Multinational Finance_Individual_Assignment_RalfJANSEN_FINAL

Student: Ralf Jansen Course: Multinational Finance Campus: KEDGE Marseille Date: 18.12.2015

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Multinational Finance

Ralf Jansen

Case study: Dassault and its recent Rafale fighter jet sales success in Egypt


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Table of contents

1. Introduction .............................................................................................................................. 3 1.1. RAFALE case study focus ............................................................................................................ 3 1.2. Background information on the RAFALE fighter jet project .......................................... 3 1.3. RAFALES recent sales success ................................................................................................... 3

2. Egypt, country risk analyses ................................................................................................ 4 2.1. Country key facts ........................................................................................................................... 4 2.2. Current events ............................................................................................................................... 5 2.3. Socio-‐political stability ............................................................................................................... 5 2.3.1. Terrorism ..................................................................................................................................................... 5 2.3.2. Nile River water sharing rights .......................................................................................................... 6 2.3.3. Geographical footprint ........................................................................................................................... 7

2.4. Financial risk analyses ................................................................................................................ 8 2.4.1. Overview ...................................................................................................................................................... 8 2.4.2. GDP growth ................................................................................................................................................. 8 2.4.3. Inflation ......................................................................................................................................................... 9 2.4.4. Budget balance ....................................................................................................................................... 10 2.4.5. Current account ...................................................................................................................................... 10 2.4.6. Public debt ................................................................................................................................................ 11 2.4.7. Currency risk ........................................................................................................................................... 11

2.5. Economical risk analyses ......................................................................................................... 12 2.6. Overall SWOT analyses ............................................................................................................. 12 2.7. Conclusion ..................................................................................................................................... 13

3. Market study fighter jets .................................................................................................... 14 3.1. Market update .............................................................................................................................. 14 3.2. RAFALE competitor products ................................................................................................. 16 3.3. DASSAULTS and it’s rivals in the jet-‐fighter market ....................................................... 17 3.4. Conclusion ..................................................................................................................................... 18

4. Possible reasons for the late sales success of the RAFALE fighter jet ................. 19 4.1. Geopolitical ................................................................................................................................... 19 4.1.1. General ....................................................................................................................................................... 19 4.1.2. The US initiative to sign an agreement with Iran on the country’s nuclear development program ......................................................................................................................................... 19 4.1.3. The conflict in neighboring Libya ................................................................................................... 19 4.1.4. Russia’s sale of advanced S-‐300 air-‐defense system to Iran ............................................... 20 4.1.5. America’s declining influence in the Middle East .................................................................... 20 4.1.6. The Arab Spring in North Africa and the Middle East ........................................................... 20

4.2. USD/Euro rate .............................................................................................................................. 21 4.3. Conclusion ..................................................................................................................................... 22

5. References ............................................................................................................................... 24


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1. Introduction 1.1. RAFALE case study focus The following Multinational Finance case study is going to analyze the main reasons for the recent sales success of the RAFALE fighter jet from DASSAULT. A product which has never been sold outside France for ages and out of the sudden, DASSAULT managed to sign deals with few foreign countries. This individual assignment is going to focus in particular on the RAFALE jet delivery to Egypt by analyzing geopolitical as well as multinational finance specific aspects. 1.2. Background information on the RAFALE fighter jet project France decided in the late 1980’s, after several unsuccessful attempts to align on a European Combat Aircraft project, to develop it’s own jet fighter called RAFALE. The multirole fighter is designed and build by the French aviation company DASSAULT and few other domestic supplier. The first version of the jet has been introduced in 2001 after years of delay due to budget cuts caused by the end of the cold war. RAFALE is available in three different versions and on production for almost 30 years already. France tried hard to export the fighter jet to other countries but without being successful for the last 20 years. Since 2015, the situation has been changed and first customer like Egypt signed contracts. 1.3. RAFALES recent sales success Beginning of 2015, French president Francois Hollande confirmed the first RAFALE jet fighter deal outside France with Egypt. Egypt ordered 24 RAFALE fighter jets as well as a naval frigate and related military equipment worth 5.2 billion euros. According to France 24 Business News, France guarantees for half of Egypt’s credit line and takes therefore a huge risk in case Egypt struggles to finance the deal with DASSAULT. There are no details available about the exact agreed on RAFALE piece price between France and Egypt. The official RAFALE jet fighter price ranges between 69 and 79 million Euro per piece and is 20-‐30% more expensive compared to its main competitor products. Nevertheless, the deal with Egypt lead to the exceptional level of defense order intake for DASSAULT in 12015 first half amounted to EUR 3,721 million (EUR 266 million in 2014 first half). Other countries like India announced it’s interest to order 36 RAFALE and Qatar could become the second export contract soon with an order volume of 24 jet-‐fighter. There must be a reason behind why the product is selling now outside France after so many years of unsuccessfulness on the global jet-‐fighter market. The RAFALE jet hasn’t been significantly changed during the recent years from a technical point of view, which could explain this phenomenon.

