A Shift in Emphasis Is Underway in the Global Defense Market
Regional tensions drive Asian defense spending while domestic issues shrink European outlays.
As European military acquisitions are decreasing, the market in Asia and the Middle East is growing. This transition masks underlying complexities in the international defense market. European nations are shifting from buying tanks and fighter jets to purchasing cyberwarfare and networking equipment while Asian militaries consider maritime surveillance platforms, missile defense systems and power projection capabilities, such as submarines and aircraft carriers.
Global defense markets shrank slightly in 2012 and 2013, mostly because of cutbacks in the United States and Europe, explains Tom Captain, vice chairman and U.S. aerospace and defense leader for Deloitte LLP. U.S. defense spending contracted by 3.3 percent during this period because of a combination of budget cuts and its withdrawal of forces from Iraq and winding down operations in Afghanistan. Large European militaries, such as the United Kingdom and France, also cut their spending. But while defense acquisitions shrank, spending in other sectors, such as Asia and the Middle East, helped to make up for some of this deficit, Captain explains.
Europe’s decline in defense spending is driven by shifting national priorities and external issues such as the European debt crisis. The result has been concern about the need for big-ticket platforms, such as warships and attack aircraft. The nationalized nature of Europe’s defense industries is another factor in the decline. Most European defense firms are partially owned by the government, which leads to additional inefficiency, Captain observes. Consolidation since the end of the Cold War has created major multinational consortia such as Airbus and EADS, he notes, but many small national firms remain. While Europe’s combined defense budgets rival the size of the U.S. defense budget, Captain observes the inefficiencies are causing problems. Issues include job and industry protectionism in the defense sector.
Long lead time for major programs, such as the United Kingdom’s Queen Elizabeth-class aircraft carriers, also contributes to inefficiency. These multiyear programs last through a variety of economic cycles, which often leads to engineering compromises to save costs as budgets shrink during the course of a program. “It’s a very inefficient way to buy anything,” Captain says.
Unlike Asia, European nations have not had an external threat since the end of the Cold War. Captain notes that until the Libyan intervention, European forces had been dependent on U.S. transport, logistics and command, control, communications, computer, intelligence, surveillance and reconnaissance (C4ISR) capabilities. When French and British forces participated in the Libyan operation, they found themselves running out of munitions and having logistics difficulties to complete their missions, he says.
The contraction in the European market is not uniform, observes Brad Curran, aerospace and defense senior analyst with Frost and Sullivan. Most of the continent’s traditional U.S. allies—the wealthy western European nations such as the United Kingdom, Spain, France and Germany, have all reduced their defense acquisitions. But other parts of Europe are buying hardware. This is the case for the Baltic states, Scandinavia and the new NATO nations, such as Poland and Romania, which are still in the process of replacing their aging Warsaw Pact-era tanks and equipment with more modern systems. Finland, Norway, Sweden and Switzerland are modernizing their forces, which is leading to spikes in spending. A number of nations, including Poland, Romania, Spain and Turkey, are acquiring missile defense systems and technologies as part of NATO and U.S. programs, Curran says.
Recent events such as the Libyan operation also have highlighted weaknesses in European military capabilities, such as a lack of C4ISR platforms and systems. “It really showed them how dependent they are on the United States,” Curran explains. This lack of capability has driven many NATO nations to invest in C4ISR systems, he adds.
Another bright spot is Turkey, which Curran includes in Europe because of its NATO membership. Curran notes that Turkey has an active defense industrial sector, and the nation is driving to become a leader in military technology exports within the next 20 years. In addition to modernizing national systems, Turkey’s defense sector is expanding to produce and develop armored vehicles and defense electronics. “They want to make a serious bid to be a major defense exporter,” he says.
While European nations may not all be investing in major platforms such as tanks and fighter jets, they are acquiring command and control and cybersecurity systems. The United Kingdom’s National Security Strategy has emphasized cyber attacks as a major threat; and the Nordic Defense Cooperation, which includes Finland, Iceland, Norway, Denmark and Sweden, has marked cyber operations as a priority for joint cooperation.
Defense industries in Europe have had a number of setbacks that also are a factor in defense spending decisions. One is the region’s inability to successfully develop and deploy domestic medium-altitude and endurance unmanned aerial vehicles (UAVs), Curran notes. Continental armed forces instead have been purchasing U.S. and Israeli-manufactured UAVs for these missions.
