Aerospace & Defence updates
Sign up to myFT Daily Digest to be the first to know about Aerospace & Defence news.
The French defence contractor at the heart of the diplomatic crisis over the new “Aukus” strategic pact for the Indo-Pacific has vowed to claw back tens of millions of dollars from Australia for a cancelled A$90bn (US$65.4bn) submarine contract.
“We will defend our rights and all our costs . . . every cost that we incurred and every cost related to the demobilisation,” Pierre-Eric Pommellet, chief executive of Naval Group, told the Financial Times.
French officials and executives say that by cancelling the order for 12 diesel-electric submarines for strategic reasons rather than because of any fault by Naval Group — Australia has decided to buy nuclear-powered submarines from the US instead in a pact that also involves the UK — Canberra must repay money already spent and meet the costs of winding down a large design and engineering operation to build the vessels in Adelaide.
Pommellet said Naval Group, in which the French state holds a majority stake and Thales a further 35 per cent, had already been paid €840m for its investments in the project before the cancellation. When the costs of other contractors such as Lockheed Martin, which was to make the submarines’ combat systems, are taken into account, the Australian government is likely to have spent nearly double that on a project that will produce nothing.
Australia may also have to pay out under penalty clauses in the French contract. Although Pommellet declined to say if the contract included such clauses, Australia’s ABC network previously said it had obtained part of the strategic partnering agreement signed in February 2019 showing that Australia would be liable for a €90m “break payment” if it decided to cancel when Naval Group had already submitted a basic design, rising to €250m for a detailed design — which has yet to be provided.
Even if all its costs are eventually covered, Naval Group has suffered a heavy blow from the cancellation of its flagship project. It represented 10 per cent of revenue, or about €500m a year as an average for the years to come, said Pommellet. “Losing 10 per cent of turnover is big.”
Meanwhile, Thales Group, which had its own agreement to supply subsystems to US defence company Lockheed Martin for the submarine programme as well as its stake in Naval Group, downplayed the immediate impact of the cancelled contract, saying it would not hit its 2021 targets.
Though it had booked only €30m of orders on the programme so far, Thales still stood to earn up to €1bn from the agreement in the years ahead, according to some analyst estimates. And the ruptured agreement could have wider ramifications on its relationship with the government of Australia, which has become an important market for the company in recent years, some analysts said.
For Naval Group, a lucrative, high-tech contract that was not only a project but “a transformation for the company” and “a transformation for France”, suddenly turned out to be “a huge crisis” from which the company must extricate itself through growth in other areas and with other customers, Pommellet said.
Australian prime minister Scott Morrison kept Aukus secret within such a small group of trusted advisers that Pommellet was convinced none of his interlocutors in the French contract negotiations earlier this year knew what was about to happen.
Indeed, Naval Group received a letter from the Australian government on September 15 confirming that everything was on track for the next phase. Pommellet said he could hear his colleagues in Paris celebrating the news in a nearby office as he took a call explaining that the deal had in fact been cancelled. “Imagine coming in and telling your team, ‘I have something to tell you’ . . . it’s hard.”
In addition to throwing into doubt the future of 1,000 French employees in France and Australia, the cancellation also affected 80 Australian families who had moved to be near one of Naval Group’s sites in France. “The city of Cherbourg has created an international school for them . . . They hear this story the same day as us, and so, for them, from one day to another — just nothing to do.”
Having cancelled the Naval Group project and deeply offended France by brushing aside its ambitions in the Indo-Pacific, Australia now faces many years of negotiations to secure a different set of submarines that could be even more expensive and complicated to build, not least because they are nuclear-powered.
French officials have been scathing about the vagueness of the Aukus plan, described by one as “only a framework of the study of a project of a project” and by Pommellet previously as no more than “a slogan”.
“We don’t know what it is,” he told the FT. “It’s very secret. But for us, the Aukus deal is a contract that terminates, 1,000 people that need to find jobs, 80 Australian families that are just left, and a shipyard where you had hundreds of people working that just stopped in the centre of Adelaide.”
Additional reporting by Anthony Klan in Sydney.