Unbundling

Over the last two decades, RUAG has successfully managed the transition from a federal military enterprise to an international technology company. Now the Group is facing a new transformation: an unbundling strategy aimed at creating the conditions for continuing to guarantee supplies to the Swiss Armed Forces, on the one hand, and successfully developing its third-party business on the other....

When the Federal Council laid the foundations for establishing the RUAG technology group in 1997 with the Federal Act on State-Owned Defence Companies (BGRB), the focus was on one goal in particular: to transform these federal military organisations into competitive enterprises capable of holding their own on the market. The new Group tackles this major challenge of transformation with a new strategy, seeking to diversify and expand its activities in the military and civilian segments at home and abroad – with organic growth, but also via acquisitions.

RUAG establishes itself fast

RUAG quickly succeeds in acquiring new business. Among its new customers are aircraft manufacturers Airbus, Bombardier and Pilatus. At the same time, the Group invests in expansion and in 2002 acquires Dynamit Nobel in Germany and Sweden and parts of insolvent company Fairchild Dornier GmbH in Oberpfaffenhofen, Germany. Further acquisitions follow, including Saab Space in Sweden, Austrian Aerospace and Oerlikon Space in Zurich. With these acquisitions, RUAG becomes Europe’s largest independent space supplier and its market leader in small-calibre ammunition.

RUAG pursues its transformation rigorously and establishes itself as a business capable of competing at international level with a high degree of credibility vis-à-vis partners and customers. After two decades of change, today the company rests on a broad industrial base. The Group maintains sites in 16 countries around the globe, from the USA to Australia, and plays an important role in technologically sophisticated and prestigious programmes such as the Airbus A320 or the European and American launch vehicles Ariane 5 and 6, Atlas V and Vulcan. RUAG also ranks among the world’s leading suppliers of smallcalibre ammunition for hunting and sports applications. In the past few years, the Group has generated more than half of its sales abroad; its work with the Swiss Armed Forces, originally 85 % of its business, now accounts for 30 %.

Switzerland has also benefited from this internationalisation and diversification, gaining access to a broader spectrum of promising civil and military technologies. Moreover, the expansion drive has also brought growth and employment to the country: today, RUAG has 4,500 employees, most of them highly qualified, at 35 sites across Switzerland – around 500 more than it did 20 years ago. 

Two decades of successful transformation have brought RUAG to a point where it needs a new agenda if it is to continue to tread its chosen path successfully. The intention is for RUAG to continue to pursue its statutory purpose – that of equipping the Swiss Armed Forces – and at the same time to have the opportunity to develop further in its other business areas. The Federal Council has thus decided to unbundle RUAG. Under the umbrella of a new holding company, RUAG’s business activities are to be reorganised into two separate companies. One of these, with the working name ’MRO Switzerland’, will mainly provide services to the Swiss Armed Forces. The other business areas, which are active worldwide and mainly transact civilian business, will be consolidated into a second company with the working name ’RUAG International’.

Another reason behind this decision was the cyber-attack perpetrated on RUAG in 2016, which showed that even a supposedly well-protected organisation is not wholly immune to such attacks. The unbundling will also result in a complete separation of the IT systems of MRO Switzerland and RUAG International, paving the way for enhanced information security. In particular, the computing systems at MRO Switzerland will need to meet the security standards of the Swiss Armed Forces, as they need to perform without fail for Armed Forces operations in all threat situations.

With this unbundling, however, the Swiss Federal Council is also responding to the Swiss Federal Audit Office's requirement for RUAG to prepare transparent accounts by customer group and accordingly disclose separate profit margin figures. Thus a paradigm shift is taking place: in the past two decades, the maxim was to generate synergies between civil and military third-party business on the one hand and Swiss military business on the other.