European defense ministries try to save money by jointly working on programs in multinational efforts. But these programs are often complicated by industrial and political issues that tend to extend development times and raise overall costs of systems. “It’s just a mess,” Curran says. The European defense market also has problems with industrial overcapacity—too many firms competing for limited business—and too little force structure within the continent’s armed forces.
Asia, with China, India and Indonesia leading the way, is responsible for the biggest growth in global defense markets. The increasing wealth of this area’s nations combined with regional tensions are driving many Asian states to arm themselves.
India will be spending some $80 billion over the next five years to modernize its military, Captain says. Regional tensions and the need for power projection also are driving the acquisition of expensive platforms such as attack and surveillance aircraft, warships and submarines. India recently launched its first home-built aircraft carrier, the INS Vikrant. China has launched a refitted former Russian aircraft carrier and is planning to build its own carriers in the future. Captain notes that China’s interest is to protect its shipping lanes and its perceived interests in the South China Sea and the Spratly Islands.
Both India and China are expanding their power projection capabilities. India also is replacing its old, outdated, Soviet-made equipment for modern systems such as attack submarines, surveillance and maritime aircraft, heavy transport aircraft and helicopters, Captain says.
India has its own armaments and aerospace industries and, similar to Turkey, it is aspiring to be a global player within the next two decades. This ambition also drives India’s business dealings with other nations. Many of its international military acquisitions call for technology transfers with local industries as a part of the deal, Curran explains.
Missile defense needs also are driving military sales in Asia. This especially is notable for South Korea and Japan. Always worried about its belligerent and unpredictable neighbor North Korea, South Korea is investing in defensive technology such as anti-missile systems, surveillance satellites and fighter aircraft, Curran says. Regional neighbor Japan is in a similar situation with North Korea and ongoing tension with China.
Japan is buying additional sea and ground-based anti-ballistic missile systems and modernizing its C4ISR systems to improve interoperability with U.S. and allied forces. It also is broadening its definition of defense because its post-war constitution prohibits it from acquiring offensive weapons. To fit in this legal gray zone, Japan has been very creative in how it describes certain platforms with potential offensive capabilities, such as its new class of helicopter-carrying “destroyers,” which are flat-decked multipurpose ships similar to the U.S. Navy’s larger amphibious assault ships. Captain notes that the current conservative government in Japan is actively considering changing the terms of what is considered “defense” in the constitution to operate more effectively with U.S. and allied forces in the region.
Ongoing regional tension with China may soon force the Japanese government to make some fundamental decisions about modifying its existing defense policies—decisions that may impact its lucrative regional trade with China. “Japan will have to decide to have a robust defense or make an accommodation with China,” Curran says.
Indonesia, an archipelago of hundreds of islands, is acquiring new platforms to help monitor and patrol its national borders, Captain says. He notes that many area nations are becoming wealthier and taking on more responsibility for regional missions such as police/anti-piracy operations and disaster relief.
But the defense spending by Asian nations to upgrade their armed forces is leading to security concerns about potential conflicts over offshore resources. The United States is worried about the proliferation of sophisticated anti-ship missiles and quiet diesel-powered attack submarines in the region, Curran says. Modern diesel submarines, especially small, quiet, German-manufactured boats, are very hard to detect in Southeast Asia’s busy littoral zones. These stealthy submarines pose a threat to U.S., allied and regional forces, which is driving a need for better anti-submarine detection and warfare capabilities for Pacific nations, he says.
Regional tensions also are driving arms spending in the Middle East. The United Arab Emirates and Saudi Arabia are spending more on military equipment. The regional unrest and uncertainty caused by the Arab Spring uprisings, the ongoing civil war in Syria and regional tensions with Iran and Israel are creating a demand for new weapons.
But this regional unease also is extending to border protection and monitoring because of ongoing territorial disputes. Saudi Arabia’s borders, especially in its unpopulated southeast corner known as the Empty Quarter, are not well-patrolled. Captain notes that the Saudi Ministry of Interior is creating a border guard force and putting surveillance systems in place to protect its national sovereignty. “You’re seeing a lot of wealth driving a lot of purchases in this area,” he explains.