1 DASSAULT AVIATION Group’s business report for 2015 first half, page 7


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2. Egypt, country risk analyses 2.1. Country key facts Egypt has one of the longest histories in the world that borders the Read Sea and Mediterranean Sea. Its main source of water is the Nile River with its 6853 km of waterways which will be shared by 11 different other African countries.

Table 1: Egypt Key Facts (source: CNN Library)


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2.2. Current events The following table below highlights the major political events during the last 5 years in Egypt. Looking to the different events clearly highlights that the country went recently through major changes including significant challenges. In order to not totally destabilize the region, the American government agreed on financial as well as political support programs.

Table 2: Major events in Egypt during the last 5 years

2.3. Socio-‐political stability

2.3.1. Terrorism Egypt has been targeted with terrorist attacks since the 1990’s included the police, tourists, government officials and the Christian minority. Terrorism belongs unfortunately to Egypt’s recent history and will remain a significant risk factor for the touristic industry. The latest bomb attack of the Cairo Italian Consulate or the attack of Metrojet flight 9268 with 224 killed people clearly show that the ISIS terror will not stop at the Libyan border. There is also a high threat of kidnapping by ISIS terrorist groups, particularly in remote desert areas.


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2.3.2. Nile River water sharing rights

The Nile River with its 6853 km of waterways is by far the longest river in the world as well as one of the most historical ones. The pyramids in Egypt for example could have only been build because of the Nile River with its logistics advantage for the material transportation, like the 2Granite stone brigs. Its water and energy will be shared by 11 different countries, which has been also a big source for conflicts over the years, with an increasing tendency. Egypt is the dominating country with 355,6 out of 85 billion cubic meters, when it is coming to the Nile water utilization rights. This agreement has been signed between Egypt and Sudan in 1959 without respecting the other 9 countries water needs. In 1979, the Egyptian President Anwar Sadat said, ‘the only matter that could take Egypt to war again is water’ which explains Egypt strong economical and agricultural dependency on the Nile River water. Nevertheless, time has changed and more and more African countries like Ethiopia for example are starting to claim their Nile water usage rights. Ethiopia is one of the rising stars in Africa with huge energy needs for its economical growth and political stability. Consequently, Ethiopia is going to construct actually the ‘Grand Ethiopian Renaissance Dam = GERD’, a project that has been the source of major controversy discussions between Egypt and Ethiopia. The GERD will be Africa’s largest hydroelectric dam with a maximum power generation of 6000 megawatt. Once in operation, filling the reservoir behind the dam will take up to several years and can significantly impact Egypt’s water supply, especially during dry years. The Egyptian Nile delta is already suffering from water shortages today and farmers are afraid that the situation will become even worse once the GERD is ready. This is also one of several reasons why Egypt has major concerns against the GERD project and is trying, since the beginning in 2011, to prohibit it. Even war is an option for Egypt to save its Nile water usage rights but there are positive signs that the conflict could be politically solved. Since the beginning of this year, all three major conflict parties (Egypt, Sudan and Ethiopia) signed an 4agreement about the basic usage principles of the GERD. There are no details available yet about the agreement but the Ethiopian prime minister, Hailemariam Desalegn said that he wanted to give an assurance that the dam would ‘not cause any harm to downstream countries’. This is definitely one step in the right direction to improve the pending conflict about the Nile water usage rights but just one piece of the puzzle. The overall Nile water usage right situation is a very complex one and there is still no common agreement in place, which includes all 11 African Nile countries. The latest split of Sudan, in 2011, in two independent countries (Sudan and South Sudan) underlines the complexity of the problem with all its different stakeholder and interests groups. There has been no clarification so far how Sudan and South Sudan would share the Nile water. Furthermore, the Arab spring in 2011 brought a lot of chaos and destabilization to the region, which does not make things easier for a common and fair agreement. The GERD project is scheduled to be operational in 2017 and the latest agreement will hopefully