'MRO Switzerland'

'MRO Switzerland' ensures provisioning of the Swiss Armed Forces

As before, the core mission of MRO Switzerland will be to ensure the provisioning of the Swiss Armed Forces – reliably, transparently and cost-effectively. This will primarily involve support and maintenance services for military systems, for example the F/A-18 Hornet fighter aircraft. RUAG will provide these services as the Swiss Armed Forces’ “materiel centre of excellence”. As well as maintenance, repair and overhaul (MRO) services, this role also encompasses technical and technological support, procurement and logistics, as well as upgrades and modifications. Every year, as the materiel centre of excellence, RUAG provides services to the Swiss Armed Forces in the form of service level agreements (SLAs) with an equivalent value of around 400 million francs. Today, these tasks are mainly performed within the RUAG Defence and RUAG Aviation divisions. More specifically, the Land Systems and Network Enabled Operations Services business units (currently part of the Defence division) and the Military Aircraft & Subsystems and Products business units (which currently belong to the Aviation division) will be part of MRO Switzerland, which will employ around 2,500 people.

MRO Switzerland will be permitted to continue engaging in selective transactions with third parties, provided the value creation involved generally takes place in Switzerland, the transactions generate favourable synergies and no adverse effects for the DDPS, and the services generally break even.

The Swiss Confederation will remain the sole owner of this business in perpetuity. This will ensure that the interests of the Federal Department of Defence, Civil Protection and Sport (DDPS), as an essential user, are fully safeguarded. It is expected that the DDPS will also be represented on the Board of Directors of MRO Switzerland.

'RUAG International'

“RUAG International” to become a globally operating technology company

RUAG International will take on the remaining services provided by RUAG in its current form (mainly for civilian third-party customers). More specifically, this covers the space business, currently housed within the RUAG Space division, the aerostructures business (currently RUAG Aerostructures) and the ammunition manufacturing operations for the Hunting & Sports and Armed Forces & Law Enforcement segments and for industry (RUAG Ammotec). The civil and international activities of today’s Aviation division and the Defence division’s Simulation & Training unit will be consolidated into the new MRO International division. This unit will likewise belong to RUAG International.

The future RUAG International is intended to continue the company’s successful development as an international technology company. To this end, RUAG International will be introducing a new strategy. Depending on the focus of this strategy, RUAG International could also jettison some existing business units while on the other hand making new acquisitions to augment its portfolio.

Significant investment will be needed to successfully further develop today’s Space and Aerostructures divisions. As long as the Confederation is the sole shareholder, these types of investments are difficult to justify, as these mainly civilian activities are not directly in the interests of the Swiss Armed Forces and, moreover, take place partly outside of Switzerland. Against this backdrop, options for a partial or full privatisation of RUAG International are also to be investigated.

By contrast, Federal Council considers that there is no question of privatising the holding company. It wishes to remain the sole shareholder of this holding company and thus maintain complete control over the MRO Switzerland business unit, almost all of whose business is conducted with the Swiss Armed Forces.

Timetable

Timetable and first organisational changes

The first organisational changes at RUAG in preparation for the unbundling had already taken place on 1 January 2019: the Board of Directors appointed Andreas Berger as CEO of the organisational unit MRO Switzerland. Until the unbundling is completed he will report to RUAG CEO Urs Breitmeier. Andreas Berger will be responsible for the units that will later be part of the free-standing MRO Switzerland unit. The Military Aviation business unit has been integrated into MRO Switzerland and handed over to Philipp Berner, who was previously in charge of the Aviation division. At the same time, the Board of Directors handed over to Felix Ammann (previously Vice President Supply Chain for RUAG Aviation) the running of the newly created MRO International organisational unit, which will consolidate a large part of the third-party business of the Aviation and Defence divisions and which will in future be a part of RUAG International.

In the year under review, RUAG drafted a detailed implementation plan. The Federal Council will rule on this in spring 2019. The costs of the unbundling, estimated to be around CHF 70 million, will be borne by RUAG. According to the timetable, the new corporate structure is set to be implemented on 1 January 2020. From this day forward, MRO Switzerland and RUAG International will be organised and run as separate companies. The companies’ IT systems will also be unbundled as of the beginning of 2020.