Major Defense Companies See Decline in Arms Sales
2013-02-26 By Richard Weitz
According to newly released data by Stockholm International Peace Research Institute (SIPRI), the weapons and military service sales of the largest companies (the SIPRI Top 100) amounted to $410 billion in 2011, a 5 percent fall in constant dollars from the previous year.
SIPRI calculates that global military spending reached $1.74 trillion in 2011.
Since 2002, arms sales by the SIPRI100 have increased by 51 percent in real terms ($271 billion in 2011 prices and exchange rates), but several developments have recently squeezed sales.
The reduction in arms sales in 2011 resulted from reduced government spending in general, targeted cuts in military plans and programs, and deferred in weapons program procurement affected overall arms sales in North America and Western Europe. The reduced tempo of the military operations in Iraq and Afghanistan along with the sanctions on arms transfers to Libya also contributed to the reduced sales.
SIPRI defines arms sales “sales of military goods and services to military customers, including sales for domestic procurement and sales for export.” North American and Western Europe defense companies continued to dominate the Top 100 list, though SIPRI had to exclude China-based companies due to limited data.
Sales by the 44 U.S.-based arms producers amounted to 60 percent of the total arms sales of the Top 100, while the 30 companies based in Western Europe occupied 29 percent of the total.
Many of these companies have responded to the reduced sales by shedding less profitable product lines and pursuing military specialization; others firms have downsized or diversified into related markets.
For example, cyber security remains a growing market due to the elevated publicity about cyber threats and its connection to other national security issues. According to SIPRI, “These companies’ cybersecurity activities are focused on data and network protection software and services; testing and simulation services; training and consulting services; and operational support.”
Furthermore, Raytheon, BAE System and EADS Cassidian have been pursuing more civilian sales in addition to the defense market. Many of the large defense companies have also established foreign subsidiaries to exploit new sales opportunities in Asia, Latin America, and the Middle East. Others have purchased smaller firms specializing in cyber security or other niche areas.
According to SIPRI, U.S.-based Lockheed Martin remained the largest weapons seller in 2011, with arms sales of $36.27 billion, while Boeing overtook Britain’s BAE Systems as the second largest weapons merchant.
Here’s SIPRI’s list of the top 10 arms vendors in 2011 (2011 is the last year for which SIPRI has full results.):
1. Lockheed Martin, U.S, $36.27 billion
2. Boeing, U.S., $31.83 billion
3. BAE Systems, Britain, $29.15 billion
4. General Dynamics, U.S., $23.76 billion
5. Raytheon, U.S., $22.47 billion
6. Northrop Grumman, U.S., $21.39 billion
7. EADS, Trans-European, $16.39 billion
8. Finmeccanica, Italy, $14.56 billion
9. L-3 Communications, U.S., $12.52 billion
10. United Technologies, U.S., $11.64 billion
The top 10 arms groups accounted for significantly more than half the sales of the SIPRI Top 100.
It is likely that many governments continued buying foreign weapons in 2008 despite the onset of the global financial crisis that summer, but since 2009 the crisis has finally caught up with many of them. Striving to contain soaring budget deficits due to declining tax revenues and rising social welfare expenditures, leaders of several developing countries canceled or deferred many arms purchases, reducing international weapons purchases and deliveries to their lowest levels in years. Nonetheless, Asian and Middle Eastern governments continue to purchase large volumes of foreign weapons, as do NATO countries and Russia.
In addition to the techniques mentioned by SIPRI, defense companies have sought to sustain sales through flexible payment arrangements and other measures to boost sales.
These steps include the liberal use of counter-trades and other offsets, canceling or swapping debts, allowing important clients to license the production of some weapons, and undertaking a sustained effort to improve their support and maintenance services.
Thanks to the many arms they have already sold to foreign countries, moreover, the existing large companies are guaranteed a large number of annual sales of ammunition, ordnance, spare parts, training, and upgrades to past clients. Complex new weapons such a fighter aircraft or major warships require extensive servicing and are often deliberately designed to allow for continuous upgrading of their platforms with the latest armaments, computers, and other hardware and software.
In addition, everything else being equal, countries tend to buy new weapons that are compatible with their existing systems. If a foreign military already has many American weapons, it will typically find it easiest to incorporate additional U.S.-made systems into its inventory since they should have high degrees of interoperability with its existing force and be best able to leverage current training and logistics services.
Countries are redoubling efforts to make sales and develop or keep customers.
The biennial International Defense Exhibition and Conference (IDEX) 2013, currently occurring in Abu Dhabi, doubled in size compared to 2011. This year’s IDEX hosts around 1,112 exhibiting companies from 59 countries. More than 180 US defense firms are present. Middle Eastern countries have the highest defense spending per capita. According to SIPRI, Middle East military expenditures rose by 4.6 percent in 2011, reflecting the turmoil in some Arab countries, Iranian war threats, and the civil war in Syria.
Asia is also an important market, as seen by the back-to-back visits of major delegations from Russia, France, and Britain to sell more arms to India.
For example, French President Francois Hollande recently completed a two-day visit to India in an effort to convince India to spend $12-billion for 126 Rafale fighter jets. Dassault Aviation’s (PINK: DASTY) chief executive Eric Trappier joined the French delegation, which included Foreign Minister Laurent Fabius and Defense Minister Jean-Yves Le Drian. France is pursuing other major projects with India, including a $9.3-billion deal with Areva to construct a 9,900-megawatt nuclear power plant in the western Indian state of Maharashtra.
India is currently the world’s largest arms importer, but the Indian government recently announced plans to cut defense spending by 5 percent due to the country’s economic slowdown. The government also wants to source more defense buildings to its domestic defense industry, but its home firms are not yet able to provide heavy weapons (i.e., tanks, fighter jets, and helicopters).
India’s defense imports are now also threatened by the scandal surrounding the Italian defense company Finmeccanica, whose $753 million contract to sell helicopters to India may be scuttled by charges of corruption and kickbacks.
Prime Minister David Cameron recently completed a high-profile trade mission to India since Agusta-Westland, is a subsidiary of Finmeccanica.
Boeing and Dassault may be in a position to fill any new contract, but there may be lengthy delays. Boeing is also now bidding to sell 22 Apache Helicopters and 15 Chinook heavy-lift helicopters to the Indian government. In 2012, Boeing sold India four C-17 heavy-lift aircraft.
According to SIPRI, India purchased 82 percent of its weapons from Russia during the 2006-2010 period. But recurring problems with some Indian purchases along with India’s changing geopolitical orientation could eventually displace Russia’s currently preeminent status in India’s foreign military purchases.