2 Granit was brought over 900 km from Aswan on boats on the Nile River, http://www.cheops-pyramide.ch/khufu-pyramid/stone-quarries.html 3 http://www.transboundarywaters.orst.edu/research/case_studies/Nile_New.htm 4 http://www.bbc.com/news/world-africa-32016763


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help to not further destabilize the middle-‐east but one thing is for sure, the mess around the Nile water usage rights will continue in the future.

2.3.3. Geographical footprint

Another challenge Egypt is facing has to do with its geographical location and the power vacuum and instability in Libya, Egypt’s neighbor. There is a big likelihood that the critical political situation in Libya will also have an impact on Egypt’s political stability. By looking to the COFACE country risk map of 2015 below, it becomes clear that Libya is not the only country on high risk, nearby the Egyptian border. Countries like Sudan or the Chad are also ranked with D, the worst grade on the COFACE country risk scale.

Screenshot 1: COFACE Country risk map, Egypt and its neighbor’s country


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2.4. Financial risk analyses

2.4.1. Overview

2.4.2. GDP growth Before the Arab Spring in 2010/2011, the Egyptian economy growth was quite stable with around 5 percent a quarter. During the regime of President Hosni Mubarak (1981 – 2011) the country enjoyed improved economy and living standards for the majority of Egypt population. Since 2011, the country faced difficult political and economical times caused by the revolution with all its uncertainties for the tourism and manufacturing business. The GDP growth rate graph below clearly highlights the mentioned political changes before and after 2011.

Graph 1: Egypt GDP growth before and after the Arab Spring revolution in 2011, source: www.tradingeconomics.com


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Since 2014, Egypt with it’s new president Abdel Fattah al-‐Sisi is slowly getting back on track in terms of economical stability and this has been underlined with a more stabilized growth rate. The outlook for 2016 looks quite positive for the Egyptian economy which will lead to more foreign investments and more production and construction.

2.4.3. Inflation The Inflation rate in Egypt is and was always quite high compared to European countries like France or Germany. Since 2011, the Inflation rate circulates around 10 percent and shown in the graph below.

Graph 2: Egypt Inflation rate between 2005 and 2015, source: www.tradingeconomics.com

As a reference, the Inflation rate of the USA, France and Germany are actually between 0 and 0.5% which is of course linked to a much stronger economical and political environment. Compared to other Middle East and North Africa countries, Egypt’s inflation rate gets worse recently as a result of currency deprecations as shown below.

Graph 3: Recent Inflation rate within the Middle East and North Africa, source: World Bank


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2.4.4. Budget balance Egypt budget balance never went positive during the last 10 years, which is not that unusual compared to other countries like the USA. Nevertheless, the budget deficit reported for 2015 is quite high with 11,50 percent. Even there is a positive trend compared to the last two years (2013: -‐13.7%, 2014: -‐12.2%), there is still some homework to do for the government.

Graph 4: Egypt budget balance between 2005 and 2015, source: www.tradingeconomics.com

2.4.5. Current account The current account balance as a percent of GDP gives an indication about the countries competiveness. In case of Egypt, the competiveness has been decreased recent years but there is a positive trend happening since 2012.

