is project specific, European defense companies are also acquiring companies or establishing joint ventures or cross-share holdings that are not tied to a particular program. Key European Countries Vary in Their Willingness to Purchase Major U.S. Defense Items

Despite attempts to develop a unified European armament policy, individual European governments still retain their own defense procurement policies. Key European countries, including France, Germany, Italy, the Netherlands, and the United Kingdom, vary in their willingness to purchase major U.S. defense equipment. In the major defense competitions in which U.S. companies competed in the United Kingdom over the last 5 years, the U.K. government tended to chose a domestically developed product when one existed. The U.S. government is also seeking opportunities to form transatlantic partnerships with its European allies on defense equipment development and production, but some observers point to practical and cultural impediments that affect the extent of such cooperation. U.S. Companies Form Industrial Partnerships With European Industry to Sell Defense Equipment

U.S. defense companies are forming industrial partnerships with European companies to sell defense equipment to Europe because of the need to increase international sales, satisfy offset obligations, and maintain market access. Changes to U.S. Policies Support Defense Trade and Transatlantic Cooperation

DOD has taken a number of steps over the last few years to improve defense trade and transatlantic cooperation. Some observers indicated to us that there may be some impediments to pursuing U.S.-European defense cooperative programs on major weapon systems because (1) European procurement budgets are limited compared to the U.S. budget; (2) the potential that U.S. support for a program may change with each annual budget review may cause some European governments concerns; (3) despite changes in DOD guidance, many military service program managers may be reluctant to engage in international cooperative programs due to the significant additional work that may be required and potential barriers that may arise, such as licensing and technology sharing restrictions; (4) many U.S. program managers may not consider purchasing from a foreign source due to the perceived technological superiority of U.S. weapons; and (5) European and U.S. governments have shown a desire to maintain an independent ability to provide for their national defense. Conclusions

Efforts have been made to develop a more unified European armament policy and defense industrial base. To maintain market access in Europe, U.S. defense companies have established transatlantic industrial partnerships. These industrial partnerships appear to be evolving more readily than transatlantic cooperative programs led by governments.
Why GAO Did This Study

GAO reviewed the changes that have taken place in the European defense market over the past 5 years, focusing on: (1) what actions European governments and industry have taken to unify the European defense market; (2) how key European countries' defense procurement practices have affected U.S. defense companies' ability to compete on major weapons competitions in Europe; and (3) how the U.S. government and industry have adapted their policies or practices to the changing European defense environment. GAO's review focused on the buying practices of five European countries--France, Germany, Italy, the Netherlands, and the United Kingdom.

What GAO Found

GAO noted that: (1) pressure to develop a unified European armament procurement policy and related industrial base is increasing, as most nations can no longer afford to develop and procure defense items solely form their own domestic companies; (2) European governments have taken several initiatives to integrate the defense market, including the formation of two new organizations to improve armament cooperation; (3) European government officials remain committed to cooperative programs, which have long been the impetus for cross-border defense cooperation at the industry level; (4) some European defense companies are initiating cross-border mergers that are not tied to government cooperative programs; (5) although some progress toward regionalization is occurring, European government and industry officials told GAO that national sovereignty issues and complex ownership structures may inhibit European defense consolidation from occurring to the extent that is needed to be competitive; (6) until European governments agree on a unified armament policy, individual European countries will retain their own procurement policies; (7) like the United States, European countries tend to purchase major defense equipment from their domestic companies when such options exist; (8) when national options do not exist, key European countries vary in their willingness to buy major U.S. weapon systems; (9) trans-Atlantic industrial partnerships appear to be evolving more readily than trans-Atlantic cooperative programs that are led by governments; (10) U.S. defense companies have established these trans-Atlantic partnerships largely to maintain market access in Europe; (11) U.S. defense company officials say they cannot export major defense items to Europe without involving European defense companies in the production of those items; (12) some U.S. defense companies are seeking long-term partnerships with European companies to develop a defense product line that will meet requirements in Europe or other defense markets; (13) they believe such industrial interdependence can also help counter any efforts toward U.S. or European protectionism and may increase trans-Atlantic defense trade; and (14) the U.S. government has taken several steps over the last few years to improve defense trade and trans-Atlantic cooperation, but some observers point to practical and cultural impediments that affect U.S.-European cooperation on major weapon programs.