Arms Transfers Alter Dynamics of International Defense Market

By Aleksandar D. Jovovic
As countries face constrained defense budgets and escalating equipment costs, we are likely to see a significant rise in government-to-government transfers of used defense systems. This trend may affect the defense industry, as it might generate opportunities primarily driven by upgrades, modernization, and sustainment within an expanding customer base.  

Annual sales in this market could near $10 billion next year.

Since World War II, the United States has used defense transfers as a powerful incentive for political and military cooperation. Indeed, the Defense Department reports that it transferred some $7 billion of hardware in a single five-year span in the 1990s, while the Navy has provided an impressive 231 ships to 43 countries over the past two decades.  

Countries aren’t just transferring defense equipment in order to support allies or influence political and security developments. As budgets are strained by international engagements, rising personnel costs, and increasingly expensive systems, countries are looking to clear space for new systems and recoup some costs in the process. As Australia commences a decade of defense modernization, it is looking to sell hundreds of older aircraft, ships and ground vehicles.  

Some cases are less auspicious. The Greeks simply cannot afford all their new Type 214 submarines built by ThyssenKrupp HDW, and have embarked on an effort to sell one. Alongside the financial incentives to slim their forces, ministries of defense are engaged in a reassessment of strategic objectives. For the Netherlands, a robust heavy armor arsenal has made less sense with the end of the Cold War, so they have been shedding Leopard tanks through sales for some years now.   

The financial upside for industry is typically not tied to the current value of the used equipment itself — which is sometimes purely nominal — but rather the trailing expenses the buyer incurs to update and modernize the equipment.  Several months ago, the Perry Class frigate USS McInerney, now renamed PNS Alamgir, set sail for Asia to join Pakistan’s naval contingent in the Arabian Sea and Indian Ocean. The foreign military financing deal for this decommissioned vessel was valued at $60 million including refurbishment, training, and anti-submarine warfare improvements. The transfer is reportedly the first of an eight-vessel purchase.

Viewed individually, the initial deals, largely the result of transactions between governments rather than ministries of defense and industry, are of interest to defense strategist and political scientists. But the increased availability of high-quality used defense equipment, coupled with increasingly expensive new defense systems and tighter defense budgets may well have an outsized effect on the international defense industry. All this takes place at a time when top global defense players are increasingly eager to grow outside traditional home markets. These trends may be relevant to firms worldwide in different ways based on each firm’s position in the defense solution lifecycle.  

At first glance, increased sales of used platforms, such as fighter aircraft, may not bode well for original equipment manufacturers intent on selling new solutions. Indeed, in the short run, used defense article sales may not be ideal for firms struggling to sustain a viable production base. However, strong residual value of any piece of equipment is likely a strong selling point for future customers of new platforms. Furthermore, used platforms in the hands of new owners rapidly require sustainment and upgrades, driving opportunities for the prime integrator. Looking forward, today’s thrifty second-hand buyer could be the next decade’s new systems procurer. The strong performance of used platforms thus builds brand name recognition and customer relationships within aspiring customer communities, at little or no cost to the original manufacturers.  

Systems providers, including suppliers of avionics, sensor systems, and electronic warfare equipment, face a similar quandary. Used equipment sales may lessen new sales at the margins, but they quickly open upgrade and modernization opportunities, both on platforms that currently house their equipment and on those that are equipped with competing systems. In recent years, for example, used F-16s have been an often-considered item by countries spanning the globe from Indonesia to Romania. In each case, part of the initial price tag included requirements for modernization and upgrades, offering potentially lucrative opportunities to systems providers.

Maintenance, repair, and overhaul (MRO) services in the aircraft, naval and ground vehicle segments may also stand to benefit. Older platforms require more attention as a matter of course, and the longer the legacy of each platform or piece of equipment the larger the pool of qualified support firms — outside the original equipment manufacturer. Indeed, the proliferation of established platforms to new markets affords the MRO firms a useful stepping stone to expand global operations beyond the present day usual suspects.

Rather than ignore this trend as a marginal development relegated to smaller customers, or an irritant distracting from higher-value sales of new equipment, defense firms should embrace the opportunities these sales may create.  Original equipment manufacturers, major systems providers, and services firms can advise their current customers (typically in developed defense markets) on the most efficient and profitable ways to transfer dated equipment, and counsel second-hand buyers (often in the developing world) on how to get the most out of their new investment, both in terms of capabilities and years of service.  

Not only are these steps part of the often evoked full-lifecycle support, but they develop relationships with future buyers, often in countries that are experiencing robust growth, and assist sellers in filling government coffers and clearing out hangars for future acquisitions of new state-of-the-art equipment as economic conditions improve.

Aleksandar D. Jovovic is a senior associate at the Avascent Group. Sebastian Sobolev, a defense analyst at Avascent, contributed to this piece. They can be reached at and

Topics: International

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