Graph 5: Egypt current account balance between 2005 and 2015, source: www.tradingeconomics.com

As the country needs to significantly invest in its economy and security in order to stabilize the internal socio-‐political situation, the latest current balance low seems to be a logical consequence out of Egypt’s investment in the future.


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2.4.6. Public debt The public or government debt to GDP ratio is the most accepted measures by investors to quantify a countries ability to make future payments on its debt and is therefore an indication for the country borrowing costs. Egypt’s public debt to GDP ratio was set to 90.5% in 2014. According to the 5CIA World Fact book ranking for 2014, Egypt is having the 20th highest public debt to GDP ratio. France for example has a ratio of 95.5% and is ranked on place 18.

Graph 6: Egypt Public debt to GDP ratio between 2005 and 2015, source: www.tradingeconomics.com

The increasing trend of Egypt’s public debt to GDP ratio, starting from 2011 can be also explained with the dramatically changed political situation after the Arab Spring and the increasing financial needs to stabilize the country. 2.4.7. Currency risk The Egypt’s pound is heavily under pressure because of its limited investors as a result of the Arabic Spring and therefore limitation to access to foreign currencies. The value of the Egyptian Pound has been continuously decreasing and has almost no ‘real’ market value anymore.

Graph 7: EGP to USD ratio, showing the falling EGP value trend

5 CIA World Fact-‐Book: https://www.cia.gov/library/publications/the-‐world-‐factbook/rankorder/2186rank.html


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2.5. Economical risk analyses By looking to the latest Egyptian GDP growth rate trend, there are clear positive signs for the economical development of the country. Nevertheless, terrorism is a major threat for the Egyptian economy, which heavily relies on tourism. The right balance between a western orientated economy trade and internal religious trade-‐offs are very important in order to keep the country stable. Another big challenge is the undervalued Egyptian Pound, which does not attract external parties to invest in the Economy like alternative energy projects. The low oil price is definitely beneficial as an oil importing country and the recently discovered gas field near the Egyptian coast can also make them more independent from the oil price. The country need to have highly educated people to help developing the country into the right direction with all its challenges but this requires a stable economic environment, less inflation and peace in the region. Egypt, with it’s geopolitical importance for countries like America or Europe can rely on financial and technological support which helps to grow its economy and political stability. 2.6. Overall SWOT analyses

Graph 8: Egypt country SWOT diagram


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2.7. Conclusion Egypt is still in a very big change process and many other countries in the world will carefully watch its progress. Since 2011, when the Arab Spring happened, the country went through many ups and downs and the new elected President Abdel Fattah al-‐Sisi has still a long way to go in order to stabilize the country. One of the biggest challenges are the Islamic Terrorism and the under valued Egypt Pound which makes it difficult to attract external investors. Traditionally, the country will be financially and economically supported by the United States as well as by the GULF states because of its strategic importance in the region. It is of strong interest of the western countries as well as the Middle East to have stability in Egypt. The country is surrounded by many countries like Libya which are very unstable and undermined by Islamic Terrorist like the Islamic State. One of the major challenges for Egypt and President Sisi will be the fight against Terrorism, which requires to have a powerful military and of course the latest military technology in hands. The majority of the Egyptian population is not well-‐educated and therefore very easy to influence by Islamic Terrorist. The political and economical development in Egypt will remain a key factor for the overall stability in North Africa and the rest of the Middle east and therefore the rest of the world.


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3. Market study fighter jets 3.1. Market update According to the latest International Fighter Aircraft market update for 2015/2016, 4000 fighters are expected to be procured over the next 15 years. Beside existing fighter jet programs in the USA, Russia, China, India and France for example, there are new market entrants from Japan, Indonesia, South Korea and Turkey with own jet fighter designs. Todays, largest jet fighter program is clearly the F-‐35 Joint Strike Fighter from Lockheed Martin, with more than 3000 aircrafts planned to deliver to 12 different countries.

