BAE Systems Takes Hit After Germany Embargo

March 22, 2019

Germany has approved moves to block exports of its arms to Saudi Arabia, after Angela Merkel expressed deep concerns about the killing of journalist Jamal Khashoggi last October. BAE Systems has reported that this could have unintended consequences on the fulfilment of its current contracts to Riyadh. BAE is reliant on Germany, and other governments, licensing the sale of products and parts.

BAE and Germany are both partners in the production of the UK firm’s flagship product, the Eurofighter Typhoon fighter jet, and its production will likely take a hit.

UK Government Seeks Exception For BAE

Foreign Secretary Jeremy Hunt lobbied German foreign minister, Heiko Maas, with a private letter to exempt large defence contracts from the embargo. Hunt urged that if the ban went ahead, UK arms sellers wouldn’t be able to fulfil their existing contracts of the Eurofighter and Tornado jets to Saudi Arabia. Maas has said this embargo doesn’t weaken European credibility or its defence industry.

Despite the UK deploring the killing of Khashoggi, they have not halted the selling of jets and missiles to Riyadh and the UK government have been criticised for fuelling the civil war in Yemen. The two sides of the Yemeni conflict met in Sweden last December in an attempt to start peace talks. Maas told Hunt that depending on the outcome of the talks, Germany may revise their embargo.

BAE Financial Performance

Despite the uncertainty of Brexit, BAE saw profits rise in 2018. Net profits rose from £827 million in 2017 to £1 billion in 2018. This increase has likely been due to an increase in new orders, which was boosted by Philip Hammond announcing a £1 billion injection for the defence industry.

However, even though financial performance seems strong, investors have not been so confident. BAE makes 16% of its annual sales on the Eurofighter Typhoon and other arms exported to Saudi Arabia. With the new German embargo announced today, BAE’s share price slumped by 6 percent at the opening of the FTSE (21st February).