French Naval Group Changes CEO’s: A Change of Direction?

By Pierre Tran

Paris – The government has picked a senior Thales executive, Pierre-Eric Pommellet, as the next chairman and chief executive of Naval Group (NG), the incumbent top executive Hervé Guillou told parliamentarians.

“The person the state is proposing to succeed me is Pierre-Eric Pommellet,” Guillou told Jan. 28 the economic affairs committee of the French Senate.

The state holds 62.5 percent of NG, while Thales holds 35 percent of the company, which builds warships and submarines.

An NG Feb. 20 board meeting is expected to approve the pick of Pommellet, confirmed by a March 24 shareholders meeting, with the government due to publish the appointment in the Official Journal in March.

Guillou is due to retire in March, when he reaches the statutory retirement age of 65. He took up the post of NG executive chairman in 2014.

Rumors had circulated that Pommellet was in line for the top job, sparking dissent among  staff, as NG and Thales have long competed for export deals in the key area of combat management systems for warships.

An appointment of Pommellet would make NG, a company of “national sovereignty, ” dependent on Thales, an equipment manufacturer, labor unions UNSA and CFE-CGC said in a Jan. 21 statement. Thales also wielded disproportionately large influence on NG in view of its minority stake, the unions said.

Pommellet “will no longer be number 2 at Thales — he will be 100 percent Naval Group chairman and chief executive, ” Guillou told senators. That meant “defending 100 percent the strategic interests of Naval Group, ” which might entail conflict with suppliers, competitors, and the French government, he added.

An example of that conflict with the state could be seen in NG’s lobbying the economy and finance ministry for payment of some €100 million, the profit the company had to forego when France cancelled the sale of two Mistral helicopter carriers to Russia in 2015. Paris recalled those warships in the wake of Moscow’s backing of armed secession in eastern Ukraine, and then sold the vessels on to Egypt.

Thales received its stake in NG in a sale of assets to the naval company, in the government’s move toward French industrial consolidation. However, Thales insisted on retaining its combat management systems, which compete directly with those built by NG, which prides itself as prime contractor for systems and integrating weapons and sensors on warships.

That French fratricide could be seen in a joint Belgian and Dutch competition for a total 12 minehunters, in which Thales partnered with EDR, Chantiers de l’Atlantique and Socarenam to form the Sea Naval Solutions bidding team.

NG partnered with ECA to form Belgium Naval & Robotics, which won the deal last year. That contract was worth €2.6 billion ($2.9 billion), Belgian daily L’Echo reported.

It was “stupid ” there was such competition inside Europe, said François Lureau of consultancy EuroFLconsult and former arms procurement chief.

Pommellet is “highly competent, undoubtedly the best qualified, ” with experience in the naval sector, defense and the DGA, ” he said, referring the Direction Générale de l’Armement procurement office.

There will, however, continue to be competition on exports of combat systems, the high value and high technology part of a naval contract.

“They can’t do otherwise, ” as much depends on the clients’ pick of systems and weapons, he said. There is need for communication between the two companies.

There was another view, with the government looking for a resolution of competition.

“This was not an anodyne move, ” said Loic Tribot La Spiere, chief executive of think tank Centre d’Etude et Prospective Stratégique. This was the government’s attempt to develop synergy and avoid competition.

“This is an attempt to harmonize the export policy, ” he said.

Guillou has long known of the internal competition for foreign sales. When Guillou was head of the French unit of the then EADS defense and communications division, he pointed up the common practice of finding two French companies bidding in a foreign competition when it was likely there was just one bidder from, say, Germany and the US. That internecine warfare drove down profit margins of French companies.

“He’s a really nice guy, he knows the business well, he’s respected by Dassault,”  said an executive who has worked with Pommellet. That number two post at Thales was the “worst job in the world, ” having to say no to everybody and cutting costs, the executive said. The top job at NG was a “once in a life time ” opportunity.

Dassault Aviation holds a 25 percent stake in Thales.

Pommellet hails from Brittany, northwest France, which is proud of its regional character. Those Breton roots may help as NG has shipyards in Lorient and Brest in Brittany.

Faced with NG staff resistance, Pommellet will need to win support.

There is need for a “step-by-step ” approach to build confidence, which does not come easily and is not set by decree, Guillou told senators.

Among the candidates for the top job were Alain Guillou, NG executive vice president for international development, and Benoit Ribadeau-Dumas, head of the private office of prime minister Edouard Philippe, an industry source said.

A strategic plan awaits Pommellet when he arrives in the NG head office in the 15th arrondissement, with the priority to meet the French navy’s needs as set out in the multi-year military budget law.

NG is called on to deliver the Barracuda nuclear-powered attack submarine, frigate for defense and intervention, and a third generation nuclear ballistic missile submarine. There will also be the government’s decision on whether the next aircraft carrier will be nuclear or conventionally powered.

Guillou made clear the importance of exports, which helped cut the cost of design and manufacture of vessels for the French navy by earning money overseas. That pursuit of “competitive cost ” delivered a unit price of some €750 million for a French FREMM multimission frigate compared to €1 billion for a German frigate and £1.2 billion for a British frigate, he said.

One of the key export files Pommellet will pick up when he takes the chairman’s office is the €30 billion deal with Australia for 12 diesel-electric submarines, based on the Barracuda.

Guillou sought to play down the severity of a recent report on the Shortfin Barracuda project by the Australian National Audit Office, which noted a five week delay in entering the systems requirements review, a key phase in the project.

That delay arose from “an evolution in operating requirements ”, which required extra  study, he said, adding such a short slip in the timetable counted for little in a 25 year program. Guillou was confident NG would deliver the first boat in 2032.

Guillou pointed up what he called “malicious intent ” in the media treatment of the audit report, with negative articles appearing promptly in Germany and the Netherlands. The Australian government had replied to the report by saying the delay did not present a problem, he said.

Guillou attributed the hostile response to political pressure in Australia and said he could name the politicians concerned.

European industrial cooperation will be another issue for Pommellet to pursue, following the creation of the Navaris joint venture by NG and its Italian partner Fincantieri.

Navaris will seek cooperation in export efforts, which can cost €10 million-€20 million in a sale campaign, Guillou said. Navaris plans to pitch for the European Patrol Corvette, a project backed by the European Union’s Permanent Structured Cooperation (PESCO).

Navaris is open to other European partners, Guillou said, adding that he had been in Berlin the previous week, looking to interest the Germans but found little interest.

Germany is cooperating with France in the Future Combat Air System and in land systems, so perhaps it was not ready for naval cooperation, he said. Perhaps there would interest in Sweden, he added. “The door is open. ”

Guillou offered his assistance once Pommellet took up the post. Pommellet is chief operating officer and chief performance officer at Thales.