Screenshot 2: Lockheed Martin F-‐35 Fighter jet

The F-‐35 Joint Strike is a family of single seat, single engine and all-‐weather stealth multirole fighter. The United States plans to buy nearly 2500 F-‐35 during the next years. The American Lockheed Martin is also by far the biggest military service company in the world with a sales volume of $37,470 million in 2014. DASSAULT, is not part of the 10 major player for military equipment as shown in table below.

Table 3: SIPRI: 10 largest arms producing and military services companies in the world


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The following diagram shows the French company share of arms sales (including jet-‐fighter) as launched within the 2014, 6SIPRI report. United States companies are contributing to this market with 54.4% and France with 5.6%. China is not included because of missing mature data availability but Chinese military companies and Chinese Jet-‐Fighter are playing more and more a significant role in the military equipment and service market.

Graph 9: Share of arms sale of companies by country in 2014: Source: SIPRI 2014 report

A further breakdown on the share of global active military aircraft fleet in 2014 by country also shows the dominant position of the United States. Egypt, contributes with 2% to this overview and shares rank number 8 with North Korea, Turkey and France.

Graph 10: Global share of active military aircraft fleet by country, 2014, Source: www.statista.com

6 SIPRI 2014 report: http://www.sipri.org/research/armaments/production/recent-‐trends-‐in-‐arms-‐industry


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3.2. RAFALE competitor products The market for military fighter-‐jets is a very competitive one and mainly dominated by US American companies like Lockheed Martin and McDonnell Douglas for instance. During the recent years, more and more new entrants from countries like China for example are trying to get into the market by spending huge development budgets for new military jet-‐fighter models. China is here a special case because it is almost impossible to get mature data about the Chinese Military industry but it is proven fact that China is going to play a bigger role in this market in the future. Also Russia is increasing its military development budgets constantly after the end of the cold war in order to compete against the United States military power. Below, there is a list of major military jet-‐fighter from different competitors, the RAFALE jet needs to compete against. The reason why a country buys a dedicated jet-‐fighter model cannot be only limited to technical or financial data. Military jet-‐fighter sales negotiations are also including political as well as economical aspects, which makes it quite complicated to understand why a country decides to buy the product. Nevertheless, the table below gives some basic information about some potential RAFALE jet competitor products.

Table 4: Jet Fighter overview, RAFALE competitor, Source: Wikipedia

This is just a snapshot of few existing jet-‐fighter products and should help to get an idea about the competition situation, the RAFALE is dealing with.


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3.3. DASSAULTS and it’s rivals in the jet-‐fighter market By looking to the recent sales figures from some of the major competitors of DASSAULT it also clearly underlines the dominant position of the US market player.

Table 5: Sales figures from few major military jet-‐fighter player, US$ to € rate: 1 US$ = 0.91€

Competitor

2014

Net Sales ($) in million

Net Sales (€) in million

Net Earnings ($) in million

Net Earnings (€) in million

Lockheed Martin $45.600 41.726 € $3.614 3.307 € Boeing Defence $30.881 28.257 € $3.133 2.867 € DASSAULT $4.022 3.680 € $309 283 € Airbus Military $14.234 13.025 € $447 409 €

Competitor

2013






Competitor

2012






Table 6: Sales and Earnings from few major military jet-‐fighter players between 2012 and 2014


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All the mentioned figures are copied from the different annual reports from the companies and the relevant links are highlighted within the reference section. Developing new fighter-‐jet models requires investing a huge development budget. By analyzing the different net earning results, it also becomes obvious that DASSAULT’s American competitors are in a much better position because of much higher net earning volumes.

