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A transformed market challenges Western defense producers

12 January 2014 Ben Moores, BA (Hons), M.A. Guy Anderson

The global defense market has undergone an unprecedented rebalancing during the past five years. The US Defense Department, which accounted for more than half of world defense spending during the latter 2000s, has seen its budgets fall by $100 billion since 2010 alone, and the defense ministries of the other NATO countries have sliced an additional $20 billion from their collective budgets.

Yet world military spending has remained relatively static at approximately $1.5 trillion, as rapid spending growth in the rest of the world has almost offset budget declines in the West. Although equipment spending, the key metric for the world's defense industries, has declined by about $10 billion globally to $290 billion since 2010, global military exports have increased during the same period, swelling to $73 billion by 2012 from around $56 billion in 2008, buoyed by higher spending by emerging countries, according to IHS Jane's.

Although this development appears to be welcome news for defense producers in Europe and the United States, the new market realities present substantial challenges. Even as Western countries are pushing exports to offset falling revenues at home, competition between Eastern and Western suppliers is increasingly becoming the norm, especially in key international markets such as South Asia and Southeast Asia.

Few European and North American defense corporations are fully prepared to compete in this new environment. With their corporate capabilities geared toward Western demands, they face an imperative to restructure and reshape business plans to accommodate cost-conscious emerging-market customers.

The greater challenges facing European and North American defense industries, though, are fratricide and long-term decline through technology transfer. The West increasingly exports know-how and blueprints rather than finished tanks and warships. Rapidly emerging exporters such as South Korea, Singapore, and Turkey learned much of their business from Western producers in earlier decades.

Wasteful competition within Europe itself is impeding the West's response. Since defense budgets began to decline in the late 2000s, Europe's largest defense-producing countries have encouraged their local champions to seek new markets, when it may have been better to pool both their efforts and the spoils. The recent Indian Medium Multi-Role Combat Aircraft competition-an $11 billion program to buy 126 fighter jets-is a case in point, with Sweden's Saab JAS 39 Gripen, France's Dassault Rafale, and the consortium-created Eurofighter Typhoon competing head to head.

Yet too much pessimism on the part of Western defense exporters is unjustified. IHS Jane's calculates that the United States and United Kingdom alone accounted for 36% of world military export production between 2008 and 2010. That share is forecast to increase to around 50% between 2013 and 2020, based on acquisition programs already on stream. After 2020, however, the market is almost impossible to predict, and Western producers may well have to change course again to address a radically reshaped global market.

Guy Anderson Senior Principal Analyst of Aerospace & Defense Research, IHS

Ben Moores Senior Analyst of Aerospace & Defense Research, IHS

Paul Burton Senior Manager of Defense Industry, Markets & Budgets, IHS

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