Restructuring of the Hellenic Defense Sector: Through the eyes of foreign investors and analysts Panos T. Xenokostas President & CEO, ONEX Technologies Inc. May 2015
Index Defense industries categories European Defense Industries vs Hellenic Defense Industries heading the future and last 20 years restructuring Conclusions & differences Choices and statistics The Hellenic defense industries at a glance The day after and what needs to change The restructuring started but moves very slow.. The successful case study Conclusions 1
Defense Industries Categories Tier 3 contractors are commodity suppliers and general service suppliers, as well as Tier 2 Global contractors industrial produce components Footprints and of supply success services: magic electrical words & electronic : Prime Tier capacity 1 contractors: contractors. (Lead (specialized This level also systems systems includes integrators, producers, all providers platform producers example of «general in electronics, economic equipment, mechanical engineering, metal working, casts & molds, etc., producers along with and of a weapon producers infrastructure Prime contractors systems): of complete» services variety of services. in Usually the sub-systems (transport - risk sharing EU small these and are network mainly major and partnersmedium components): large services, enterprises companies communications, small and medium these (SME) (primarily are or often subsidiaries national externalized specialized of champions), firms training, the major which etc.). defense are At specialized subcontracted this level of the producers defense by supply (prime the production. prime chain contractors contractors. one finds a and sub-contractors), Often, large these number are of these also small risk and sharing medium companies - companies partners. enterprises (SME) as well as subsidiaries of major defense producers often produce often dual-use produce goods dual-use or service goods or service (prime contractors and sub-contractors) which supply dual-use products to prime contractors or subcontractors. enterprises (SME) or subsidiaries of the major defense producers 2
European Defense Industries vs. Hellenic Defense Industries Heading the future and last 20 years restructuring 1991: When the European & US restructuring actually started Defense investments decreasing: Up to 30%-50% Employment decreased up to 65% State Industries changed ownership: Up to 90% Government incentives & protection still? YES Supporting non competitive industries? NO Greece the last 20 years was a salmon in the European Defense river 3
European Defense Industries vs. Hellenic Defense Industries Heading the future and last 20 years restructuring Estimated Employment in the defense industry in EU Countries (1993-2003*) (in thousands) When restructuring was happening 4
European Defense Industries vs. Hellenic Defense Industries Heading the future and last 20 years restructuring Sources of imported military equipment ( 2001-2006) (number of pieces imported) Imports Champion when offset and local participation was at its best 5
European Defense Industries vs. Hellenic Defense Industries Heading the future and last 20 years restructuring Military expenditure in EU countries (In million US $ at constant 2005 prices and exchange rates) Greece was the Champion! 6 ONEX SA 2015 Do not reproduce without authorized permission
European Defense Industries vs. Hellenic Defense Industries Heading the future and last 20 years restructuring Employment per segment in defense related activities in Europe in 2006 (number of persons employed) Dual Use Services & Goods 7
European Defense Industries vs. Hellenic Defense Industries Heading the future and last 20 years restructuring The top 100 defense producing companies share of turnover, in % Share of defense production in total turn-over of major EU defence producers (%) Share of defense production (Non State owned companies What is the existing coproduction programs with these companies, NOW?) 8
Conclusions & differences EU Industries: The last 20 years the EU & Defense Industries.. were preparing for NOW: Restructuring Co-production, Innovation, Investments in R&D, Teaming Utilizing their spending and return them to investments Dual use of services & goods 9
Conclusions & differences Greek Industries: Total absence of any reformation And 2 major causes of the Hellenic Holocaust STATE OWNED COMPANIES: The old Soviet Union model in Business Practices PRIVATE COMPANIES: OFFSET : A tool that ultimately turned to a culture & entrepreneurial spirit disaster 10
Choices and Statistics Last 15 years main target for the EU & US industries to form National Champions: EADS: Aerospatiale Matra, DASA, CASA and number of others THALES: Thomson CSF, Racal, Signaal and number of companies in US, UK, Canada, South Korea, South Africa etc. USA: The formation of Northrop Grumman and Lockheed Martin are Illustrative for the process 11