3.4. Conclusion The military fighter market enjoys a continues demand, thanks to the stable number of military conflicts in many countries all over the world. As a result of changing political environments and geopolitical conflicts, countries like the United States, Russia or China are massively investing in their domestic military industry in order to maintain power and political influence in the world. More and more Unmanned Aerial Vehicles are entering the market since a while and this trend seems to be continuing also in the future. Nevertheless, traditional Multirole Fighter like the RAFALE are requested by the market and DASSAULT managed to get a small piece of the cake with its recent deals with Egypt and India. The major weak point of the RAFALE jet is the fact that it can be only equipped with French Weapons which means that it requires its own supply chain. On the other hand, the latest F-‐35 jet fighter from Lockheed Martin is quite expensive for the maintenance and has no tested during real battles. Another important selling argument for the RAFALE is the fact that all parts will be produced locally in France, which makes the supply chain for the parts less complex. The Eurofighter for example will be produced in four different countries and that can become more difficult.


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4. Possible reasons for the late sales success of the RAFALE fighter jet 4.1. Geopolitical

4.1.1. General Below, there are some major geopolitical events listed, from different sources, in order to draw the global picture about possible reasons for the recent RAFALE sales success.

4.1.2. The US initiative to sign an agreement with Iran on the country’s

nuclear development program On July the 14th 2015, the USA and Iran signed an agreement on preventing Iran from gaining a nuclear weapon in exchange for sanctions relief. According to the US Secretary of State John Kerry, the deal with Iran should bring regional stability and security and is a major milestone for the Gulf region. On the other hand, Saudi Arabia and it’s closest allies (including Israel) fear that the deal with Iran will make it more, not less likely, that Tehran will eventually build a nuclear bomb. Egypt, like Israel, has also strong doubts about the peaceful usage of the Iranian nuclear program. 4.1.3. The conflict in neighboring Libya The situation in Libya is still quite critical and chaotic after the 4th year of the revolution against the former dictator Muammar Gaddafi. Even worse, there is no sign that the country will go back to ‘Normal’ soon and this is a big concern for Egypt, Libya’s neighbor. Today, almost everyone in the streets of Tripoli has a gun and the business is almost down because of the violence and the presence of the Islamic State terrorists in parts of the country. Egypt fears the Islamist militias could take bigger control about the Libya and potentially threaten Egypt directly. Egyptian President Sisi therefore wants to update his military forces in order to better protect his country and this goes also in Line with the latest RAFALE deal with France. Even though, the Egyptian air-‐force has more than 1000 planes in operation, the war against the Islamic Terrorists requires to have the latest technology available. This has been also recognized by the United Arab Emirates and they seem to partly finance Egypt’s recent military upgrade in order to defend their own interest by having Egypt as a sort of secure buffer between Libya and themselves. Below, there is a map which should illustrate the geographical presence of the two main Islamic groups, Sunni and Shi’a.

Graph 11: The geographical footprint of the Islam world in the Middle East and North Africa


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4.1.4. Russia’s sale of advanced S-‐300 air-‐defense system to Iran Russia confirmed to sell one of the world’s most advanced air defense systems to Iran, the S-‐300 missile system. As reported by the independent journal beginning of November 2015, the deal is worth $800 million and became active after the sanctions against Iran were lifted, earlier this year. Israel as well as other Gulf countries shared big concerns as the S-‐300 missiles could be used to defend Iran’s nuclear facilities. 4.1.5. America’s declining influence in the Middle East After the New York twin tower attacks in 2001 and several years of military campaigns in the Middle East later, America’s influence in the region has been significantly declined during the last 13 years. The US war making policy in Iraq, Afghanistan, Libya and Syria brought the Middle East a lot of chaos and destabilization with unpredictable consequences for the future. The power of the Terror organizations for example became even stronger as shown during the recent ISIS attacks in Syria and Europe. Many Arabian countries are starting to react and choosing to setup new alliances with other powerful countries like Russia or China in order to become less independent from America. Egypt recently elected President Abdel Fattah el-‐Sisi also follows this trend by moving away from the American influence and started to build up stronger relationships with other global forces. This can be also seen as an explanation for the 24 Rafale deal with France, signed by beginning of 2015. Egypt, which traditionally financially be supported by the US government was one of the main US military equipment in the past.

