The future contract with the army is worth some 23 billion euros ($25 billion), Leonardo chief executive Roberto Cingolani told a press conference.
The two firms will each have a 50-50 stake in the new Italy-based company, Leonardo Rheinmetall Military Vehicles (LRMV), which will be up and running early next year.
Their first goal is to develop the new Italian main battle tank (MBT) to replace the current Ariete and which will be based on Rheinmetall's Panther KF51.
"We are creating a new heavyweight in European tank production," said Armin Papperger, chief executive of Rheinmetall, in a press release.
He added: "We are primarily addressing the Italian market, but we will also be targeting other partner nations which are in need of modernising their combat systems in the future."
Cingolani said it was a "significant step towards the creation of a European defence system based on specialised shared platforms".
He later told reporters that while Leonardo was a large group, it was "not big enough as a critical mass to compete with the US giants, Chinese giants, other countries' giants".
The joint venture will also work on the new Lynx platform for the Armoured Infantry Combat System (AICS) programme.
"The development and production of other vehicles of this family, such as recovery, engineer and bridge-laying vehicles, is also planned," the statement said.
Sixty percent of the work will be carried out in Italy, with the new venture based in Rome and in La Spezia, while labour will be divided equally between Leonardo and Rheinmetall.
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