Choices and Statistics Mergers & Acquisitions in EU Mergers and Acquisitions of the Armoured Vehicles Sector in the EU 12
Choices and Statistics Mergers & Acquisitions in EU The Formation of EADS 1977 2005 13
Choices and Statistics Mergers & Acquisitions in EU The Formation of THALES 1977 2005 14
Choices and Statistics Mergers & Acquisitions in EU The Formation of BAE Systems 1977 2005 15
Choices and Statistics The Top 100 Aviation Industries in the World 89 Public & Private 20 of the biggest are in Sweden (2), Singapore (1), S. Korea (1), Japan (1), China (1), Brazil (1) 3 joint stock 8 State owned 89 Private & Public: 12 Private (PE & Founding families) 77 Public, PE S Shares 7%-70% of the total capital 16
Choices and Statistics 4 Factors strongly influence the acquisitions activity: Government to encourage The trend to invest in expanding sectors. Outsourcing & privatization of traditional military functions (services, logistics, information, technology, networkcentric program) Non-US & Non-EU companies desire to access the markets Private Equity Groups 17
The Hellenic Defense Industries at a Glance The Last 25 Years Math: $1 = -$1 $40 B Investments State Industry = $7 B (OFFSETS) + $7 B (DEBTS) = $14 B 35% Profit = -$7 B = ($1000/Y * 15Y) * 449.341 18
The Hellenic Defense Industries at a Glance Now : SECTOR SALES /YEAR ACTUALL NO WIPS : < $200M SALES & EXPORTS NON- HELLENIC OFFSET RELATED : < $50M (95% ONE PRIVATE COMPANY) ALL THE ABOVE WHEN THE PRIVATE COMPANIES IN >95% WERE BUILT DIRECTLY OR NON DIRECTLY WITH OFFSET BUDGETS (TAX PAYERS MONEY) GOVERNMENTAL COMPANIES WERE BUILT WITH OFFSET AND STATE INVESTMENTS VERY LOW INTERNATIONAL COMPETITIVE ADVANTAGES NON RETURN ON TAX PAYERS MONEY 19
The Hellenic Defense Industries at a Glance What is still out there? Some Infrastructures (most of the need upgrading, automation, robotics etc.) Very few personnel with skills and special training A lot of brain drain 20
The Day After and What Needs to Change CHALLENGES RELATED TO EXTERNAL ENVIROMENT Competition at very high levels Defense budget & spending are going down IMF & EU Element in the Hellenic Economy & Defense sector Brain Drain Importers CHALLENGES RELATED TO INTERNAL ENVIROMENT Skills & age pyramid structure Model & Legislation related to assets Governmental Strategy related to exploiting existing infrastructures Consolidation & National Champion Philosophy Extroversion Transparency Culture Attract foreign & local investors 21
The restructuring started but moves very slow The successful case study HAI-ONEX collaboration for CL-215 and CL-415 Increase productivity 200% Decreasing cost 300% On time service Flexibility for HAF Train new personnel and knowledge continues 22
The restructuring started but moves very slow The successful case study HAI ONEX C-130 Increase productivity from E62K /year to E115K in average base ( savings for HAI >E5,3M/year or >E21M for 4 years) Productivity / ONEX personnel: 200.000 Savings for HAI: 6.900.000 / year Increasing speed and on time for the customer Increasing competitiveness for customers global chain Financial solution for HAI Credit of millions Train new Hellenes Knowhow bridge to new generations HAI ONEX F-16 Increase productivity from E62K /year to E120K in average base ( savings for HAI >E4,3M/year or >E18M for 4 years) productivity / ONEX personnel: 225.000 savings for HAI: 3.750.000 / year Increasing speed and on time for the customer Increasing competitiveness for customers global chain Financial solution for HAI Credit of millions Train new Hellenes Knowhow bridge to new generations Average productivity of HAI personnel is estimated to 62.000 / year 23
The restructuring started but moves very slow The successful case study The challenges we faced and still are facing are: Legislation and related law Bureaucratic and old Soviet Union cultures Clear governmental strategy that will help management to move forward Change in the non-decision culture Objectivity Business experience and balance sheet understanding Culture of extroversion and collaboration Ministers to take decisions based on facts and data. No rumors and non paper practices 24
Conclusion Defense Industries Consolidation Exploiting the local infrastructures with new investments Reformation of the State-owned old Soviet Union model to modern schemes and partnerships Innovation, Extroversion & strategic partnerships Cooperative models and global platforms : $1 defense investment - $1 exports ($0.2 profit, $0.1 contributions, $0.05 taxes) $1 = +$1,35 235 times optimized Profit = +$1,7 Billion+ $7 Billion =$8,7 Billion ($1000/Υ *20Υ)*449.341 25
Conclusion An Investment in knowledge always pays the best interest Benjamin Franklin, 1706-1790 26
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