4.1.6. The Arab Spring in North Africa and the Middle East The Arab Spring term has been invented by an American journalist and it stands for the revolution in North Africa and the Middle East, which has been started in 2011 in Egypt. Since this time, nothing is the same anymore with lots of chaos and the rising of the Islamic Terror group IS. Many countries like Libya for example are totally out of control and that has generated a lot of violence and refugee streams towards Europe. What was supposed to be a peaceful transition from a dictator regime towards a democratic system became a big mess with unpredictable consequences for the region and the rest of the world. There are many theories saying that countries like the USA have been massively involved in the Arab Spring in order to get rid of the dictator regime in this country. Everything has been started with small demonstrations in public places and until today, there are thousands of killed people, a lot of instability, many terrorist attacks also in Europe and a military involvement of many other countries like France, the USA and Russia.


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4.2. USD/Euro rate

According to the ‘France delivers first RAFALEs to Egypt’ article in the DefenseNews from the 20th of July 2015, 24 RAFALE warplanes have been sold to Egypt for $5.2 billion, by beginning of 2015. In order to better understand whether the timing of the deal has something to do with currency exchange rate changes, we need to have a closer look to the recent years, USD/EURO rate history. Below, you can find the USD/EURO rate between beginning of 2011 and end of October 2015.

Graph 12: USD vs. EUR graph between 2011 and 2015

The graph clearly shows that the US dollar became stronger during 2014 and 2015, compared to the EUR. Meaning, companies producing their products in Europe by paying their manufacturing costs (material & labor) in Euro and selling the final goods in USD, will benefit from this trend. Assuming, they will have the same manufacturing costs between 2014 and 2015, as well as selling for the same price in USD, the profit margin goes up. What does this now mean for DESSAULT and their 24 RAFALE warplane deal with Egypt? The following table below, compares the USD to EURO transformation of the $5.6 billion deal by using the USD/EUR rate from March 2015 and comparing it with the one in March 2014.

Table 7: USD vs. EUR Rafale deal with Egypt comparison in 2014 and 2015

By looking to the given figures from Table1, it becomes clear that DASSAULT will get more value in EUR in 2015 by assuming that the sales price stays the same. In order


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to utilize the stronger USD for cost competitive reasons, DESSAULT could of course reduce the sales price by staying with the same profit margin. This has been highlighted in the red row. Assuming that DESSAULT need to sale the 24 warplanes for €4.065 billion in order to cover the manufacturing costs and it’s profit margin from 2014, it could offer the 24 planes for $3.78 billion in 2015. This makes a difference of ($5.5 billion -‐ $3.8 billion = $1.7 billion) and therefore the product much more attractive for the customer. As a conclusion, the USD/EUR rate increase as shown in Graph1 makes the products produced in EUR and soled in USD more attractive and could have made an impact on the latest sales success of the Rafale deal with Egypt.

4.3. Conclusion By looking to the latest developments in North Africa and the Middle East, caused by the so called Arab Spring, it clearly shows that the whole region became much more fragile. Many countries like Libya for example lost it’s stability and this has been utilized by Islamic Terrorists like the Islamic State. It basically already started many years ago when the United States started the war in Iraq against Saddam Hussein. The different conflicts between the two major Islamic groups namely the Sunni and Shi’a has been almost under control during the dictatorship regime in Iraq, Libya and Egypt in the past. Since, there is no more dictator ruling these countries, old conflicts between the mentioned Islam groups are popping up again and this is also part of the reason why the Islamic State became so successful recently. Egypt, has therefore no other option than having a stable political environment established as well as having access to a powerful military to protect the country. The war against the Terrorism requires having the latest technology in hands. This does not necessarily explain why Egypt bought the RAFALE as it should have also bought American fighter but it explains at least the need for state of the art fighter-‐jets. Another piece of the puzzle to answer the question about the decision to buy the Fighter from France is linked to the fact that the American influence in the region is going to decline since few years already. Many North African as well as Middle East countries see clearly America’s war policy in the region as main reason for the instability. America also reduced significantly the financial aid for Egypt since the Arab Spring in 2011 which also explains why the country is more open to buy military equipment from none American companies. There is no sign that Egypt will totally give up on US American military equipment in the future but there is a strong willingness to get at least less dependent. The Egyptian military has a lot of US military equipment and this requires getting maintenance support form the American companies in order to keep the fleet operational. France itself also plays its role in the game as they are desperately looking for RAFLE customer outside France for many years already. This could explain why France is willing to sell the products to Egypt for very attractive conditions by financially securing half of the deal. Furthermore, France has a strong interest to get more influence within the North African and Middle East region and the deal with Egypt can help to achieve this goal. The French government clearly hopes to get follow up RAFALE business from Egypt but also from the GULF states, which also financially support Egypt in its military shopping tour.


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Screenshot 3: Country mapping, different stakeholder involved in the RAFALE deal with Egypt

Even though, the US$/€ exchange rate in 2015 was quite beneficial for France to sell the RAFALE jet fighter in US$, the main reason remains a geopolitical one as mentioned above. It will become more and more important for countries like Egypt to protect them against Terrorism without fully relying on other countries military power like the USA or Russia. It seems to be almost sure that the mentioned conflicts and instabilities in the region will not be solved on a short run. It will still require a lot of time and effort to stabilize North Africa and this also requires having a powerful Egyptian regime in place.

Table 8: Overview of the main RAFALE sales reasons


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5. References 1. [Terrorism in Egypt] https://en.wikipedia.org/wiki/Terrorism_in_Egypt 2. [CIA World Fact-‐Book] https://www.cia.gov/library/publications/the-‐world-‐

factbook/rankorder/2186rank.html

3. [Coface, Egypt country risk report] http://www.coface.com/Economic-‐

Studies-‐and-‐Country-‐Risks/Egypt

4. [International Fighter] http://www.international-‐

fighter.com/media/1001045/48964.pdf

5. [BBC News, Gulf allies back Iran nuclear deal after US security guarantees]

http://www.bbc.com/news/world-‐middle-‐east-‐33758939

6. [Time, The real reason Egypt is Buying Fighter Jets from France]

http://time.com/3710118/egypt-‐rafale-‐fighter-‐jet-‐france/

7. [Independent, Russia confirms sale of advanced S-‐300 air defense system to

Iran] http://www.independent.co.uk/news/world/middle-‐east/russia-‐

confirms-‐sale-‐of-‐advanced-‐s-‐300-‐air-‐defence-‐system-‐to-‐iran-‐a6727656.html

8. [Wikipedia, Egypt] https://en.wikipedia.org/wiki/Egypt

9. [CNN, Egypt Fast Facts]

http://edition.cnn.com/2013/07/03/world/africa/egypt-‐fast-‐facts/

10. [Trading Economist, Egypt Economic Indicators]

http://www.tradingeconomics.com/egypt/indicators

11. [Airbus defense, annual report 2012-‐2013]

http://annualreport.airbusgroup.com/int/annual-‐

report2013/index.html#/46

12. [Airbus defense report, annual report 2014]

http://www.airbusgroup.com/int/en/investors-‐shareholders/Annual-‐

reports-‐and-‐registration-‐documents.html

13. [Reuter UK, Libya conflict, order gap spurred French RAFALE sale to Egypt] http://uk.reuters.com/article/uk-‐france-‐egypt-‐rafale-‐idUKKBN0LH2D920150213

14. [Wikipedia, RAFALE jet fighter] https://en.wikipedia.org/wiki/Dassault_Rafale

15. [Wikipedia, F-‐35 jet fighter] https://en.wikipedia.org/wiki/Lockheed_Martin_F-‐35_Lightning_II

16. [Wikipedia, Eurofighter] https://en.wikipedia.org/wiki/Eurofighter_Typhoon 17. [Bloomberg, US$/€ rate] http://www.bloomberg.com/quote/EURUSD:CUR

Documents

Multinational Finance_Individual_Assignment_RalfJANSEN_FINAL